The Student Loan Debt Bubble
In 2008 we saw one of the first financial bubbles burst in the housing market. Student debt is estimated to be the next economic bubble to burst. Student tuition is increasing at an average of 6% higher than National inflation per year. What’s more troubling is student debt is more than $1 trillion. more ...
Your Guide to Student Loans
In the early days of this country, James Madison, Thomas Jefferson and George Washington wanted there to be a national university system. However, Congress disagreed as there was no statement for higher education in the Constitution and they felt higher education was to be left up to the states.
It was not until 1944 with the Servicemen's Readjustment Act, more commonly known as the GI Bill, that the numbers of college educated American's rose. In 1954 the College Scholarship Service created merit based scholarships.
Thanks in part to the Soviet's launching Sputnik, Congress was afraid that America was falling behind in Science and Engineering. The National Defense Education Act in 1958 led to the low interest government student loan. This is what we now refer to as the Perkins Loan. The Stafford Loan came about in 1965 with the Guaranteed Student Loan program for middle income students. In 1972 with the Higher Education Act Congress opened the door for financial aid for junior colleges and trade school along with colleges and universities.
Through the years the issue of loans outweighed the issue of grants. As more students became eligible, tuition costs rose. Tuition rose higher than inflation. President Clinton tried to create another overhaul of the student loan program in 1998, but was not successful.
How Do Student Loans Work?
Student loans are low interest loans given to students or parents to cover the cost of college. Many student loans do not come due while you are in school as long as you are taking a certain number of credits. When you have graduated, or when you stop going to school, your student loan comes due.
What Are Federal Student Loans?
Federal student loans are looked on as the most favorable of all loans. Not because of the amount that you will receive, but because of the low interest. Federal loans are paid to the school first to cover tuition and then you receive a check to cover living expenses and books. Some of the federal loans that are out there include:
- Perkins Loan: Based on need
- Stafford Loan: Has a low and high cap, offers about 6.8% interest rate
- Parent PLUS: Loans based off of the parent credit score
What Are Private Student Loans?
Private student loans are issued from banks. These loans are based on your credit score. The interest on private loans will vary based on the LIBOR and Prime Rates at the time of application.
What are the Differences with Subsidized and Unsubsidized Loans?
Subsidized loans do not accrue interest from the start. This means you are not being charged interest for four or five years when you are in school. Unsubsidized loans will accrue interest from day one. You can offset this by making interest payments when you are in school. You do not have to pay the principal until after you finish school and this will save you some fees later.
When Do I Have to Pay Back My Loan?
With unsubsidized loans you can choose to begin payments right away, defer principal and pay interest or defer everything until six months after you graduate. Repayment methods will vary based on your expected salary and your degree. If you are entering the public service sector such as teaching or nursing there may be a time when your loan is forgiven.
If you run into issues repaying your student loan you can look for forbearances from federal loans or consolidations from private loans. This may make the stress of making payments in tough times a little easier.
How Do I Apply for Student Loans?
As soon as you apply to school you should apply for the FAFSA. The Free Application for Student Aid looks at your tax information and need and will determine which federal loans you will qualify for. This application should be filed as close to January 1st as possible for the fall semester. Most schools will have counselors that you can talk to when applying for student loans gets overwhelming.
What Should I Look For in a Good Student Loan?
When it comes to private student loans you will want to do your research. Check out a company, read the reviews, see how they are rated on the Better Business Bureau website. You want to find a strong company that will offer you are good interest rate and payback options that work for you.
Why Would I Need a Student Loan?
If you can pay for your college for all four years, or if you have a full scholarship; congratulations! However, if you are like the majority of students out there you will need some form of financial aid. An education will help you advance in life; a student loan helps you get there.