For parents of high school seniors college plans are beginning to firm up around this time of year. Financial packages offered by universities are typically released in the March time frame and the reality of financing a college education will soon be apparent.
For many students and American families student loans are a vital part of the financing equation. The process of accessing student loan resources involves completing the dreaded FASFA process which could have been done as early as October 1st for the 2017-2018 school year. For families who weren’t quite that proactive a good rule of thumb is to have the FASBA complete and submitted as soon as possible after January 1st, so now is the time.
The Federal government plays a large role in the student loan business and of course this means it can all be a bit confusing and overwhelming. It is important however to understand the basics of these financial products, and perhaps more importantly to have a strategy to manage them carefully.
The three primary types of student loans are subsidized loans, unsubsidized loans and PLUS loans.
Subsidized loans are awarded based upon financial need determined through the FASFA process. With a subsidized loan the government pays the interest while the student is enrolled in school and no payments are required as long as the student is enrolled in college. There are two programs involving subsidized loans, Stafford Loans and Perkins Loans.
Stafford Loans can be dispersed directly to the student for tuition and/or living expenses. Perkins loans programs are administered through the college or university and most often go directly to pay university expenses. Both subsidize loan programs have relatively low interest rates and cap the total amount that can be borrowed in the mid $20,000 range.
Unsubsidized loans are more widely available but are also awarded based on the FASFA process. The primary difference with an unsubsidized loan accrues interest while the student is enrolled in school, but like subsidized loans there is no need to make payments. In keeping with the confusing government program part of the equation, Stafford Loans also come in the unsubsidized variety so it’s important to understand what type of Stafford loan is being accepted. Unsubsidized loans are also capped and caps are coordinated with subsidized loans.
PLUS loans designed for both parents and graduate students. Parent PLUS loans are for parents of dependent undergraduate students, and Grad PLUS loans are for graduate students themselves.
As with other education loans, PLUS loans are funded directly by the federal government. But unlike traditional student loans, they have no maximum amounts and can be used to cover any education costs not covered by other financial aid. They have a fixed interest rate of 7.21 percent, which is high. When I see families getting in trouble with student loans, PLUS loans tend to be the culprit.
Which brings me to the most important of the student loan discussion. In my opinion these products can be dangerous if not managed carefully. Just because the loan enables “setting and forgetting” doesn’t mean it shouldn’t be attended to. Student loans need to be managed like any other financial product, closely and carefully.
As a Dad I know the goal of sending our kids to school is to prepare them for a productive and independent life. In my experience working with many families, without a doubt the largest impediment to this goal is mis-managed student loans. Proceed with caution.
Opinions are solely the writer’s. Marc Ruiz is a wealth adviser with Oak Partners and a registered representative of SII Investments, member FINRA/SIPC. Oak Partners and SII are separate companies.