Student Loans

High school juniors and seniors are getting ready for college. Some of you might qualify for scholarships, while others think they’ll have to take out student loans. Before you take out student loans, you need to make sure that upon graduation from college you will be able to get a job that allows you to pay your day-to-day living expenses and to repay your student loans. There are two kinds of student loans that you should know about Federal Student Loans (FSL) and Private Student Loans. (PSL)

FSL’s have more favorable terms than PSL’s. The government sets a low, fixed interest rate, nearly all students are eligible to receive federal student loan money. The FSL’s also  feature a grace period after graduation during which no payments are due.Within the FSL you have the Stafford Loan, which could be a subsidized Stafford Loan or an unsubsidized Stafford Loan. FSL have a lower interest rate than PSL The Stafford Loans are available to almost anyone who completes the FAFSA, has a financial need, and is at least enrolled have time in the college they’ve applied.

The subsidized Stafford Loans are need-based. Interest does not accrue on the loans while students are in school or during a six-moth grace period after leaving school.

On the other hand, the unsubsidized Stafford Loans are not need-based.Interest will accrue on them. The students are responsible for all the interest even while they are in school.

The annual loan limits increase as students progress through school. The limits for dependents are:

Independents are eligible for an additional $4,000 in unsubsidized loans during the first two years of school and an addition $5,000 in unsubsidized loans during the last two years.

Congress has passed a bill lowering the Subsidized Stafford loan interest rates to 3.4% for the 2012-2013 year. This rate was set to expire July 1, 2012 but has been extended. The interest rates for the current 2012-2013 academic year are 3.4% for undergraduate subsidized loans and 6.80% for undergraduate unsubsidized loans. Please see the chart below that highlights Stafford Loan interest rates through 2013. Student loan rates for the PLUS Loan and Private Student Loans will vary so check each loan type prior to applying.

Note: Graduate Stafford Loans (both subsidized and unsubsidized) have a fixed interest rate of 6.8% through 2013.

Academic YearSubsidized RatesUnsubsidized/Graduate Rates
2010-114.50%6.80%
2011-123.40%6.80%
2012-133.40%6.80%
Current Stafford Loan interest rates in effect from 07/01/2012 to 06/30/2013

Within the Stafford Loans are the Federal Perkins Loans (FPL) and the Federal Parent PLUS Loans (FPPL). The FPL’s are designed for the students with the greatest financial need.

It has a low fixed interest rate of just 5% and they share many of the characteristics of subsidized Stafford loans. In addition, they also include the advantages of not having fees and having a longer grace period.

The FPPL’s are for parents of undergraduate, dependent students. They can be used to fund the entire cost of a child’s education. The interest rates are a fixed 8.5%.

PSL’s may be available to cover the rest of the education costs for students. Students who will be taking responsibility for their loans without the help of their parents are the most likely candidates for private loans.

Many companies, including banks, offer PSL’s. The major ones are Sallie Mae and Citi. Interest rates vary based on many factors, and lower rates go to those:

  • who have a higher credit score
  • who have a co-signer
  • who sign up for automatic debit payments

Be very careful about getting yourself into student loan debt. It might seem that the only way you can afford a college education is through debt. However, that is not the case. Upon graduation from high school, take a full-time job during the spring and summer and save. Let’s face it your expenses will be minimal because you will be living at home. I do encourage you to contribute to your parents’ household expenses, especially for single-parent homes. When fall rolls around, enroll in your local community college and take on a part-time job. This will save you a ton of money. Do this for the next two years. After you have the two years of community college under your belt, apply for the university and transfer your two years of college credits. Remember to keep working while in college and during the spring and summer. You might not be able to afford to go full-time to college, as you might not have enough in savings. However, take as many courses as you can afford. It’ll take you a little longer to graduate, but you will graduate without student loan debt.

Additionally, if you default on your PSL’s, your parents will have to pay for the loan because the co-signed. Co-signing a loan for anyone include children is a bad idea. In almost all instances where someone co-signs for another person, the co-signer ends up paying the debt.

Some students who get scholarships decide to take on PSL’s for extra income. This is STUPID! You have a scholarship that’ll pay your tuition. If you need extra money, take on a job. Rent your books or buy used books from other students who have already taken the classes. Use the internet to find used books or even new books at much lower prices than your college’s bookstore. Do not use PSL money to go on trips on Spring break or to party during the weekends. You will regret it when you graduate with student loan debt.

Some of you might be thinking, oh well, if I get a job that does not allow me to pay my student loans, I can file for bankruptcy. Wrong, student loan debt is not automatically dischargeable in bankruptcy court.  You must show that payment of the student loan debt “will impose an undue hardship on you and your dependents.”

Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). Not all courts use this test. Some courts will be more flexible, some less.

If you can successfully prove undue hardship, your student loan will be completely canceled. Filing for bankruptcy also automatically protects you from collection actions on all of your debts, at least until the bankruptcy case is resolved or until the creditor gets permission from the court to start collecting again.

It is a good idea to first consult with a lawyer or other professional to understand other pros and cons associated with bankruptcy. For example, a bankruptcy can remain part of your credit history for ten years. There are costs associated with filing for bankruptcy, as well as a number of procedural hurdles. There are also limits on how often you can file for bankruptcy.

The bottom line is not to get student loans. However, if you absolutely cannot afford to go to college without them, make sure that your debt will be something that you can afford to pay when you graduate.

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