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Know your student loans

Thursday, July 24, 2014 | 6:00 a.m. CDT

COLUMBIA — The numbers are staggering.

Outstanding student loan debt in the United States has surpassed the $1 trillion  mark, according to the Consumer Financial Protection Bureau.

Nationwide in 2013, 70 percent of college students graduated with debt, owing more than $35,000 on average, according to a Fidelity Investments study.

In 2012, 63 percent of Missouri students graduated with an average debt load of about $23,000, according to the Project on Student Debt.

Unfortunately, the outlook is not improving. According to the Federal Reserve Bank of New York, student loan debt is the only form of consumer debt that has increased since 2008, and it accounts for 9 percent of all household debt in the United States, second only to home mortgages.

So what can you do to minimize the cost of your education?

Know your student loans.

It could save you thousands of dollars in the long run.

The website for MU's Office of Student Financial Aid offers information on several different student loan options. Below, you'll find the advantages and disadvantages for some of the most common, federal student loans.

Ford Federal Direct Subsidized Loans

Advantages:

  • Relatively low-interest rates that are fixed for the life of the loan. The interest rate for a Direct Subsidized Loan disbursed on or after July 1, 2014, and before July 1, 2015, is 4.66 percent.
  • The U.S. Department of Education will pay the interest accrued on the Direct Subsidized Loan while you're attending school at least half-time; during a grace period, which is the first six months after graduating, leaving school or dropping below half-time status (unless the loan was disbursed between July 1, 2012, and July 1, 2014, in which case you would be responsible for the interest accrued during the grace period); or during a period of deferment.

Disadvantages:

  • Direct Subsidized Loans are only available to undergraduate students.
  • You must demonstrate financial need for the loan.
  • There is a loan fee of 1.072 percent on all Direct Subsidized Loans disbursed on or after Dec 1, 2013, and before Oct 1, 2014. There is a loan fee of 1.073 percent on all Direct Subsidized Loans disbursed on or after Oct 1, 2014, and before Oct 1, 2015.

Ford Federal Direct Unsubsidized Loans

Advantages:

  • Direct Unsubsidized Loans are available to undergraduate, graduate and professional students.
  • For undergraduate students, relatively low-interest rates are fixed for the life of the loan. The interest rate for a Direct Unsubsidized Loan disbursed on or after July 1, 2014, and before July 1, 2015, is 4.66 percent for undergraduate students.
  • You do not need to demonstrate financial need for the loan.

Disadvantages:

  • You are responsible for paying the interest, even while attending school at least half-time or in a period of grace or deferment.
  • For graduate and professional students, the interest rates are fixed for the life of the loan, but they are higher than interest rates for undergraduate students. The interest rate for a Direct Unsubsidized Loan disbursed on or after July 1, 2014, and before July 1, 2015, is 6.21 percent for graduate or professional students.
  • There is a loan fee of 1.072 percent on all Direct Unsubsidized Loans disbursed on or after Dec 1, 2013, and before Oct 1, 2014. There is a loan fee of 1.073 percent on all Direct Unsubsidized Loans disbursed on or after Oct 1, 2014, and before Oct 1, 2015.

Ford Federal Direct PLUS Loans

Advantages:

  • Direct PLUS Loans are available to graduate and professional students or to parents of dependent undergraduate students.
  • Interest rates are fixed for the life of the loan.

Disadvantages:

  • Borrowers are subject to a credit check. Individuals with an adverse credit history cannot borrow money without meeting additional requirements.
  • The interest rate for a Direct PLUS Loan disbursed on or after July 1, 2014, and before July 1, 2015, is 7.21 percent.
  • There is a loan fee of 4.288 percent on all Direct PLUS Loans disbursed on or after Dec 1, 2013, and before Oct 1, 2014. There is a loan fee of 4.292 percent on all Direct PLUS Loans disbursed on or after Oct 1, 2014, and before Oct 1, 2015.
  • Direct PLUS Loans enter repayment once the loan is fully disbursed. Graduate students, professional students and parent borrowers may receive a deferment for various reasons, but interest will accrue during this period.

Federal Perkins Loans

Advantages:

  • Perkins Loans are available to undergraduate, graduate and professional students.
  • Relatively low-interest rates are fixed for the life of the loan. The interest rate for a Perkins Loan is currently 5 percent.
  • Interest does not accrue while you're attending school at least half-time, and you have a grace period of nine months after graduating, leaving school or dropping below half-time status before you must begin the repayment process.
  • There are no loan fees.

Disadvantages:

  • Your college is the lender and not all schools participate in the Perkins Loan program.
  • You must demonstrate exceptional financial need for the loan.
  • There are limited funds and not everyone who qualifies for a loan will receive one.

Interest rates and loan fees matter

Choosing the right student loan can result in lower monthly payments and dramatically reduce the amount of interest that accrues over the life of the loan.

Experiment with a student loan calculator and see the differences firsthand.

For example, the approximate cost of attendance during the entire 2013-14 school year at MU for an in-state, undergraduate student taking 14 credit hours per semester was $22,788.

Now imagine you borrowed that money at some of the most advantageous rates available, something similar to a Direct Subsidized Loan, with an interest rate of about 4.66 percent and a loan fee of about 1.072 percent.

You would have 120 monthly payments that average just over $240 per month. Over that 10-year span of time, you would pay back approximately $6,000 in accrued interest.

Now imagine you borrowed that money at some of the most disadvantageous rates available, something similar to a Direct PLUS Loan, with an interest rate of about 7.21 percent and a loan fee of about 4.288 percent.

You would have 120 monthly payments that average just over $279 per month. It may not seem like that much of a discrepancy, but over the next decade, you would pay back nearly $10,700 in accrued interest.

This illustration only accounts for a single year of school. Imagine the difference over the course of four or more years of college, in addition to rising tuition rates.

If you cannot secure the federal loan of your choice, or if you have reached the maximum amount of money that you can borrow from a specific type of loan, there are always private bank and lending options.

But, remember, shop around. Search for low-interest rates that are fixed for the life of the loan and try to avoid outrageous lending fees.

It's worth repeating: Know your student loans.

It could save you thousands of dollars in the long run.


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