In 2010, two-thirds of graduates from four-year colleges obtained educational loans. Consider carefully the debt burden that will result from financing an education, the likelihood that you will be able to find a job using the education, and the likelihood that the education will allow you to pay the debt burden. There are recurring abuses involving private vocational schools that provide degrees and certificates that are of little or no use in getting a job but are very expensive.
Before getting a loan, check for federal, state, and local grants and scholarships. There are numerous state and local programs as well as scholarships from educational institutions. Service members, veterans, and their families may be eligible for GI Bill benefits or military tuition assistance.
There are two basic types of student loans: federal student loans and private loans. For most borrowers, federal student loans are the best option. Some states offer subsidized state-sponsored alternative loans.
Federal loans are made or guaranteed by the U.S. Department of Education and have fixed interest rates. Recent rates have ranged from 3.86 to 6.41 percent, depending on the program. New rates were announced in June 2015, effective July 1, 2015; these are 5.84 percent on unsubsidized Stafford loans and 6.84 percent on PLUS loans. There is also a 4 percent loan fee (“points”) on PLUS loans (made to the student’s parents) and a 1 percent fee on other direct loans (formerly known as Stafford loans). The interest rate is lowered by .25 percent if you agree to automatic debits from your bank account.
Federal loans are generally cheaper than private loans, and it is generally easier to work out the repayment terms of federal loans. In the case of subsidized direct loans and Perkins loans, there is no interest while you are in school. Subsidized direct loans and Perkins loans require a showing of financial need.
Federal loans do have some downsides: there are draconian collection methods, including administrative wage garnishment and intercepts of tax refunds, and in most cases, there is no statute of limitations. A federal statute, 20 U.S.C. §1091a, eliminates the statute of limitations based on the type of loan and who holds it. Private student loans are generally subject to the statute of limitations. Governmental ones are not, if the loan is held by one of the entities referred to in 20 U.S.C. §1091a.
Also, you cannot borrow as much as from private lenders. Generally, undergraduates can get $5,500 to $12,000 per year, and graduate students can get $8,000 to $20,500 per year.
Other student loans are generally private student loans. The most common private student loans are offered by banks and credit unions. Their interest rates are often variable, which means your interest rates and payments could go up over time. Often, rates and payments can increase on short notice. Some schools and state agencies offer loans, which tend to have fixed rates.
Private loans can also be more expensive—rates have been as high as 16 percent over the past couple of years. There may also be origination fees or “points.” In order to get a low rate, you may need to find a cosigner, generally a parent. In 2011, over 90 percent of private student loans required a cosigner.
There are some loan products that provide for the release of the cosigner after a number of timely payments. For example, Citibank provides for a release; Discover Financial Services does not.
However, 90 percent of consumers who apply for a cosigner release are rejected, according to the Consumer Financial Protection Bureau. Often, lenders require that a borrower make on-time payments for twelve consecutive months or longer in order to be granted a release. Even a day past the due date may disqualify you. There may also be qualifications relating to credit score, debt-to-income ratio, and length of employment. Lenders usually do not volunteer to release cosigners; it is necessary to know when you qualify for a release and actively apply for one.
CAUTION
Beware of promises to release cosigners on student loans.
Refinancing is an alternative. Some private student lenders offer refinancing.
NOTE: Both federal and private loans generally provide for a six-month grace period after graduation before repayment is required.
When it is time to repay, private loans don’t offer as many options to reduce or postpone payments. On the other hand, private loans are sometimes subject to a statute of limitations, and they can only be collected in the same manner as other debts—the holder must sue you and obtain a judgment. Some private lenders or their debt collectors threaten to intercept tax refunds and Social Security payments, engage in administrative wage garnishment, or prevent you from receiving federal student aid in the future, but they cannot. Garnishment is permitted only where allowed by state law, and lenders have to obtain a judgment first.
At the present time, neither federal nor private student loans are generally dischargeable in bankruptcy. For recent loans, a court finding of hardship is required, which is difficult to obtain. (Old loans may be subject to more liberal standards, such as dischargeability after a number of years.)
For most people, federal student loans are a better deal than private student loans, so you’ll want to take advantage of federal options first. To apply, fill out the Free Application for Federal Student Aid (FAFSA) and submit it early.
Summary
Exercise care in signing up for student loans. Consider whether the degree you are getting will allow you to pay off the loans incurred in obtaining it. If you can, finance your education with a federal loan rather than a private one. You generally cannot get out of a student loan through bankruptcy if things don’t work out.