Guest Post: Nadia Jones on Student Loans
Editorial Note: Ms. Jones is a freelance writer/blogger who contacted me about submitting a guest post. I suggested she submit one on a subject I know less than I should about- student loans. Her post also gave me a couple of ideas for some future posts on related subjects, like how to minimize your expected family contribution when your kids go to college and how to qualify for loan deferment in residency. So watch for those coming up soon.
The Basics Regarding Student Loans
In these times of economic uncertainty, more and more students are turning to federal loans for financial aid, and for good reason. College loans give financial security to students struggling to make ends meet so that they can fully focus on their studies. While some may argue that the debt accrued through student loans outweighs the value of a college education, medical and other professional students may want to contend otherwise. An education that dramatically increases earning power is still a great investment. If you or your family can't pay cash for your education, why pass up the opportunity for an experience that will literally influence the rest of your life and dramatically increase your earning potential?
Unfortunately even those eager for financial assistance claim ignorance when asked how they apply for it. I’d like to offer a brief overview of what you can expect from the entire loan process, from application to repayment.
Qualifying and applying for federal aid
First of all, you need to be enrolled in an institution of higher education before you apply for student loans. Students can check if they meet the necessary requirements by filling out a Federal Application for Student Aid (FAFSA) online. The application will put forth questions regarding your eligibility for federal aid. If you’re found to be eligible for aid on academic grounds, the FAFSA application will then determine your unique Expected Family Contribution (EFC). The federal government determines this figure based on a variety of financial data from your parents or legal guardians, or from your own financial information if you’re applying as an independent student. An independent student is at least 21, is married, enrolled in a graduate program, or is supporting dependents. You can only apply for loans for the amount between the cost of attendance of the school and the EFC. The EFC doesn’t change if your high-earning or high-net worth parents don’t wish to help you out either.
Essentially the FAFSA will compare the financial information of the student and his family with the estimated cost of tuition and relevant school expenses in order to determine whether or not they’re eligible for aid. If a sizeable percentage of a student’s earnings and assets (say around 12%) far exceed the estimated cost of school with the associated fees, then they’ll be less likely to qualify for grants and loans withheld for students in serious financial need. If you want to get an idea of how exactly the government determines your EFC, Finaid.org has a page that allows the user to calculate their estimated EFC using all the same financial data that you would input into a FAFSA.
A variety of grants and loans
Through the Department of Education, the federal government grants financial aid through two main methods: loans and grants. There are no federal grants for medical students. So that leaves loans.
I’ll briefly touch upon two types, the Perkins loan and the Stafford loan. Perkins loans are granted to students in more dire financial circumstances, and they’re offered to both undergraduate and graduate students.
With the Perkins loan, undergraduate students can borrow up to $5,500 a year for their school expenses, or $27,500 for their entire undergraduate career. Graduate students can borrow up to $8,000 per year for a total of $60,000 for their time in school, including any Perkins loans borrowed as an undergraduate. Students will be relieved to know that they have up to nine months following graduation (or dropping out of school) before they are required to begin making payments on their Perkins loans. Perkins loans have a fixed interest rate (as of now) at 5%.
The Stafford loan is the most common federal student loan, meant primarily to assist undergraduate and graduate students in need of financial aid. The amount a student can borrow through a Stafford loan is determined by the institution of higher education, not the federal government. If you apply for a subsidized Stafford loan, your college will determine the fee allowed to you based on your financial standing (determined by your FAFSA). Subsidized Stafford loans don’t require proof of financial need. Interest rates vary for Stafford loans, and students don’t have to begin repayments on their loans until 6 months after they’ve completed or left school.
Unfortunately, graduate students are about to lose the opportunity to apply for subsidized Stafford loans. As of July 1, 2012, the federal government will cut funding to these loans for graduate students in an effort to ease federal spending as part of the Budget Control Act of 2011. Medical students will now have to rely primarily on unsubsidized Stafford loans or private loans. (Ed Note: Learn more about private loans here.)
President Obama’s “Pay as you Earn” Initiative
Recently President Obama announced that he would utilize his executive powers to expedite student loan relief legislation passed by Congress last year. Under his “Pay as you Earn” policy, recent graduates who owe money on their loans will be able to pay back their loans at a lower rate proportionate with their earnings (from 15% to 10% of discretionary income, to be specific). Before President Obama’s announcement, these new measures were to go into effect in 2014, but now people will be able to lower their monthly payments by 2012. The new measure sets a rule whereby graduates are forgiven of their debts after 20 years of faithful payments to their balance, reduced from the old standard of 25 years. The plan also allows graduates to consolidate their loans at a slightly lower interest rate (0.5% less) than was previously available.
What you can expect to pay after your graduate
Most federally issued student loans bear fixed interest rates, so students can confidently estimate how much they have to pay back to the government after graduating. Students interested in knowing the fixed rates of the various types of loans can check out the Department of Education’s website for more detailed information about interest rates. As I stated previously, recently graduated students are granted a reprieve in their loan payments during their first few months out of school. This grace period gives the recent graduate some much-deserved breathing room so they can properly assess their finances for the future as they consider medical school and beyond. And with the new measures enacted under the Obama administration, the burden of student loans will now be slightly less than before (Ed. Note- To the student, not the taxpayer of course.)
Recent graduates should also be aware that there are a number of ways to defer payment on a student loan. Among these types of deferments are those for military or Peace Corps service, for unemployment, and economic hardship. As the former two deferments are more or less self-explanatory, I’ll briefly explain the qualifications of economic hardship deferment. A graduate expecting student loan payments can apply for an economic hardship deferral of student loan payments for up to three years, given out in one-year increments. To qualify for this deferment, a graduate must prove that they receive some sort of state or federal assistance (food stamps, TANF, etc.) or that they earn less than the minimum wage rate working full-time.
Nadia Jones blogs at online college about education, teaching, finance, and movies. You can reach her at nadia.jones5 @ gmail.com.