If your child just graduated high school or is an incoming senior, you are likely well-informed about the importance of college financial aid. Even if you are still unsure you need it, it is essential that you complete and submit the FAFSA (Free Application for Federal Student Aid) now for the upcoming 2023-2024 academic year.
But hurry. The FAFSA form must be submitted no later than June 30, 2024.
If you need financial aid for the 2024-2025 academic year, please note that the FAFSA application will be released two months later than its usual October release date. Therefore, students who plan on enrolling for next fall can begin applying in December.
Most students seek federal aid due to its many advantages. Loans provided by the U.S. Department of Education generally have better interest rates and offer several attractive repayment options.
When you should get federal loans
If you are borrowing on your own without your parent’s help, your best bet may be federal loans. They are usually cheaper since everyone gets the same fixed rate. And as mentioned above, they tend to have better repayment terms.
Federal loans also offer loan forgiveness in public-service jobs. That means you may not be responsible for paying back the full amount you borrowed if you follow that career path.
If you are unable to repay your loans after graduation due to unemployment or a low salary, you could qualify for one of two options. Both make it easier for you to repay the loan and prevent default.
Federal loans and their repayment options
If you get a federal loan, you may be able to postpone repayment for three years or longer through what’s called deferment or forbearance. To be eligible, you need to prove a financial hardship such as medical expenses or unemployment.
If you are unable to pay your monthly bills in full due to low income, you could apply for Income-based repayment. It caps your payments at 15% of your discretionary income. “Pay As You Earn” (PAYE) repayment is a second option that caps payments at 10% of your discretionary income.
If you are unemployed, your monthly payment for either option would be zero because 10% or 15% of nothing is nothing.
Do you qualify for subsidized loans?
The best federal loans are typically those that are subsidized, such as Stafford loans and Perkins loans. While you are in school, the federal government will pay the interest. However, these are need-based, meaning that you will have to demonstrate a financial hardship.
If you qualify, you could get a subsidized Stafford loan for the upcoming school year at around 5.498% for undergraduate students and 7.048% for graduate students.You may also be charged an origination fee, which is currently 1.057% for Stafford loans and 4.228% for a Federal PLUS loan.
When a private loan might make sense
Some private lenders such as banks, credit unions, and other online lenders offer private student loans. However, they don’t usually include benefits like income-driven repayment plans or loan forgiveness options. Therefore, it’s best to apply for federal student loans first. Once you have exhausted them, a private student loan could be the obvious choice.
If you currently have private student loan debt, debt settlement could help you pay it off faster. Learn more here.
Refinancing federal loans
A few banks and non-banks will refinance any combination of private and federal loans. But if you were to consolidate them into a new loan, you would give up all the benefits offered by federal loans—such as debt forgiveness for public service jobs and income-based repayment programs.
The upside is that you could get a better interest rate by consolidating federal student loans through a private lender as opposed to a Federal Direct Consolidation Loan.
Which makes the most sense for parents?
Whether you cosign on a private loan for your child or get a parent’s PLUS Loan, you may still be responsible if your child fails to make the payments. If they take out federal student loans, on the other hand, only he or she will be responsible for repaying them. As a parent, you would be off the hook.
No matter how tempted you might be to cosign a loan or take out a Parent PLUS loan, having your child handle their own loan(s) can work to your future advantage. Students today have an average of $37,338 in student loan debts. That is a burden you should avoid as you near those golden years.
Financing higher education is a thoughtful decision. It is important you have all the facts so that you know what you are getting into for many years to come.