The Ins and Outs of Student Loans
College is an expensive endeavor and the average individual cannot pay for full higher education tuition. Do not get discouraged. Today, there are millions of loans available for students, both from private and Federal lenders. The key is finding them, managing them successfully, and paying them back with interest on time.
The following set of articles go over a variety of student loan issues, including how student loans affect your credit score, tax credits, and things you should never do with a student loan. Take your time and peruse this page for a better understanding of how to successfully benefit from a student loan.
Student Loan Basics
Student loans are a form of financial aid designed to assist individuals seeking higher education. Loans are different from scholarships and grants in that the money must be repaid, usually with interest. These loans typically have low interest rates, do not require credit checks, and do not have to be repaid until after graduation. The two most popular forms of student loans include the Federal Stafford Loan and the Federal Perkins Loan.
Federal Stafford Loan
Federal Stafford Loans are made available to college students to supplement other forms of financial income. Stafford loans are made easily available, and nearly all students who apply are eligible, regardless of credit. These types of loans can be subsidized by the government (the government pays the interest while you're still in school), or unsubsidized (you pay all the interest, although you can have the payments deferred until after you graduate), depending on the individual's particular situation. Benefits of Stafford Loans include a low fixed interest rate, increased borrowing limits, and no payments while attending school.
To qualify for a Stafford Loan, you must be a U.S. citizen or national, or a permanent U.S. resident. You must have completely filled out and submitted a FAFSA form, your school must determine your exact financial need, and you must be enrolled at the institution at least half time.
Stafford Loan Limitations
The Stafford Loan carries two separate sets of limits. First, a combined base limit for the subsidized and unsubsidized loan, as well as an additional limitation for just the unsubsidized loan. Go to http://www.finaid.org/loans/studentloan.phtml for complete details about Stafford Loan limitations.
Federal Perkins Loan
Federal Perkins Loans are low-interest loans designed to help struggling students with the cost of college. The Perkins program is campus-based, with the institution playing the part of the lender using funds provided by the federal government. Perkins Loans are subsidized, and there is a 10-year repayment period. This program is available at over 1,800 postsecondary institutions nationwide, and financial aid administrators at participating institutions have considerable discretion in determining the amount of money awarded.
Perkins Loan limitations
Your Perkins Loan award is determined by your institution's financial aid department. Program limits are $5,500 a year ($27,500 cumulative) for undergrads and $8,000 a year for graduate students ($60,000 for undergraduate and graduate loans combined).
Private Student Loans
If, for whatever reason, the federal government cannot meet your borrowing needs, there are a number of private and alternative student loan supplemental borrowing programs available to you.
Private student loans should only be used as a supplemental source of income after you have exhausted all other types of student aid. As with any student loan, be wise and borrow only what you absolutely need.
The fees and interest rates charged by some private lenders can substantially increase the price of the loan. The most desirable private student loans will have rates around LIBOR + 2.0% or PRIME – 0.50% with no additional fees; such loans will be comparable to Stafford and Perkins Loan rates. It is common for private lenders to advertise a lower rate for the in-school and grace period, with a substantially higher rate kicking in when the loan enters the repayment phase.
Private student loan volume is growing rapidly, and if current trends continue, annual private education loan volume will surpass both Stafford and Perkins Federal Loan volume within the next decade. Please refer to the sources below for more information about private and alternative student loan programs.http://www.staffordloan.com/
http://www.finaid.org/loans/privatestudentloans.phtml
Article Resources:
Fin AidStafford Loan
U.S. Department of Education
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How Will Student Loans Affect My Credit Score?
When calculating your credit score, student loans work like car loans, mortgages, or any other loan which is repaid in installments rather than in amounts of your choosing as it is with credit cards. A large student loan debt is viewed more favorably than a large credit card debt. Like any loan, missing payments on a student loan will negatively affect your credit score and making payments on time will improve it. Without much of a credit history as a foundation, a poorly-handled student loan can be devastating to your credit score. However, if handled responsibly, student loans won't hurt—and can even help—your credit score.
Debt to Income Ratio
One way your student loan may affect your credit score is through your debt to income ratio. When trying to get a car loan or a mortgage, the bank will look at your current debt load. If it's high—if 40% of your income is already going toward student loan repayments—then they might see you as a risk. This risk will be reflected in your credit rating. One way to alter your debt to income ratio without actually reducing your total debt load is to negotiate a new plan with lower monthly payments over a longer period of time.
Consolidating Student Loans
Consolidating your student loans can improve your credit score by lowering your monthly debt load. If you negotiate a different repayment plan—one with a lower repayment over a longer period of time—it can improve your credit score. Of course, if you're managing multiple loans with different repayment plans, consolidation might indirectly improve your credit score by making it easier for you to repay your loans on time.
Forbearance and Deferral
Deferring student loan will not affect your credit score. Because you've worked things out with your loan servicer, you won't have missed a payment, and it won't be registered in the equation that calculates your credit rating. If you think you're going to miss a payment, you should contact your loan servicer immediately and work out a new repayment plan. It's much easier to negotiate a new plan before you've missed a payment than after you've missed one.
Defaulting on Student Loans
Your loan goes into default if you miss payments for 270 days. Each missed payment will hurt your credit score, and defaulting can devastate it. As a recent graduate, you probably don't have a long credit history to balance out the default. Consequently, a defaulted student loan will ruin your credit score, making it extremely difficult to get credit in the future—or difficult to get credit at non-exorbitant rates of interest. If you think you're going to miss a payment, you should contact your loan servicer immediately and negotiate a repayment plan. Re-negotiating or differing your loan will not affect your credit score; defaulting will ruin it.
Article Resources:
Students.govStudent Loan Borrower Assistance
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10 Things to Never Do With Your Student Loans
Take your student loan seriously. The repercussions for defaulting on a student loan are serious. Defaulting will harm your credit rating and make you ineligible for future student aid, among other consequences. The consequences are also long lasting: the IRS will garnish your social security if necessary. Here are few things to remember not to do with your student loan.
1. Never take out a loan if you haven't thought about how you're going to repay it.
There are several websites, including the Department of Education's website, with loan repayment calculators. Play around with these before you take out a loan. Write up a budget for yourself. Think about whether it's realistic for you to repay that much money after graduation. It's much easier to not take out a student loan than to get rid of one once you've taken it out.
2. Never spend a student loan on something other than education.
If you drop out of college, you still have to pay back your student loan. Whatever you do, don't spend the money on something else. Many loan providers have penalties for spending student loan money on things other than education; you would receive these penalties in addition to the already-severe penalties that come from failing to pay back the loan.
3. Never forget to check whether education-related expenses are “qualified.”
Sometimes loan money can be spent only on tuition—not on school supplies or textbooks. Make sure you know what your loan provider considers “qualified” education expenses.
4. Never ignore it.
When you graduate, remember that you have a student loan to pay back. It won't go away if you ignore it.
5. Never wait to pay it off.
If you have a government subsidized student loan, you'll have a six-month grace period in which your loan doesn't accrue interest. But if you start paying off your loan during those six months, whatever you pay will go directly toward reducing the principle balance, which will lower the amount of interest you will have to pay.
6. Never forget to notify your loan servicer of a change in address.
It's entirely your responsibility to notify your loan servicer if you move. They will usually have a form for doing so attached to any notice they send you. If you fail to notify them, they will send notices to the wrong address until they transfer your loan to a collection agency, ruining your credit rating.
7. Never neglect to pursue deferral if you need to.
When you defer a student loan, you don't have to make payments, the loan doesn't accrue interest, and it doesn't count against your credit score. There are a variety of reasons you might defer a student loan. You can defer if you're unemployed, underemployed, or if you return to school. If you think you're not going to make a payment, you should absolutely try to defer.
8. Never neglect your options.
Some schools offer loan forgiveness if you pursue certain careers after graduation. For example, some teaching programs forgive your loans if you go on to teach in a high-need district, and some law schools forgive your loans if you go into public service. Some non-profit organizations, such as AmeriCorps and Peace Corps, also allow you to defer your loans or even have them forgiven. Don't forget to research these options before you give up on repaying your loan.
9. Never neglect to consolidate.
If you find yourself with a bunch of loans with different repayment schedules, you can significantly increase your chances of repaying on schedule by consolidating all of them into a single loan. Consolidation can also give you the opportunity to negotiate a new repayment plan.
10. Never neglect to call your loan servicer if you don't think you can make a payment.
Loan servicers are often good about negotiating a repayment plan that works for you. This can be as straightforward as a deferral or as complex as a graduated repayment plan—a plan that has increasingly expensive installments, based on the assumption that you'll earn more as you progress in your career. You'd be surprised what can come from a simple phone call to your loan provider.
Article Resources:
Student Loan Borrower AssistanceFair Loan Rate
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Student Loan Tax Credits
Tax credits reduce the amount of taxes you have to pay. This is different from tax deductions, which indirectly reduce your taxes by reducing the amount of income your taxes are based on. There are two types of tax credits available to help you pay for college: the Hope Credit and the Lifetime Learning Credit. These are sometimes referred to as “education credits.”
Who is eligible?
Eligibility for education credits is based on the Modified Adjustable Gross Income (MAGI) of the taxpayer—the student if they are paying for college on their own, or the student's parent or guardian if the student is listed as a dependent. The size of your credit is gradually reduced when your MAGI rises above $48,000 or, if you're filing jointly, $96,000. If your MAGI rises above $58,000 or, jointly, $116,000, you will be ineligible for an education credit.
Eligibility for education credits is also based on the amount you spend on education, either in the form of tuition or in the form of “qualified education expenses”: expenses such as textbooks or other materials that the student is required to pay for as a condition of enrollment. For example, a student who qualifies for the Hope Credit is credited an amount equal to the first $1,200 she spends on tuition or other education-related expenses and 50% of the next $1,200 for a total credit of $1,800.
You can claim only one tax credit per student per year: if you are eligible for both the Hope Credit and the Lifetime Learning Credit, you can choose to take one this year and the other the next year if you are still eligible.
Midwestern Disaster Area
If you're attending an institution in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, or Wisconsin, you may have expanded eligibility requirements. The size of your credit may also be doubled. See the IRS website for Publication 970 for a list of eligible counties.
If you are eligible for the Hope Credit, you can receive up to $1,800 toward your income taxes. To be eligible, you must
• Not yet have completed the first two years of post-secondary education. Generally, this means you are still a freshman or a sophomore.
• Be pursuing an undergraduate degree or other recognized education credential. See the IRS website for a list of recognized credentials.
• Be enrolled at least half time.
• Not have any felony drug convictions on your record.
The Hope Credit can be used for two years, usually the freshman and sophomore year.
The Lifetime Learning Credit can give you up to $2,000 toward your taxes. Unlike the Hope Credit, the Lifetime Learning Credit can be used for any year of postsecondary education regardless of whether it culminates in a degree. Also unlike the Hope Credit, the Lifetime Learning Credit is available for an unlimited number of years and lacks the ban on felony drug convictions.
For more information about education credits, see the IRS website about publication 970.
Article Resources:
IRS.govBank Rate
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Student Loan Tax Deductions
The federal government has several methods for making college more affordable. One method, education credits, directly reduces the taxes you pay. The second, tax deductions, indirectly reduces your taxes by allowing you to subtract money spent on education from your reported income. You can take the deduction even if you don't itemize deductions on your 1040 or 1040A. There are two forms of education-related deduction: the Tuition and Fees Deduction and the Student Loan Interest Deduction.
Eligibility
To be eligible, you, your spouse, or your dependent must be responsible for the education-related expenses. If you are a dependent, your parent or guardian can claim a deduction but you cannot. Furthermore, you must have spent the money at an eligible college, university, or vocational school and spent it on either tuition or a purchase required for attendance. For a list of eligible schools and qualified education-related purchases, see the IRS website. You can't claim a deduction for expenses paid for with a tax-free scholarship, grant, or education savings account.
Like education tax credits, the size of the deduction you take is depends on your Modified Adjustable Gross Income and on the amount you spend on education. However, the point at which your deduction begins to phase out is higher for a deduction than it is for a credit. If you're filing singly, deductions are phased out when your income is above $55,000; if you're filing jointly, $115,000. If your income is above $70,000, or $145,000 if you're filing jointly, then you will be ineligible for a deduction.
Tuition and Fees Deduction
If you spend more than $4,000 on tuition or required purchases at an eligible institution, the Tuition and Fees Deduction may allow you to deduct up to $4,000 from your income when filing taxes. The exact amount you can deduct varies depending on your income and filing status.
Loan Interest Deduction
The other type of deduction is based on the interest you pay on your student loan. If you take out student loans to pay for your education, you may be able to claim a deduction of up to $2,500 per year for the interest you pay. However, like the Tuition and Fees Deduction and education credits, the amount you can deduct may decrease depending on your income and filing status. Of course, to qualify for a Loan Interest Deduction you must have used the loan for education or qualified education-related expenses.
How to Get a Deduction
You don't need to itemize deductions in order to claim education-related tax deductions. You simply need to file federal tax form 1040 or 1040A and attach a completed Form 8917. For more information about eligibility and filing procedure, see IRS Publication 970, Tax Benefits for Education .
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Back to the TopResources for Student Loans
College.gov : College.gov has an entire section entitled "how to pay" for college. Here you can find information on financial aid basics, scholarships, grants, loans, and information on the FAFSA.
ELM Resources : ELM is a non-profit organization that provides a place where schools can choose from thousands of lender codes to disburse FFELP and private loans.
Equal Justice Works : Equal Justice Works provides extensive information on student debt relief. This can be an excellent tool for anybody who is struggling to pay back their student loans.
FAFSA : The Free Application for Federal Student Aid should be the first step any individual looking to obtain an education takes. By filling out this application, you are on your way to receiving federally mandated aid. This site also has numerous helpful tips and articles.
ParentPLUSLoan.com : The Parent PLUS Loans is especially for parents and guardians who have good credit and need to borrow money for their children to attend university.
The Portal for Student Aid : Sponsored by the Federal Government, the Portal for Student Aid covers what kinds of financial aid are available, repayment information, college savings calculators, and other basic information on funding your education.
StaffordLoan.com : The Stafford Loan is a Federal Loan for undergraduate and graduate students attending college at least half-time. It is the most common way for students to pay for college.
Student Loan Funding : This web site goes over Federal Stafford Loans, private education loans, and Federal Parent PLUS Loans. It also has a section dedicated solely to parents.
Student Loan Borrower Assistance : This site is for individuals who already have loans but want to learn more information about their options and rights.
The U.S. Department of Education : The USDE has numerous resources listed for financial aid.
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