Posted: 1:00 p.m. Monday, June 9, 2014
By Clark Howard
Do you need to borrow to fund college education for yourself or your child? I wrote this guide to tell you about my Clark Smart approach to student loans. Meanwhile, don't forget to have a look at my very popular section on student loan forgivness and income-based repayment plans for federal student loans! And there are even the first glimmerings of refinance options for those stuck in private student loans.
Types of student loans available
Subsidized Stafford loans are the single best source of money you can borrow. The interest is picked up by taxpayers while you're in school. Subsidized Stafford loans first disbursed between July 1, 2013 and June 30, 2014 carry a fixed interest rate of 3.86%. Freshman can borrow $3,500 annually; sophomores can borrow $4,500 each year; and juniors and seniors cap out at $5,500.
Once you exhaust your subsidized Stafford stockpile, you want to move on to unsubsidized Stafford loans. Unsubsidized Stafford loans first disbursed between July 1, 2013 and June 30, 2014 carry a fixed interest rate of 3.86%, just like their subsidized counterparts. Similarly, freshman can borrow $3,500 in unsubsidized Stafford loans annually; sophomores can borrow $4,500 each year; and juniors and seniors cap out at $5,500. But I want you to borrow as little as possible in unsubsidized loans because the interest on these loans accumulates while you're in school.
As a third option, parents can help their kids by taking out PLUS loans, which are issued at a fixed rate of 6.41%.
You apply for federal student loans by visiting FAFSA.ed.gov and completing the Free Application for Federal Student Aid.
The worst loan available is…
I want you to avoid private student loans at all costs. Back in 2005, the private student loan industry bought off enough politicians to gain the right to do any and all tactics short of causing you bodily harm in their efforts to collect on their money. You have no wiggle room when it comes to repayment options, like you do with federal loans as I explain below. Private student loans typically can't even be dismissed in bankruptcy.
Clark's rules of student loan borrowing
Are you struggling with federal student loan debt now that you're out of school? Fortunately, there is a lot of help for you if you limited your borrowing to federal student loan programs. Unfortunately, there are no similar programs to help with repayment of private student loans, which is partly why I advise against them!
Under the Pay As You Earn repayment program, your monthly payments on federal loans will be capped at a 10% of your income. In addition, your outstanding debt is forgiven after 20 years of on-time payments. This new provision applies to federal student loans taken out after October 2007; it does not apply to any private loans. To see if you're eligible for Pay As You Earn, visit the Education Department's website at StudentLoans.gov.
For federal student loans taken out before October 2007, your payments are capped at 15% of your income and must be paid on time for 25 years to be forgiven. This is part of the income-based repayment program. Visit IBRInfo.org for more info.
There are new student loan forgiveness laws that actually benefit a wide range of workers. Public service employees can qualify for full loan forgiveness after making 10 years of monthly payments on their federal student loans. By contrast, private sector employees must make 20-25 years of monthly payments on their federal student loans to have their remaining balance wiped away.
Below is a list of the public service fields that will qualify for loan forgiveness. Ask your loan servicer for complete details about how to take advantage of this generous program:
In addition, this comprehensive list compiles some of the most popular loan forgiveness opportunities. A state-by-state list of loan forgiveness programs has also been compiled by the American Federation of Teachers.
A new way to refinance private student loans?
Recently, the private student loan market began opening up with the first real chance of offering refinances that I've seen in about 10 years.
The Cleveland Plain Dealer reports a company called Charter One is advertising an Education Refinance Loan with fixed rates as low as 5.24% and a variable rate of 2.84% above the one-month LIBOR rate.
Those low rates are contigent on two things: A good credit score and a co-signer. So this offer is of no help if you're falling behind on debts and your credit is shot.
You can refinance anywhere from $10,000 to $170,000 in private student loans with 15 or 20-year repayment options. Federal student loans are *not* eligible for this refi offer.
Private student loans should still be avoided at all costs. But this option may help you if you're already stuck in one.