Student Loans: Things to Consider

A college education can play a major role in the future success of your children, but it’s no secret that it’s expensive. As summer comes to an end and parents start stressing about sending their kids off to college, we share some things for families to consider before they start taking out student loans.

There are two types of student loans: federal student loans and private student loans.

  • Federal student loans
    • The federal government offers these loans, which can be either subsidized or unsubsidized. Subsidized loans do not accrue interest while the student is in school; unsubsidized loans do. Unsubsidized loan debt can be minimized if the student pays off the interest while he or she is still enrolled in school.
    • Students must start paying off the loans 6 months after they graduate.
    • These loans offer a more flexible repayment schedule than private loans do and can offer relief, if needed.
    • Interest rates are usually lower than private loans.
    • Eligibility is based on the student’s need, rather than the borrower’s credit rating.
  • Private student loans
    • A student should only consider private loans if federal loans are maxed out.
    • These loans are offered through banks or other financial institutions.
    • The repayment schedule is set by the lender and normally does not offer much repayment relief, if needed.
    • Interest rates are usually higher than federal loans.

Read through the terms of the loan agreement carefully. Consider having a CPA from A.C.T Services, Inc. look over the terms of your loan to make sure you understand what you’re signing.

Avoid family arguments later by talking about repayment plans now.
Before deciding which loan to choose, have a serious conversation with your child about his or her future budget. Talk about what the monthly repayment amount will be after he graduates and if he thinks he’ll be able to cover the monthly cost. Does the major he’s choosing at school offer enough job prospects and a manageable salary that will enable him to cover his monthly repayment? If he can’t pay his loans, will he move back home until he can cover his own bills? Having these conversations now will avoid running into family arguments and disappointments later on.

If you can’t stick to your repayment schedule, call and talk to your loan provider.

Students may be eligible for deferment or forbearance. Deferment is when the repayment of a loan’s principle and interest is delayed. Forbearance means the federal student loan payment will be temporarily postponed or the amount will be temporarily reduced.

Don’t let your child borrow EVERYTHING he or she needs.

It’s important to note that students shouldn’t borrow all they need to attend school. They can lower the amount of debt they’re taking on by using loans only for certain expenses, like tuition, fees and books, and getting a part-time job to pay for living expenses. Students can also consider applying for a federal work-study program through FAFSA.

You can now submit your FAFSA as early as Oct. 1!
Students attending college in the 2017-18 school year are now able to submit a FAFSA as early as Oct. 1. Students (and their parents, if necessary) should report income information from their 2015 tax return, rather than the 2016 tax return. This application process should be repeated every year your child attends college.

Taking out student loan debt can have a big effect on your child’s life and budget after he graduates, so do your research now to help your child be able to make efficient, on-time payments later on.

We can help!

If you’re unsure of which route to take, please don’t hesitate to reach out to us! Having a CPA look over your loan options and provide recommendations (especially when applying for private student loans) can help you and your child save money in the long run! Contact us today.

Contributed by: Tina L. Moe, CPA, CGMA, President & CEO

(Other Sources: Journal of Accountancy, July 25, 2016, James Sullivan)