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11 Things Every Parent (And Student) Needs To Know About Student Loans

National Debt Relief now offers Student Loans ConsolidationThere you are the proud parent of a son or daughter who’s been accepted to college and is all excited at the prospect of beginning a new phase in his or her life. Or maybe you’re the son or daughter yourself and you just can’t wait for August to roll around. But have you all calculated what it’s going to cost for four years of college and exactly how you’re going to pay for it.

1. Get Your FAFSA in early

The first thing you need to know is that it’s critical to get your Free Application for Federal Student Aid or FAFSA in as early as possible. If you are counting on student aid you should have already submitted it to the federal government as well as to the school or schools you child chose. The reason for this is because most colleges offer financial aid on a first-come, first-served basis. Schools have a limited amount of funds and once they’ve distributed them, that’s it. No matter how worthy your child might be, if you get your FAFSA in late, he or she could miss out on getting any aid at all – outside of a federal or private loan.

2. Understand the different types of federal loan available

There are three types of federal loans available. The first is a Federal Direct Loan. The second is a Federal Perkins Loan. And the third is a PLUS loan. A Federal Direct loan comes directly from the federal government (the Department of Education.) A Perkins Loan comes from the college or university of your child’s choice and is needs based but subsidized by the federal government. And finally, a PLUS loan also comes from the federal government but it could be your loan and not your child’s.

3. Learn how much you or your child could borrow

If your child is dependent on you and is a first-year undergraduate student he or she can borrow up to a maximum of $5500. The limit for a second year undergraduate student is $6500 and for third year students and beyond, the maximum is $7500. There are other maximum limits for independent students and graduate students and you can learn them by clicking here.

4. Be happy if you get a Financial Aid Shopping Sheet

If you’re lucky, your child’s school will provide you with a Financial Aid Shopping Sheet. This is a relatively new form that will give you a good idea of the school’s net price. It’s the cost of attendance – room, board, tuition, books etc. minus grants, scholarships, work-study and loans. You might think of this document as the school’s discounted sticker price. Unfortunately, about two thirds of all colleges don’t make your net price very easy to understand. In fact, you may have to contact the school’s department of student aid to learn exactly what his or her college will cost.

5. Be aware that you will need to submit a new FAFSA every year.

Like it or not, you will be required to fill out and submit a new FAFSA every year. The government and your child’s school will then once again determine the amount of aid he or she will receive.

6. Watch out for the term “renewable”

If your child does receive financial aid from his or her school, be sure to watch out for the term “renewal.” What this means is that the aid is subject to being renewed every year. Many people have gotten excited when they learned their child had received $5000 in student aid only to later discover that it was for just one year and that it’s renewal will be contingent on the child’s grades.

7. Know the difference between subsidized and unsubsidized loans

There are two types of Federal Direct Loans — subsidized and unsubsidized. Loans that are subsidized are those where the federal government pays the interest charges so long as you or your child is in school. These loans are needs based meaning that you must prove you have a financial need. Unsubsidized loans are ones where you pay interest while in school but there are no eligibility requirements. If you get a subsidized loan, the school will determine how much you can borrow, Also, subsidized Direct Loans are available only to undergraduates that are in school at least half time.

8. Understand you can’t transfer a Direct PLUS Loans

To be eligible for a a PLUS loan you must be a graduate or professional degree student and enrolled at least half-time at an eligible school in a program that would lead you to receiving a degree or certificate. Or you could be the parent (biological, adoptive, or in some cases, stepparent) of a dependent undergraduate student that’s enrolled at least half time at a participating school. Note: if you take out a Direct PLUS Loan in your name, you cannot transfer it to your child at some future date. If the loan is in your own name, it’s yours and you will be required to repay it.

9. Know that a federal student loan is like forever

It used to be said that there were two things in life that were constants – death and taxes. Today, you could add a third to this, which would be student loans. They are unlike any other form of loan in that they cannot be discharged by a bankruptcy (except in very special circumstances). Once your child takes out a student loan, he or she will be required to pay it off in full. Period. There are some very limited ways to get a federal student loan deferred, canceled or forgiven but generally speaking once the funds from a federal loan have been disbursed, you or your child will be on the hook for repayment. And the federal government is not at all forgiving. If your child’s loan goes into default, he or she could end up having their wages garnished or could fall into the clutches of one of those awful debt collectors.

10. Be relieved to know there are tax benefits

The one good news about student loans is that they do come with some tax benefits. For instance, there are two income tax credits that can help offset the cost of your child’s education. The American Opportunity Credit would allow you to claim up to $2500 per student per year for the first four years of school as your child works towards a degree or similar credential. Second there is the Lifetime Learning Credit that allows you to claim up to $2000 per student per year for any college or career school.

If you took out student loans for yourself, your spouse or your dependent, you can take a tax deduction for the interest that you paid on it. This applies to all loans (not just federal student loans) that are used to pay for higher education expenses. The maximum deduction is capped at $2500 a year.

11. Realize that there are to save for your child’s education

While it may be too late for this there are two ways to save for your child’s education that have positive tax benefits. The first of these is the Coverdell Education Savings Account that allows you to save as much as $2000 a year for your child’s educational expenses. Second, most states offer Qualified Tuition Programs (also known as 529 plans. This would allow you to either prepay or save up to pay for your child’s education-related expenses. Then when your child is in school and you begin withdrawing money from your account to pay for his or her expenses, it won’t be taxed.

Here, courtesy of National Debt Relief is a video with more information about 529 plans and how you could use one to help pay for your children’s education.

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