Many parents lecture — er, talk to — their teenagers about being responsible. Don’t text and drive. Do try to spend that summer job money wisely. As children approach college, talking about student loans might be a smart idea.
For one, the topic is pretty complicated.
And second, even if you plan to help repay any student loans, most qualified education loans are taken out in the student’s name, and there’s usually no escape: Even bankruptcy rarely erases student loan debt.
Maybe your student-athlete or scholar is counting on a full ride. While confidence is a wonderful thing, full rides are exceedingly rare.
Here are six student loan concepts you can discuss with your aspiring college student.
1. Here’s What We Think We Can Contribute
It might be uncomfortable to talk frankly about your family finances, but they almost always determine the amount and types of financial aid your child may qualify for.
It can be important for parents to discuss what they’re able to contribute in order to help their young adults wrap their heads around the numbers, too.
2. Let’s Forge Ahead With the FAFSA
The first step to hunt for financial aid is to complete the FAFSA®, the Free Application for Federal Student Aid. It takes most people less than an hour. Students helping their parents fill it out will get a look at the expected family contribution: the family’s taxed and untaxed income, assets, and benefits.
Based on financial need, a college’s cost of attendance, and FAFSA information, schools put together a financial aid package that may be composed of scholarships and grants, federal student loans, and/or work-study.
Awards based on merit (scholarships) or need (grants) are free money. When they don’t cover the full cost of college, that’s where student loans can come in.
If your income is high, should you bother with the FAFSA? Sure, because there’s no income cutoff for federal student aid. And even if your student is not eligible for federal aid, most colleges and states use FAFSA information to award nonfederal aid.
About 400 colleges and scholarship programs use the CSS Profile, a financial aid application in addition to the FAFSA. It determines eligibility for institutional scholarships and grants.
3. Interest Rates: Fixed and Not
Your soon-to-be college student may not know that there are two types of interest rates: fixed and variable.
Fixed interest rates stay the same for the life of the loan. Variable rates go up or down based on market fluctuations.
You can explain that all federal student loans borrowed after July 2006 have fixed interest rates, which are set each year, and that private student loan interest rates may be variable or fixed.
4. Federal vs Private Student Loans
Around now your young person is restless. But press on.
Anyone taking out student loans should learn that there are two main types: federal and private. All federal student loans are funded by the federal government. Private student loans are funded by some banks, credit unions, and online lenders.
If your child is going to borrow money for college, it’s generally advised to start with federal student loans. Since federal student loans are issued by the government, they have benefits, including low fixed interest rates, forbearance and deferment eligibility, and income-based repayment options.
Private student loans have terms and conditions set by private lenders, and don’t offer the generous repayment options or loan forgiveness programs of federal loans, but some private lenders do offer specific deferment options.
Private student loans can be used to fill gaps in need, up to the cost of attendance, which includes tuition, books and supplies, room and board, transportation, and personal expenses. A student applicant often will need a cosigner.
5. Another Wrinkle: Subsidized vs Unsubsidized
Financial need will determine whether your undergraduate is eligible for federal Direct Subsidized Loans. Your child’s school determines the amount you can borrow, which can’t exceed your need.
The government pays the interest on Direct Subsidized Loans while your child is in college, during the grace period (the first six months after graduation or when dropping below half-time enrollment), and in deferment (postponing repayment).
With federal Direct Unsubsidized Loans, interest begins accruing when the funds are disbursed and continues during grace periods, and the borrower is responsible for paying it. Direct Unsubsidized Loans are available to both undergraduate and graduate students, and there is no requirement of financial need.
Borrowers are not required to pay the interest while in school, during grace periods, or during deferment (although they can choose to), but any accrued interest will be added to the principal balance when repayment begins.
There are annual and aggregate limits for subsidized and unsubsidized loans. Most dependent freshmen, for example, can borrow no more than $5,500.
6. Soothing Words: Scholarships and Grants
It’s important to not overlook the nonloan elements of the financial aid package. They can (hooray) reduce the amount your student needs to borrow.
Scholarships and grants are essentially free money.
While some schools automatically consider your student for scholarships based on merit or other qualifications, many scholarships and grants require applications.
You may want to assign a research project to your college-bound young adult to look into all of the scholarship options they may qualify for.
Debt isn’t the most thrilling parent-child topic, but college students who will need to borrow should know the ins and outs of student loans: interest rates, federal vs. private, subsidized vs. unsubsidized, and repayment options.
If federal aid doesn’t cover all the bases of college, your student can consider a private student loan with SoFi.
SoFi Private Student Loans come with competitive rates, flexible repayment options, and no fees. A student can apply entirely online, with or without a cosigner.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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