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By Elizabeth LaScala

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About this blog: I post articles to offer timely and substantive college admission guidance on important topics and issues. Originally from New York, I have a B.S. from Hunter College in NYC and advanced professional degrees from the University of...  (More)

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Student Loans That Make Sense

Uploaded: Dec 13, 2013
The wide availability of student loans in the US reflects the value our nation places on access to higher education. As a college admission counselor, I have worked with students who could not attend college without the help of a student loan. However, student loans are often viewed negatively, in part because they are associated with the rising cost of higher education.

From the consumers' perspective, the rising costs of education can put students or parents in serious debt. But loans can also be viewed as a sensibly used credit card or home equity line of credit. If you choose and use credit judiciously, it can build a sound credit history, add value to your life now and help you prepare for your future. For these reasons, there is no need to avoid student loans entirely, and some good reasons to take out a loan. For example, a student can build a good credit history with a small loan that she can afford to pay off after graduation. Some affluent families may still include a loan in the plan to fund college so the student can be a stakeholder in his or her own education. The key for students is to use loans wisely so you end up with a manageable loan debt while building and maintaining a good credit history.

One way to conservatively manage your loan debt is to plan on borrowing no more than the maximum allowed by a direct student loan, a federal loan made through the William D. Ford Federal Direct Loan Program for which eligible students and parents borrow directly from the US Department of Education. There are two types: Direct Subsidized Loans are available to undergraduate students with demonstrated financial need and Direct Unsubsidized Loans are available with no requirement to demonstrate need. The college you attend determines the amount you can borrow based on your cost of attendance, your need and other financial aid you may receive. If a student were to take a maximum subsidized student loan for each of 4 years, the aggregate total allowed would be $19,000. If a student does not qualify for subsidized loans, she or he could still borrow the unsubsidized version and the full amount of $27,000 would be available. If there is demonstrated financial need for some of the time a student is in college, these two types can be mixed, but the aggregate amount cannot exceed $27,000 over 4 years.

One clear advantage to the direct student loan program is that it has built in caps which keep a student from going beyond certain limits. The interest rate on the Direct Student Loan Program is fixed for the current year at 3.86%. Interest rates are tied to the 10-year Treasury bill and surely may rise in future years. The rate is set every July 1st. The Department of Education provides very clear and annually updated guidelines to the affordability of college and reasonable levels of college debt.

Taking advantage of the direct student loan program should not overburden a recent graduate. Loans from these programs are designed to be affordable and many entry level employment positions will permit a careful spender to make a repayment plan work.

So, let's take a concrete example. Since interest rates are expected to slowly rise, let's use a rate of 4.62%. If a student qualifies for a subsidized loan and takes the aggregate limit of $19,000 at an interest rate of 4.62%, repayments would be right around $200 per month to pay off the loan in 10 years. This is manageable on an income of $30,000 a year. If the same student took the full aggregate limit of subsidized and unsubsidized loans and accrued a debt of $27.000, he or she would have to earn an annual salary of closer to $34,000 to comfortably make a monthly payment of about $280. Certainly, there are loans that tend to sink families into deep debt and these are the ones that give all loans a bad name. Take for example a family that takes out an $80,000 Parent Plus loan at an interest rate of 8.5%. To pay off this loan in one decade would take an annual salary of at least $119,000 with monthly payments of $991. That's a huge chunk of change! A useful tool can be used to estimate the salary one needs to earn to pay back a specific dollar amount of loan under various terms and limits.

Paying for college should never be an afterthought, and families who construct a sensible plan to pay for college costs by reviewing the full range and mix of options, including the federal student loans, tend to fare best.

Elizabeth LaScala Ph.D. guides families through the sometimes complex world of college admission. She helps students identify college majors and career paths, develops good fit college lists, and provides essay coaching and application support to help students tackle each step of the admission process with confidence and success. Elizabeth also helps families maximize opportunities for scholarships and financial aid awards. For more information visit. Call 925 330-8801 or write elizabeth@doingcollege.com.

Comments

 +  Like this comment
Posted by KD Clark, a resident of Danville,
on Dec 16, 2013 at 10:04 pm

Here is a little secret. Some colleges offer the exact same degrees as expensive colleges
but charge a fraction of the cost! A list of them can be found at www.DegreesAnywhere.com


 +  Like this comment
Posted by Roz Rogoff, the San Ramon Observer,
on Dec 17, 2013 at 5:13 pm

Roz Rogoff is a registered user.

Elizabeth,

This is an excellent blog. I teach online for University of Phoenix and we cover loan options in the introductory courses. I would like to provide a link to your blog for our new students. This will be very helpful for them in planning their financial arrangements for school.

Roz Rogoff


 +  Like this comment
Posted by Elizabeth LaScala, a resident of another community,
on Dec 18, 2013 at 10:24 pm

Roz,

I am glad you found my recent blog helpful. Please contact me by phone and we can discuss your request. My office number is 925 891 4491.

Elizabeth LaScala


 +  Like this comment
Posted by Jull, a resident of another community,
on Dec 20, 2013 at 1:44 pm

I have come across several articles earlier, where students shared their experience of paying off or simply avoiding loans due to scholarships or grants. Do you have any related articles? Would be nice to read.

Jull from Web Link


 +  Like this comment
Posted by Elizabeth LaScala, a resident of another community,
on Dec 20, 2013 at 4:29 pm

Hello Jull,

Sorry, I have no additional articles of this type and have no leads to share with you at this time. I wish I could be more helpful.

Regards,
Elizabeth


 +  Like this comment
Posted by danhayes, a resident of Another Pleasanton neighborhood,
on Jan 22, 2014 at 9:01 am

Taking advantage of the direct student loan program should not overburden a recent graduate. Loans from these programs are designed to be affordable and many entry level employment positions will permit a careful spender to make a repayment plan work. For info is here at [url=Web Link website[/url]


 +  Like this comment
Posted by Priyankasingh, a resident of Dublin,
on Mar 4, 2014 at 7:35 am

student loan program in all country is flexible and time to time govt. change policy. Student Loans That Make Sense is really good topic and Indian govt give benefits and reduce student loan premium. Web Link Paying for college should never be an afterthought, and families who construct a sensible plan to pay for college costs by reviewing the full range and mix of options, including the federal student loans


 +  Like this comment
Posted by Markrobinson, a resident of Danbury Park,
on Apr 8, 2014 at 9:24 am

Student Loans That Make Sense and it is clear advantage to the direct student loan program is that it has built in caps which keep a student from going beyond certain limits. Web Link The interest rate on the Direct Student Loan Program is fixed for the current year at 3.86%. there are some flexibility in premium also according to state rules and regulation.


 +  Like this comment
Posted by Robinson, a resident of Birdland,
on Aug 8, 2014 at 9:54 am

Student Loans That Make Sense is really good topic and Indian govt give benefits and reduce student loan premium. The interest rate on the Direct Student Loan Program is fixed for the current year at 3.86%. Web Link


 +  Like this comment
Posted by Rebeca, a resident of another community,
on Sep 15, 2014 at 1:22 am

This is very useful blog indeed. I teach online for personal finance and we cover loan options as well. I would definitely provide a link to your blog for our new students.

Regards,
Rebeca from Web Link



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