Navigating Student Loans in Today’s Economy
by Diane Ozanich

So you’ve exhausted every possible lead for a scholarship, but there is still a looming gap of zeros in your education costs. You’re ready to bite the bullet and sign your name in blood to interest rates and payment plans. But what about this recession everyone’s talking about? What about that $1.6 billion loss Sallie Mae posted last quarter? Who can you trust to still give you a fair interest rate?

It’s a slippery slope and my first advice to anyone contemplating major loans right now, is buyer beware! We’ve all learned valuable lessons in the last year when it comes to adjustable interest rates. Make sure you ask lots of questions and have a complete understanding of your terms of agreement.  This is your financial life for the next 10 years; it’s not to be taken lightly.

With that admonishment out of the way, here are your jumping off points:

Subsidized and Unsubsidized: These words are bandied about endlessly, but what do they mean? In a nutshell, subsidized means the government is going to pay the interest on your loans while you’re in school, and probably for up to 6 months after you graduate. Unsubsidized means you are responsible for the interest immediately. Usually you have the option of either beginning payments on the interest immediately, or deferring them up to 6 months after graduation when you begin payments on the principle.

Federal Loans: These are the bad boys that you’re looking for.  They have fixed interest rates and are typically subsidized. You apply for these loans by filling out the FAFSA (Free Application for Federal Student Aid). There are mainly three different kinds of loans, the Perkins Loan, the Stafford Loan, and the PLUS Loan.

• Perkins: You’ll have to prove exceptional financial need, but it’s perfect for independent students. Typically it’s a 5% fixed interest rate and it can grant you up to $20,000 for undergraduate, and up to $40,000 combined undergraduate and graduate. The best bonus is that these loans could be cancelled if you go in to fields like nursing or law enforcement, volunteer for the Peace Corps. or go on to teach in a low-income school.

• Stafford: Be cautious of the Stafford because it can be either subsidized OR unsubsidized. If your family can prove less than $50,000 of gross income per year you can be approved for the subsidized version. Otherwise they may offer you the unsubsidized loan. The interest rates on this loan are currently higher than the Perkins, around 6%, but by 2011 it should be a mere 3.4% due to a government program.

• PLUS: (Parent Loan for Undergraduate Students) This is a loan designed to cover the gap between the financial aid packet that a school offers you and what you actually need, including books and room and board. It’s deceiving in its name, because you can also apply for it if you are a graduate or professional student. Interest rates are around 8.5% and vary depending who is offering, and based on your credit check. You must apply separately from the FAFSA. Look for banks and credit unions that offer federal education loans.

Private Loans: These are your riskier loans due to the fact there are no government- backed securities.  Despite private loans being a whopping 20% of the student loan market, they are not only going to be harder to find and obtain, but interest rates can vary from 8% to a terrifying 19%. These are loans from banks and credit unions that are not part of a federal student loan program, and repayment will probably begin immediately.

IATG Quick Tips:

•    Don’t procrastinate. Fill out that FAFSA ASAP!
•    Talk to your financial aid office! They can point you in the direction of your best private loan options if federal loans don’t come through.
•    Find a co-signer who can increase your credit score, it could help you out with more money and a lower interest rate.
•    Don’t get discouraged, the money is out there and you will find it.

Questions, comments, and concerns: send them my way at diane@iamthatgirl.com

photo by bill mcbain

education, fafsa, finances, financial aid, loan, money