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Student Loans 101

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Student Loans 101

The low-down from Truth in Accounting

Courtney Buble

7.26.17

In between textbook ordering, dorm/apartment shopping, and end-of-summer partying, something else to be aware of as you prepare for the semester is your financial planning. As boring as it may sound, this is super important for you to be aware of as you plan your future and pay back your loans.

Truth in Accounting (TIA) is Chicago-based nonprofit founded in 2002 that strives to make financial information transparent and accessible to the public. TIA’s mission statement is “To educate and empower citizens with understandable, reliable, and transparent government financial information.” If you missed our feature article, be sure to catch up here.

Now, let’s get into the nitty-gritty and talk about something that all millennials should be aware of: student debt.

As of the end of 2016, the federal student loan debt was $1,331.7 billion with 42.3 million borrowers, according to data from The Office of Federal Student Aid. A major risk of taking out student loans is not getting a job that pays you enough to pay back those loans. To avoid such a conundrum, the following information may be of use.

Some historical context first

In 1965, the federal government did three things to increase college attendance. They were: guaranteeing student loans against default, promising a certain interest rate to banks (regardless if students were paying lower rates), and paying additional fees to banks for their facilitation and collection of student loans. This was part of the Higher Education Act of 1965. The law was reauthorized in 1968, 1972, 1976, 1980, 1986, 1992, 1998, and 2008. As a result many Americans received college degrees and a profitable revenue stream was created for banks.

Fast Forward to to 2010. President Barack Obama signed a law that got rid of banks as the middle-men for student loans. The Student Aid and Fiscal Responsibility Act of 2010 provided that loans were now given out by the Department of Education and funded through the U.S. Treasury.

Student loans have been in the news a lot as of late. On July 6, 18 states and the District of Columbia filed a lawsuit against Secretary of Education Betsy DeVos. They sued because DeVos froze rules that would eliminate student debt for students who were cheated by fraudulent colleges. These rules, finalized by former President Barack Obama in October, were supposed to go into effect July 1. This would have let students apply for loan forgiveness if they were misled by a college or if the school violated consumer protection laws. DeVos and the Trump administration are citing a lawsuit brought on by a California association that is defending the for-profit colleges.

Types of loans

It’s important to understand the difference between the various loans out there. Here is the quick run-down, as explained by TIA.

Subsidized (Government doesn’t accumulate interest until graduation)
● For undergraduates
● Financial need is required

Unsubsidized (Interest accumulates, but not paid during periods of grace and determent)
● For undergraduate, graduate, or professional degree students
● Financial need is NOT required

PLUS
● For parents of dependent undergraduate students OR graduate and/or professional degree students
● Financial need NOT required

Perkins
● For undergraduate, graduate or professional degree students
● Eligibility depends on financial need and availability of funds at student’s school
● School is the lender and government subsidizes the loan
● This is being phased out

According to the TIA’s State Data Lab, in 2016 the average student debt was $33,689. The table below is the average student debt across the 50 most populated cities in 2016, in addition to the national average.




Recommendations

If you’re struggling with student loans, here are some possible options for you:

1) Switch to an income-driven payment plan

2) Consolidate your federal student loans to one monthly payment. This can lower payments and give you more time, yet be aware there are more payments and more interest.

3) Deferment: Postpone unsubsidized or PLUS loans, but know that you’re responsible for accumulated interest.

4) Forbearance: Stop making payments or reduce payments for up to a year. Reasons for this are: illness, medical/dental internship or residency or teaching service (that qualified you for teacher loan forgiveness)

5) Forgiveness, cancellation and discharge if you meet one of the following requirements
-Your school closes
-You complete five academic years of teaching service
-You have a total and permanent disability (TPD)
-The borrower or student dies
-You work full time in public service for a qualifying nonprofit or public entity (Public Service Loan Forgiveness program)

6) Refinance: Change your payment plan for different interest rates, monthly payments, payment periods, etc. Student Loan Hero outlined 10 questions you should ask yourself before doing this.


Hopefully this article provides some insight into what can be a daunting problem!




This article is based on information provided by Truth in Accounting, specifically, a presentation called “Student Loan Debt” by Founder and CEO Sheila Weinberg. It should be noted that TIA is non-partisan and does not advocate for any specific policies.