Understanding Student Loans

How Can I Save for College?

One powerful tool for families is a 529 Education Savings Plan, which allows parents or grandparents to set money aside in an account where it will grow tax-free. Several states allow for state tax deductions on contributions made to 529 plans which provides further tax benefits. Distributions from a 529 account can be used for college, private K-12 school tuition, trade school, and other relevant education expenses. We’ve written more about 529 plans, if you’d like more information about this flexible savings option.

What Types of Financial Aid Are Available?

Outside of student loans, there are both need-based and merit-based options for covering education expenses. Merit-based scholarships and similar options are available to students based on their academic merit. They are offered by colleges and other organizations, and the application process will vary depending on the specific scholarship.

Grant options such as Pell Grants and Federal Supplemental Opportunity Grants are given to students based on the income information reported in the Free Application for Student Aid (FAFSA). Grants do not need to be paid back.

What Do I Need to Know About the FAFSA?

The FAFSA is an in-depth questionnaire to measure the assets available to a student and their parents. It determines an applicant’s “Student Aid Index,” determining how much aid a student is eligible for based on the resources available to them. It takes about an hour to complete and is quite comprehensive.

There are a few strategies for reducing your reportable assets, including moving a student’s money into a parent’s 529 plan, contributing money into a retirement account, paying down a mortgage to reduce liquid assets, and more. A financial advisor can help you come up with the right tactics for your specific circumstance.

How Can I Apply for Student Loans?

Once you’ve completed the FAFSA, you can choose up to 20 schools to receive it. The schools will then reach out with aid offers that include both grant and loan options.

What Types of Student Loans Are Available?

Federal loan options can be either subsidized (meaning no interest accrues until six months after graduation) or unsubsidized (interest begins accruing immediately). There are also Direct Parent Plus Loans, which are issued in a parent’s name rather than the student’s. These have a higher interest rate and less flexibility in repayment.

Private loans are also available. These may require a co-signer and often have strict repayment provisions. Although the interest rates may be more attractive, there can be additional fees and terms hidden in the fine print, so be sure to carefully examine any loan before borrowing.

How Can Parents Talk to Their Children About Student Loans?

Debt is a big responsibility, and it’s important that parents and their college-bound children are on the same page about what it means to borrow for education. It’s wise to talk through the specific numbers, including projected monthly payments and the earnings a student can expect from their future career after achieving a degree. Sometimes, having a third party like a financial planner available to answer questions can help open this very important dialogue.

What Are My Options for Repaying Student Loans?

For those who have already graduated, or those looking to the future, the issue of student loan repayment can be especially nerve-wracking. Repayment options depend largely on what type of loan you choose. For example, federal loans have greater flexibility, including income-driven repayment options. Private loans are simpler but also tend to be stricter in their payment terms.

For unsubsidized student loans, graduates have a six-month grace period before the loan begins accruing interest and payments must be made. If you do not make other arrangements, like an income-driven repayment plan, the loan will generally be placed on a standard amortization schedule for a 10-year pay-off.

What About Student Loan Forgiveness?

There are a few options for student loan forgiveness for graduates entering certain fields, such as teaching or government work. Many income-driven repayment plans also allow a provision to forgive the balance after payments have been made on time for a pre-determined period. Broader student loan forgiveness legislature is currently frozen in the courts. It’s a very polarizing and politicized issue, which makes it difficult to predict what may happen next, but students with outstanding loans are advised to keep an eye on developments so they can take action as necessary. Speak with a financial planner, or a Certified Student Loan Professional like Joseph Schmidt, for more personalized guidance.

Joseph can be reached through his website, https://www.sunrisepf.com. You can also reach out to John Moore Associates at our Arizona office at (480) 565-6100 or our New Mexico office at (505) 881-5100.