Monday Morning Quarter-Buck
Amy’s Blog
“One of the most sincere forms of respect is actually listening to what another has to say.” ― Bryant McGill
In Part three of College Education month, we explore what we call the pre-qualifying process, similar to pre-qualifying for a house; let’s make sure your child (or maybe even you) will not graduate with so much debt that they can’t afford to build their adult life. When that award letter arrives and you see anything with the word loan in it, understand, not all loans are equal!
First let’s start with the “big” deal item - what will a payment for loans look like when college ends? If the student does nothing after graduation, but begins making payments, the rule of thumb is that your standard payment will be approximately 1% per month of the student loan amount outstanding immediately after graduation (including the possible accumulated interest). For example, if you owe $50,000, the approximate monthly payment will be $500 per month; we recommend that the aggregate debt not exceed more than what the student will earn in their first year of employment after college. That means if the estimates for the first year of employment is only $30,000, then they should keep their debt to $30,000 TOTAL for all years of college.
So what do all those loans actually mean to the borrower? Actually before I get into that, let me disclose there are Federal Loans and Private Loans and they are very different! I could write a whole blog on the difference between the two, but I’m not sure I could keep you all awake if I did. Understand, it’s better to go with the Federal Loans and only use the Private loans if it is absolutely necessary, but use that as motivation to go get scholarships or negotiate with the colleges for reduced costs. In my opinion, private loans are ugly.
So, to focus on the the Federal Student Loans, there are basically two types: The William D Ford Federal Direct Loan Program (AKA Direct Loan) and the Federal Perkins Loan Program.
The Direct Loan Program has four sub-loan types:
- Direct Subsidized Loans - used for undergraduate education and is needs based and the interest is paid by the U.S. Department of Education while you are enrolled at least “half-time,” during your grace period, and during deferment. The general rule of thumb on the maximum loan amounts increase as your academic year increases: Freshman - $3,500, Sophomore - $4,500, Junior/Senior - $5,500.
- Direct Unsubsidized Loans - used for undergraduate, graduate, and professional education; this is not needs based. The interest accrues during your education program. The general rule of thumb on the maximum amounts under this loan are not so simple; it depends on if you were eligible for any subsidized loan. The aggregate level between the two loans are as follows: Freshman - $5,500, Sophomore - $6,500, Junior/Senior - $7,500.
- Direct PLUS (Parent Loan for Undergraduate Students) - used to help pay for your education expenses that are not covered by the two programs mentioned above. Parents are expected to start making payments on the loan as soon as it is fully used for the education costs. However, you can ask for that to be delayed until six-months after the student graduates (or drops below half-time); interest does continue to accrue.
- Direct Consolidated Loans - used to consolidate all of the individual student loans accumulated over the college career into one loan instead of continuing with multiple loans. Some of the payback income based programs require consolidation.
The Federal Perkins Loan program is offered to both undergraduates, graduate, and professional students with “exceptional” financial need. The school is actually the lender and payments will be made to your school (or their servicer). Your payments begin nine-months after your education career ends. Similar to the subsidized loan, the US Department of Education pays the interest on your loan while you are at least half-time and during the grace period of 9-months. The maximum amount you can borrow as an undergraduate is $27,500 ($5,500 per year) for a bachelor's degree; graduate students are eligible for up to $60,000 ($8,000 per year). Note: the $60,000 includes the the undergraduate loans too - so if you borrow the full amount in undergraduate school, then you are limited to borrowing $32,500 for grad work).
Understanding these various loan options is important in the pre-approval process, because it allows us to determine what the end might look like.
Next up: What are the loan repayment options? How does one apply for the Public Student Loan Forgiveness (PSLF)? Is loan forgiveness taxable?
As some of you may know, I work with Fiscal Fitness Clubs as a coach and educator in addition to delivering services through Irvine Wealth Planning Strategies and we have a free webinar coming up on “Tips for Fiscal Fitness,” tomorrow night at 7 pm, click here to register and attend: http://bit.ly/2rA5Afz. You can find additional information, including the disclosure brochure ADV, at www.fiscalfitnessclubs.com.
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