Student Loans: Important Considerations Before Signing

Beware: student loans can have unforeseen, long-lasting implications for a family's financial future. At Lovette CPA we can help you navigate through the confusion to make a decision that makes the most sense to you and your family. The following will offer a description student loans that we hope you’ll find helpful.
There are two types of student loans.

• Federal student loans (FSLs) are issued directly to students by the federal government. Private student loans are issued by banks or other financial institutions.
• FSL interest rates are either subsidized or unsubsidized. Subsidized FSLs do not accrue interest while the student is in school. Unsubsidized FSLs accrue interest while the student remains in school.
• FSLs and private loans have different repayment terms. The repayment terms for FSLs are more flexible and offer relief if needed. Private student loan terms are set by the lender and offer little flexibility or relief if the student has trouble repaying.
• FSLs are based on the student's financial need, not on the borrower's credit rating, whether the borrower is the student, the parents, or someone else. The only exception among FSLs is the parent PLUS loan. Financial need is calculated as the difference between the cost of attending a school and the student's expected family contribution.

These four points are certainly not exhaustive, but they are a good place to start as you consider student loan options.
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PLAN FOR FINANCING COLLEGE WITH STUDENT LOANS
There are many things to consider when financing college with student loans:

• FSLs typically have lower interest rates. The interest rate on an FSL is often lower than on a private student loan. (However, private student loans can have lower interest rates if the student and the co-signer have excellent credit.) Even if a student's or a parent's employer offers special access to private student loans, check out the availability of FSLs before choosing a private student loan.
• Keeping interest under control is important. While in school, students should consider paying the interest that accrues on an unsubsidized loan to minimize the overall interest they will pay on the debt.
• Students do not need to borrow all the money available. If possible, students should borrow only what they need to cover tuition, books, and fees, and pay living expenses with income earned by working part time or applying for a work-study program as part of the Free Application for Federal Student Aid form.
• Details can be costly and shouldn't be overlooked. When applying for a private student loan, ask questions of the lender, read the terms very carefully, and, more importantly, read the promissory note. Consult a CPA like the pros at Lovette CPA if you are unclear about any details.
• Whether students apply for an FSL or a private student loan, they should plan the loan backward. In other words, students should think ahead to the loan repayment. What are their job prospects given their major and degree? What will they earn right out of school? High student loan debt—whether for an FSL or a private loan—can limit the choices students have when they look for a job. Recent graduates may have to move back in with their parents until their student loans are paid off. That's why students should have a realistic idea of the amount of their monthly loan payments. This information can help them make more informed decisions about how they want to finance their college education and, in some cases, which major they elect.

INCOME-DRIVEN PLANS: THE DETAILS
If you’re struggling to make their monthly student loan payments, they may want to consider income-driven repayment (IDR) plans. These plans are available through the U.S. Department of Education's Office of Student Aid for any borrower with eligible federal student loans. All Direct and FFEL student loans are eligible. Parent PLUS and Perkins loans are eligible if consolidated. IDR plans help borrowers avoid delinquency and default when their monthly debt payment consumes a high proportion of their monthly income. IDR plans do have a downside: Paying back the loan over a longer period means the borrower will pay more interest.
All IDR plans have the following aspects in common:

• They can be used by borrowers who have a financial hardship. This is determined based on the size of the standard student loan payment as a percentage of the borrower's discretionary income. Discretionary income is calculated by a formula that takes into account family size, household income, and the size of the loan compared with 150% of the federal poverty level. It is used to determine qualification for a loan and the size of the monthly loan payments during the 12-month period during which a borrower is qualified.
• They require annual recertification. The borrower must reapply every 12 months.
• They offer loan forgiveness of any remaining student loan debt not paid after 20 to 25 years.
• The federal government may provide a subsidy on interest accrual if the monthly IDR payment does not cover the total amount of interest. In most cases, the subsidy is only given for a limited period (e.g., three years).

However, in other respects the types of IDR plans differ. It’s difficult to determine which IDR plan is right for you, and Lovette CPA can be your guide.

With more than 20 years of experience, Lovette CPA, P.A., is a true business resource, offering a wide range of services to individuals, families and businesses of all sizes. We have locations in Greensboro and Raleigh. For more information, call us at 336.346.1960, visit our website, www.lovettecpa.com, or e-mail skip@lovettecpa.com.