How To Minimize Your Student Debt

paying off loansQ.  I’ve exhausted all the possibilities of avoiding student loans, and I realize I must borrow money to complete my education.  What steps should I take to find the lowest-cost student loans? 

A. Federal Loans are definitely the first place to start looking. They come with several advantages. Interest rates remain fixed even if you have a change in your credit rating or graduate from school. They also come with protections in case you’re unemployed or have other financial problems. Federal student loan protections include income-based repayment, loan forgiveness, and extended deferment.  

STAFFORD STUDENT LOANS 

There are two types of Stafford loans: subsidized and unsubsidized.  Subsidized loans are only available for undergraduate programs, while unsubsidized are available for both undergraduate and graduate programs. To apply for a Stafford loan, you need to complete a FAFSA application. 

Subsidized Stafford loans are so-called because the government pays all the interest while you’re in school. Your eligibility for a subsidized Stafford loan is determined by your FAFSA application. The current rate on these loans is 4.6% for the 2014-2015 school year. The limit for these loans is $23,000 cumulatively and $3,500-$5,500 annually, depending on which year of school you are attending.  

In the unsubsidized Stafford Loan program, interest accumulates while you’re in college and is deferred until six months after graduation. You can qualify for an unsubsidized Stafford Loan regardless of income. The interest rate on these loans is 6.8 percent for the 2014-2015 school year.  The limit for these loans is $5,500-$7,500 annually, depending on which year of school you are attending. The cumulative limit is $31,000.  

Both types of loans have higher annual limits if you are an independent student (not relying on parental help)–up to $12,500 annually and up to $57,500 cumulatively.  

PERKINS LOANS 

These loans are available to undergraduate and graduate students with exceptional financial need. The school is the lender, and not all schools have the budget to participate in the program.  The interest rate for these loans is five percent.  Whether or not you qualify depends on your financial needs and the availability of funds at your college.  

As an undergraduate, the maximum a student can receive is $5,500 a year with a cumulative total of $27,500.  If you are a graduate student, the maximum is $8,000 a year and $60,000 total.   

PLUS LOANS

PLUS loans are for parents and graduate students. The interest rate for these loans is 8.5 percent.  You can read more about these loans here.

Q.  I’ve used up the limits on my federal student loans, but I still need money in order to finish school. I hear private loans are very expensive. What do I need to do to find the best deal?

A.  If you have to borrow using a private loan, you should hear warning bells in your head. Federal loan limits are there to make sure students entering the workforce can afford to make payments on their obligations. If you do seek private loans, make sure that your target job has a salary that will allow you to make timely payments on any new loan.  To calculate payments, use the repayment estimator at https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action.  

Private student loans are available to students and parents with good credit and may have competitive rates when compared to federal student loans. Most private student loans require a co-signer when a student applies, usually a parent or grandparent. The best private student loans will have interest rates comparable to PLUS loans.   

Beware of loans with high fees. A lower interest rate loan with high fees can wind up costing more than a higher interest rate loan with no fees. A good rule of thumb is that three to four percent in fees equates to about a one-percent higher interest rate. 

Private student loans are not without their problems. Should the co-signer die or file bankruptcy, some private student loans have provisions that can place the loan into default even if you’ve been making the payments on time. Another problem is some loans have sliding scale interest rates, usually a lower interest rate while you’re in school, with the interest rate increasing once you get out of school. Because of these reasons, and because of higher costs, students should only apply for private loans when they have exhausted their federal student loan limits.  

OTHER TIPS

If your school recommends certain lenders, continue to shop around independently.  You can often find a better deal.  

Get the full details of the loan, including interest rate terms.

Many banks offer discounts and fees on interest rates on both federal and private loans.  If you find one, make sure these discounts remain in place should the loan be sold down the line (highly probable).  

Bargain! If you find a good rate on a private loan, see if other lenders will beat the rate.  

By Kristy Welsh, Credit Expert at CreditRepair.com

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