Know Before You Owe Mountains Of Student Loan Debt

Image courtesy of Eric Gjerde

Each year millions of students take out thousands upon thousands of dollars in student loans and other financial aid to help pay for a college education. But as we found out yesterday, many of these prospective students are woefully unprepared for the reality of student loan debt. From reading through piles of paperwork to making payments each month and keeping track of loan servicers, financing your education can be overwhelming, but that doesn’t mean you shouldn’t learn as much as possible before you end up under a mountain of loan debt.

Nearly two-thirds of colleges students who take out loans have no idea what they’re in for, according to a recent the survey [PDF] from our colleagues at Consumer Reports.

In fact, 62% of Americans with student loan debt did not attend any financial aid information sessions prior to enrolling in college.

That’s like walking into a bank and borrowing $50,000 without having any idea when or how you’re supposed to pay it back, or the consequences of failing to meet repayment obligations.

Thankfully, the federal government and consumer advocates have compiled a wealth of resources aimed at assisting students in being financially prepared for college and understanding their debt obligations after graduation.

Still, it can be difficult for students and their families to find this information — or understand their rights when it comes to loans — if they don’t know where to look.

For most college bound students paying for school will likely begin by filling out a Free Application for Federal Student Aid.

Each year, the FAFSA hooks up students and potential students with various ways to obtain federal and state grants.

For years, we’ve been urging students to fill out their FAFSAs at the start of the new year, as some grants — especially state-level ones — are disbursed on a first-come basis.

Filling out the FAFSA early also gives you a head start on getting a better understanding on what you’ll have to borrow or go out-of-pocket for in the next school year.

While high schools may provide students with information about the college financing process and colleges offer financial aid advisors, it’s clear from CR’s recent report that many consumers aren’t aware of these sessions or they don’t feel the information is useful.

To that end, the federal government now requires students who have not previously received a Direct Loan to complete entrance counseling to ensure that you understand the responsibilities and obligations they are assuming.

The goal of entrance counseling is to help you understand what it means to take out a federal student loan, according to the Department of Education, noting that the counseling must be completed before the first disbursement of your loan.

Still, it’s up to each individual school to tell students how to complete this entrance counseling, according to the DOE. For example, colleges may require in-person counseling, or students may be able to complete the counseling online through the school’s own financial aid office or the DOE’s student aid office.

That means there’s no way to objectively measure or monitor what students are getting out of this counseling.

“For federal aid, all the required financial counseling is generally automated and provided via Dept of Ed, not the schools directly,” Suzanne Martindale, staff attorney for our colleagues at Consumers Union, tells Consumerist. “Whether schools are required to do more will depend on whether state law has additional requirements. All this to say, there are only bare bones requirements under federal law, and in practice students appear to get varying levels of counseling depending on which schools they happen to attend.”

Still, the DOE offers other resources that students can pursue on their own through its Federal Student Aid office.

For example, the office explains what financial aid is the best to accept. Rule of thumb: free money first (scholarships and grants), then earned money (work-study), then borrowed money (federal student loans).

The office also details the important differences between federal and private student loans. Federal student loans include many benefits — such as fixed interest rates and income-driven repayment plans — that are not typically offered with private loans.

In contrast, private loans are generally more expensive than federal student loans and often require a co-signer. Per the DOE, here are the differences between federal and private student loans:

Federal Student Loans Private Student Loans 
You will not have to start repaying your federal student loans until you graduate, leave school, or change your enrollment status to less than half-time. Many private student loans require payments while you are still in school.
The interest rate is fixed and is often lower than private loans—and much lower than some credit card interest rates. View the current interest rates on federal student loans. Private student loans can have variable interest rates, some greater than 18%. A variable rate may substantially increase the total amount you repay.
Undergraduate students with financial need will likely qualify for a subsidized loan where the government pays the interest while you are in school on at least a half-time basis. Private student loans are not subsidized. No one pays the interest on your loan but you.
You don’t need to get a credit check for most federal student loans. Federal student loans can help you establish a good credit record. Private student loans may require an established credit record. The cost of a private student loan will depend on your credit score and other factors.
You won’t need a cosigner to get a federal student loan in most cases. You may need a cosigner.
Interest may be tax deductible. Interest may not be tax deductible.
Loans can be consolidated into a Direct Consolidation Loan. Learn about your consolidation options. Private student loans cannot be consolidated into a Direct Consolidation Loan.
If you are having trouble repaying your loan, you may be able to temporarily postpone or lower your payments. Private student loans may not offer forbearance or deferment options.
There are several repayment plans, including an option to tie your monthly payment to your income. You should check with your lender to find out about your repayment options.
You may be eligible to have some portion of your loans forgiven if you work in public service. Learn about our loan forgiveness programs. It is unlikely that your lender will offer a loan forgiveness program.

The office also provides resources on how much students might expect to receive or how much they should actually accept of any awarded funds. The DOE urges students to only borrow what they truly need for school.

“If your living expenses are not going to be as high as the amount estimated by your school, you have the right to turn down the loan or to request a lower loan amount,” the DOE says, noting that their school will tell you how to do this.

The Consumer Financial Protection Bureau also offers similar comparisons and information related to taking out federal and private student loans.

While many of the DOE’s resources concern knowing before you owe, the agency also tries to ensure consumers know their obligations after graduation, such as repayment [PDF].

For example, the DOE requires exit counseling for anyone who received a subsidized, unsubsidized, or PLUS loan under the Direct Loan Program each time they graduate, drop below half-time enrollment, or leave school.

As with entrance counseling, schools may have alternate exit counseling requirements.

Although entrance and exit counseling may be helpful to students, it should be noted that the DOE estimates that each course lasts only between 20 and 30 minutes.

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