(NOTE: This topic is far too “BIG” for a 700 word blog post.  I’ve tried to hit the most relevant points, but certainly contact me for further questions)

In the world of the College Search, few things cause parents more fear, anxiety, confusion, anger and worry than Student Loans.

What if Brad doesn’t get a job right away? What if Caitlin transfers, or drops out?

What does a “direct” loan mean? Direct to whom?   Do I pay back or does Ashley?

Does Justin pay while he’s in school? Does Ashley have to take all of the loan amount offered?

Isn’t there loan forgiveness if she agrees to work at a tough school district or joins the Peace Corps, or teaches tough kids in the Peace Corps?

Okay, it’ll be alright, everyone.  Just let go of my jacket,  and I’ll try to provide some answers.

Sorry.

The William D. Ford Direct Loan program is an outgrowth of the Robert Stafford Loan program, which was originally the Federal Guaranteed Student Loan.  Stafford was a U.S. Senator from Vermont.  Ford was a U.S. Representative from Michigan.  (In case you were wondering…)

Direct loans are loans to the student. The student pays them back upon leaving school. Hopefully, that means graduation, but if Caitlin leaves Harvard, Kean or Lincoln Tech “prematurely”, she’s got to start paying.

The “direct” is a reference to direct FROM whom – these loans are from the U.S. government direct to Ashley, Caitlin, Justin or Brad.

There are limits – both annually and in aggregate – to what someone can borrow. For dependent students whose parents are eligible for a PLUS loan, the aggregate limit is $31,000, with no more than $23,000 being subsidized.  The 1st year limit is $5500, with no more than $3500 being subsidized.

Slow down – PLUS loan? Subsidized?  Huh?

Direct loans are either subsidized (the government is paying the interest while the student is in school) or unsubsidized (the interest is growing while the student is in school).  The PLUS loan is a federal loan a parent can take to supplement the financial aid package.  PLUS loans, and the additional Direct Loan eligibility for students whose parents are denied a PLUS loan, are worthy of a separate blog or two, in and of themselves.

$5500 is a lot of money.  Then, I – I mean Brad – just won’t take out a loan.  Or can he borrow a portion of that – maybe $1500 or $2000?

I’m glad you asked.  One of the major mistakes families make is looking at that amount as “all or nothing”.  Brad can borrow $500 or $1500 or $2500.  And generally, the best decision in utilizing your financial aid package is to take a “reasonable” portion of the loan amount available. It provides money to afford college and builds a positive credit history.  It’s considered, when managed properly, “good debt”.  Of course, determining what’s “reasonable” is the tricky part, and varies greatly from student to student.

The current interest rate for subsidized loans is 4.5%, unsubsidized loans 6.8% and PLUS loans is 7.9%.  FYI, the student can pay the interest on an unsubsidized loan, while in school, while still deferring the principle.  And it’s a really, really good idea to do so.

Direct Loans can be deferred, if you are unemployed and/or in economic hardship.  Forbearance is sometimes an option, when you can’t make payments.  But, the key is to keep in communication with the government.  If they request payment or additional information, don’t ignore them.  If you have a question – ASK!

And, yes, Direct Loans can be canceled for certain types of service as a teacher, long term public service, some cases of bankruptcy, permanent disability (but certain conditions apply) and death.

It has been reported that Student Loan Default rates have skyrocketed recently.  Take a look at this graph. Default rates are increasing, but after a big decline.  And there are wide differences in default rates for different sub-groups.  If you are in a baccalaureate program and you persist to graduation, your likelihood of default is far less than if you attend a 1 or 2 year professional program and/or do not complete your degree or certificate program.  But there IS still a real, tangible issue of concern – many of these students will graduate with the equivalent of a large home equity loan at the age of 22.

My take-away would be this:

  • If you borrow, always start with Direct Loans.
  • Borrow “some”. Don’t feel obligated to borrow all or nothing.
  • Stay in School! The chance of default increases greatly for those who do not persist to graduation.
  • ASK QUESTIONS – of me, of your Financial Aid officer and of the government.

As always, I welcome your comments and questions.  Please feel free to email me at info@cc4therestofus.com, call or text me at 908-403-3819, join me on Facebook on “College Counseling for the Rest of Us” and join me on Twitter at @MichaelCCR.