Student Loans: What You Need to Know before Signing; When Borrowing to Pay for College, It Takes Great Care to Minimize the Impact on Personal Finances
[ILLUSTRATION OMITTED] Student loan arrangements can have unforeseen, long-lasting implications for a family's financial future (see the chart "Consequences of $1.4 Trillion in Student Loan Debt").To illustrate this point, let's look at a nightmare scenario that is based on a real-life situation. A few months before his eagerly anticipated early retirement, 62-year-old Tom was diagnosed with a terminal disease. Most patients with this disease five two to five years from the date of the diagnosis. Tom had always carefully planned his family's finances. He prepared a monthly budget and began planning for an early retirement with his wife, Jo, when he was in his early 30s. His four children all went to college, which the family financed primarily through private student loans. But Tom missed a crucial detail included in the loans' promissory notes. If the student or the co-signer died before the loans were fully paid, the loans became immediately due. At the time of his diagnosis, the loans due totaled almost $150,000. Tom and Jo were devastated by the news. Tom was already worried that too much would be spent on his care, leaving less for Jo, who was just 60, to live on after his death. Jo was concerned with making Tom as comfortable as possible during the time he had left, no matter the cost. Realizing that $150,000 would now have to be diverted from the insurance proceeds at Tom's death only increased their fears. WHAT YOU NEED TO KNOW ABOUT STUDENT LOANS This story illustrates what can happen when borrowers do not realize the full implications of the loans they have taken out. Of course, not all repayment situations will be so dramatic. But Tom and Jo's story underscores the importance of knowing the basics about undergraduate student loans. Here are some key things you need to know before you, your children, or your clients take out a student loan. * There are two types of student loans. Federal student loans (FSLs) are issued directly to students by the federal government. Private student loans are issued by banks or other financial institutions. * FSL interest rates are either subsidized or unsubsidized. Subsidized FSLs do not accrue interest while the student is in school. Unsubsidized FSLs accrue interest while the student remains in school. * FSLs and private loans have different repayment terms. The repayment terms for FSLs are more flexible and offer relief if needed. Private student loan terms are set by the lender and offer little flexibility or relief if the student has trouble repaying. * FSLs are based on the student's financial need, not on the borrower's credit rating, whether the borrower is the student, the parents, or someone else. The only exception among FSLs is the parent PLUS loan. Financial need is calculated as the difference between the cost of attending a school and the student's expected family contribution. These four points are certainly not exhaustive, but they are a good place to start as you or your clients consider student loan options. PLAN FOR FINANCING COLLEGE WITH STUDENT LOANS There are many things for individuals, CPAs, and their clients to consider when financing college with student loans: * FSLs typically have lower interest rates. The interest rate on an FSL is often lower than on a private student loan. (However, private student loans can have lower interest rates if the student and the co-signer have excellent credit.) Even if a student's or a parent's employer offers special access to private student loans, check out the availability of FSLs before choosing a private student loan. * Keeping interest under control is important. While in school, students should consider paying the interest that accrues on an unsubsidized loan to minimize the overall interest they will pay on the debt. * Students do not need to borrow all the money available. …