Student Loan Advice From a Finance Specialist

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Student loan providers are the groups or organizations that finance a student’s education on the condition that they will be repaid at a later date. Approximately 43 million Americans held federal student loan debt in 2019. These compose the vast majority of student loans. Private loans can make up the difference when federal aid fails to fully cover the cost of tuition; however, these kinds of loans have their own unique requirements and, according to our expert, are best utilized after all non-private options have been explored first.

Investopedia spoke exclusively with Carrie Johnson, Accredited Financial Counselor (AFC®) and associate professor at North Dakota State University, on the topic of student loans, including the various types, the differences among providers, and some common misconceptions about them. Our edited conversation follows.

How to Apply for a Student Loan

Investopedia: What is the FAFSA, and does it matter how early you file for it? What’s the difference between the FAFSA and the CSS Profile?

Johnson: The Free Application for Federal Student Aid (FAFSA) is the form that families complete that makes them eligible for all federal student aid. The FAFSA collects student income and asset information, and if the student is a dependent, also collects the parents’ income and assets.

The information allows for a calculation called the Expected Family Contribution (EFC). The EFC is used by the institution the student will be attending to determine what types (grants, work-study, loans) and amount of federal student aid that student is eligible for.

The FAFSA collects the prior, prior year of income tax information. For example, for the school year 2021–2022, 2019 tax information is used. That way, families do not need to complete the FAFSA by the school’s priority date just to make corrections later. Each institution has a priority date. Some types of aid are awarded based on this date.

For example, a school may set a date in which only those who qualify and file the FAFSA prior to that date will receive the Supplemental Education Opportunity Grant (SEOG). This grant is a federal grant, but since each school that offers it can decide how it is awarded, the priority date is usually one of those criteria.

As stated before, the FAFSA is used to determine eligibility for federal student aid. The CSS Profile is used by some institutions to determine a student’s nonfederal student financial aid. While the FAFSA is through the Department of Education, the CSS Profile is not, and it is only required by about 400 institutions. The CSS Profile also costs money to complete each year.

Understanding Student Loans

Investopedia: Student loans are infamous for their high cost over time. Why do you think this industry still remains the primary avenue of financing higher education for so many people?

Johnson: According to the National Center for Education Statistics, the average yearly cost of attendance for a four-year public institution was $20,598—the cost is even higher at private nonprofit and for-profit institutions. That does include undergraduate tuition, fees, room, and board.

However, if you multiply that by four, you are looking at a total cost of $82,392 to obtain an undergraduate degree (if you finish in four years). Many families do not have that amount of money set aside to pay out of pocket, so student loans are used as a way to fund education.

Investopedia: How do loans differ for undergraduates and graduate students? Do you need to take out a new loan every year?

Johnson: I will start with the question related to taking out a new loan every year—the answer is yes. If you are using federal student loans, you will need to complete a new Free Application for Federal Student Aid (FAFSA) each year as well.

For federal loans, undergraduate and graduate student loans do differ in a few ways. First of all, the amount the student is eligible for is different. Each year, students are eligible for a maximum amount of Direct Student Loans based on their grade level. For example, first-year dependent students are eligible for $5,500 total, while a graduate student can receive up to $20,500 per year.

Graduate students are only eligible for unsubsidized Direct Loans. This means that interest begins accruing as soon as the loan is disbursed. Undergraduate students are eligible to receive subsidized Direct Loans (0% interest while at least a half-time student) if the information used from their FAFSA determines the student has financial need.

Graduate students also have an added opportunity to borrow federal loans in the form of a Direct PLUS Loan for graduate students, called a grad PLUS. Graduate students can fund up to their cost of attendance with federal student loans, while undergraduate students are limited in the amount of federal loans unless their parent takes out a Direct parent PLUS loan.

Investopedia: What will the differences be, if any, should a student take out a loan in their own name or if their parents take out the loan on their behalf?

Johnson: A student loan in a student’s name is their responsibility to pay back. For federal loans, these loans do not require a cosigner. If a student needs additional funding by borrowing a private student loan (a student loan from a bank, credit union, etc.), then they will most likely need a cosigner. If the borrower does not pay back the loan, it is the cosigner’s responsibility to do so. Some lenders do offer a cosigner release after so many on-time payments.

If a parent takes a parent loan, it is 100% their responsibility to pay back the loan. Even if the parent borrows with a federal parent PLUS loan, this loan is in the parent’s name and cannot be transferred to the student.

Investopedia: How does student loan debt differ from other kinds of debt? What does it mean if a student loan is subsidized or unsubsidized?

Johnson: Unlike some other forms of debt, like credit cards and unsecured loans, student loan debt is considered “good debt.” Yes, there is good debt and bad debt! Since you are financing an education and building your human capital—which can lead to a better career opportunity and potentially earn a higher income—it is looked at differently by creditors.

Student loan debt is more difficult to get discharged in bankruptcy. However, in recent months, there have been more cases in which this has not been the case.

Subsidized student loans are loans that do not accrue interest while a borrower is enrolled at least half time. Interest on unsubsidized student loans starts to accrue as soon as the loan is disbursed (released to the borrower).

Investopedia: What are the differences between student loans, grants, and scholarships?

Johnson: Student loans must be repaid. Sometimes they are called self-help financial aid, while grants and scholarships are considered gift aid because they do not need to be paid back. Grants are typically awarded based on financial need, and scholarships are usually merit-based (some can be based on other factors such as athletics or hobbies and interests).

Finding the Right Student Loan Provider

Investopedia: What are the differences between federal and private student loan providers? In which circumstances would one be better than the other?

Johnson: Federal student loans are those guaranteed by the Department of Education. The amount and type (unsubsidized versus subsidized) is based on the borrower’s financial need and grade level. Borrowers are then assigned a student loan servicer, whom they will work with after they leave school or drop below half time to repay the loan. Interest rates are fixed and set by the federal government annually.

A private student loan is through a financial institution, company, state agency, or school who offers student loans. Fees and interest are set by each institution, so they vary widely. Interest is often variable instead of fixed, which means the rate can change drastically throughout the life of the loan. It is important for borrowers to do their homework and compare fees and rates before deciding which loan to use. Private student loans usually will require a co-signer.

Federal student loans have many repayment benefits. For example, there are forgiveness options for certain occupations or in the event of a disability. If a borrower is struggling to make payments, there are options to suspend payments for a period of time. Private student loans do not offer these benefits, and in many cases, if a borrower passes away, their co-signer is then responsible for the remainder of the loan balance.

It is best to exhaust your federal student loan options before applying for a private student loan.

Investopedia: What are some things people should look for when shopping for private student loan providers? Are rates more advantageous in one situation than another?

Johnson: When shopping around for private student loans, a few items should be considered. Interest rates and origination fees are the two biggest financial-related items to compare. You may also want a loan that offers a co-signer release after so many on-time payments. Or, you may want a loan with a fixed interest rate versus a variable interest rate. The most important thing is to read all of the loan information and make an informed decision.

Investopedia: Are there any circumstances where it might make sense to not take out a student loan?

Johnson: Absolutely. If a student has enough scholarships—and/or grants and money in a savings account of some type—it would not make sense to take out a student loan. Also, if a student is offered a larger amount than needed on their award letter, they can choose to take a portion of the loan and decline the rest.

Help for Paying off Your Loans

Investopedia: What resources are available for anyone struggling with repaying their student loans?

Johnson: The first step when struggling to repay any form of debt is to contact the lender or servicer immediately. Don’t ignore the problem; it will not go away. For federal student loans, the borrower can apply for a deferment or forbearance. These allow for monthly payments to be temporarily postponed or reduced.

Investopedia: Should a student consolidate their loans after graduation? Can student loans be forgiven?

Johnson: Student loan consolidation can be a great tool to put all student loans borrowed during college into one loan. However, this needs to be done with some thought as to not jeopardize forgiveness opportunities or repayment benefits. By consolidating your loan, all of your loans will be paid off, and one new loan will be created. This means that all of the loan terms will change.

First of all, federal student loans and private student loans should never be consolidated into one loan. A Direct Consolidation Loan does not allow for private loans to be consolidated with it. So, to do this, a borrower would need to use a private consolidation student loan, which would turn the federal loan into a private loan with a new lender. If you want to consolidate your private student loans and your federal student loans, you will want to end up with two different consolidation loans.

Federal student loans can be forgiven, canceled, and discharged in a number of situations (Public Service Loan Forgiveness, Teacher Loan Forgiveness, Perkins Loan Cancellation, and Discharge, Total and Permanent Disability Discharge, etc.). Each one of these “programs” has different criteria, which the borrower must meet.

For example, there is Public Service Loan Forgiveness (PSLF). This is only available for Direct Loans (including Direct Consolidation Loans) for borrowers who are on an income-driven repayment plan, work for a qualifying employer, and have made 120 on-time payments while working full time.

Changes to Public Service Loan Forgiveness [PSLF] Program

On Oct. 6, 2021, the Department of Education announced temporary changes to the Public Service Loan Forgiveness (PSLF) program due to the coronavirus pandemic.

Borrowers are now eligible to receive credit for past payments regardless if payments were made on time or for the full amounts. Past payments ruled ineligible under the previous PSLF may count toward the 120 payment total. Previously denied PSLF applications for any errors will also be reviewed, allowing borrowers the ability to have their PSLF determination reconsidered.

Borrowers can receive credit for past payments regardless of the payment plan or loan program. However, all loans must be federal direct student loans or consolidated into a direct loan program by Oct. 31, 2022.

To qualify for PSLF, borrowers must have worked full-time for a qualifying employer when prior payments were made, and those employers include the government, a 501(c)(3) not-for-profit, or other not-for-profit organization that provides a qualifying service. Borrowers should submit a PSLF form by Oct. 31, 2022.

Investopedia: Is there a regulatory agency for student loan providers? Where should students go if they are having problems with their provider?

Johnson: The U.S. Department of Education Ombudsman Group is dedicated to helping resolve disputes related to federal student aid programs. For private student loans, a complaint can be submitted to the Consumer Financial Protection Bureau Private Education Loan Ombudsman.

Closing Thoughts

Investopedia: What are some of the common misunderstandings people have about student loans?

Johnson: I have heard a lot of misunderstandings about student loans throughout my career. Some of the more common ones are as follows.

“I don’t qualify for financial aid because my parents make too much money,” is probably the one I have heard most. That simply is not true. Income will not prevent you from qualifying for federal student loans; eligibility may just be limited to unsubsidized Direct Loans.

“I made a mistake on my FAFSA, so I was chosen for verification.” Just because you are chosen for verification, it does not mean you did anything incorrect. However, a certain number of files are chosen for verification each year, and if you are one of the lucky chosen ones, you will need to provide the required documentation to your school, or you will not be eligible for federal student aid.

“My parents are not helping me pay for college, so I am independent.” A student is considered dependent unless they meet very specific criteria. In general, if you are an undergraduate student under the age of 24 and are unmarried and do not have children, you will be considered dependent for financial aid purposes. There are a few other situations, which would change your dependency status, too.

“My Expected Family Contribution is XXXX; I don’t have that much money to pay for school.” The EFC does not represent an actual dollar amount but is just a number used to calculate how much financial aid you are eligible to receive.

Investopedia: What is your recommendation for anyone thinking about taking out a student loan? What should people know about student loans that we didn’t ask?

Johnson: It is important to know what you are getting into when taking out a student loan. Do as much homework as you possibly can. Ask questions! It is so easy to go through the motions just to make sure you have funding available to pay for college. But being an informed consumer is essential because these loans will affect your future for many years.

If you are a parent helping your child through the process, involve them every step of the way. This is probably the first debt to be incurred in their lives. They need to know the seriousness of taking on debt. It is true that most student loans do not need to be repaid until after a borrower leaves school, but if the borrower is not paying attention to the amount being borrowed every year, it can be a complete shock to them when they graduate and see the price tag later.

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