Understanding Your Options for College Loans

Brett Pittsenbargar Explains College Loans

There’s no question that college is expensive. Though parents may wish to help their children by footing the bill for tuition, it’s not always feasible to save enough to cover everything – especially if you have multiple children.

Instead, many students and parents turn to loans to help make up the difference. But throughout the course of a college career, that can really add up.

According to a survey by Lendedu.com, the average amount owed by college graduates is about $30,000. All in all, outstanding student loan debt in the United States totals about $1.2 trillion.

You have some options to keep that final price down (we shared 5 factors to consider that can lower college expenses in our blog). But despite your best efforts to save for college and your child’s efforts to earn merit-based aid, you or your child may still have to take out a loan.

Here’s what you need to consider before taking out a college loan:

What Are My Options for College Loans?

A key aspect of finances for many college students is student loans.

When scholarships, grants, income, and savings are not enough to cover the cost, students often borrow to pay for college. In fact, 70% of college graduates leave school with a loan.

Upon graduation, accumulated debt may include:

  • Direct subsidized loans (the government pays interest while students are in school)
  • Direct unsubsidized loans (students owe interest while in school)
  • Direct PLUS loans (for parents and graduate students)
  • Perkins loans
  • State and private loans (usually co-signed with an adult)

Different types of loans offer different interest rates and repayment schedules.

The federal government finances some loans. Private lenders finance others. Some loans are need-based, while others are not.

With this much variety, it’s no surprise that many students and parents have questions about their loan packages.

Many Students Don’t Know Much About Their Loans

There are a lot of details to understand and track when students borrow. That’s one reason many colleges and universities require student borrowers attend loan counseling sessions before receiving loans, either online or in person.

Unfortunately, the survey by Lendedu.com found few students retain much of the information presented:

  • 94% of students did not know their repayment terms
  • 93% were uncertain what type of loan they held
  • 92% did not know their current loan interest rates

In addition, a Brookings Institute study found about one-half of students underestimate the amount of debt they have, and one-third cannot provide an accurate estimate of their debt.

Repayment Options for College Loans

Unfortunately, student loan confusion doesn’t end with college. In large part, that’s because there a multitude of repayment options for college graduates.

The Department of Education’s Federal Student Aid website offers an overview of the eight repayment options for Direct Loans and Federal Family Education Loans. These include:

  • Standard repayment plan (fixed payments)
  • Graduated repayment plan (increasing payments)
  • Extended repayment plan (fixed payments over 25 years)
  • Income-based Repayment Plan (income-based repayment)
  • Income Contingent Repayment (income-based repayment)
  • Income Sensitive Repayment Plan (income-based repayment)
  • Pay As You Earn Repayment Plan (income-based repayment)
  • Revised Pay As You Earn Repayment Plan (revised income-based repayment)

Of course, the choices available for repaying private student loans are different and vary by lender. In addition, marketplace and peer-to-peer lending platforms make it possible to refinance and consolidate student loan debt, sometimes at lower interest rates.

With all this confusion, students and parents may end up paying more than necessary by taking out a loan with a higher interest rate than they need, or not choosing an optimal repayment plan.

It’s important for students and their parents to examine their options carefully before taking out a loan to make sure they’re choosing plans that make the most sense for their financial future.

Figure Out College Loans with Brett Pittsenbargar in Austin TX

A college degree is almost a necessity today. In 2014, Pew Research Center reported, “On virtually every measure of economic well-being and career attainment – from personal earnings to job satisfaction…young college graduates are outperforming their peers with less education.”

Don’t let finances be a barrier for your student. Contact Brett Pittsebargar at BP Financial today for advice on choosing the right loan package for your child.

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