A second-year undergrad’s financial concerns are much different from those of a borrower in their tenth year of repayment. However, student loan choices made early on in the student loan life cycle have both immediate and lasting impacts.

Students who borrow with an eye on the future will benefit from their decision-making for many years.

Picking a College and Comparing Financial Aid Offers

Before even choosing a school, student debt should already be an important consideration.

If a school is too expensive, you may run out of funding before graduation, or you may get stuck with a lifetime of student debt. Families should carefully consider funding options and school alternatives.

Part of this review should include a careful examination of the financial aid offers provided by the schools. If the financial aid offer from a school is too dependant upon student loans, it might be best to consider a different school. A good rule of thumb is that your expected starting salary should be larger than your expected student debt at graduation.

Student Loan Selection

When choosing student loans, there are two main options. Federal student loans have the best repayment plans and forgiveness options, but they also have strict borrowing limits for undergrad students. Private loans are far less flexible, but the borrowing limits are much higher.

As a student, the biggest concern might be finding the easiest application or getting quick approval. These concerns are temporary.

Once repayment begins, the importance of loan terms and interest rates becomes apparent. The borrowers who focus on these items during loan selection will have the best outcomes long-term. For this reason, shopping around is an essential step for borrowers who need private student loans.

Student Loans During School

Most student loan funds are disbursed directly to the college. After tuition and fees get paid, the remaining funds are given directly to the student. These funds can cover housing, food, and a variety of other expenses.

Term to Understand: Loan Origination Fees
A loan origination fee is an upfront cost associated with borrowing some student loans. For example, if a $1,000 loan has a 5% origination fee, the borrower will only receive $950 after deducting the fee. Origination fees are unavoidable with federal student loans. Students that need private loans should look for loans that do not charge origination fees.

During school students usually are not required to make payments on their loans. However, the loans still generate interest during this time. As a result, the amount you borrow will be smaller than the amount you have to repay. If you have a high interest rate, the amount you repay could be considerably larger.

Minimizing expenses and keeping student loan borrowing at a minimum should be a goal of all students.

Student Loans at Graduation

For most students, student loan repayment does not begin immediately after graduation. Most student loans come with a six-month “grace period.”

During the grace period, recent graduates should be generating a play to repay their student loans. This is also the time many borrowers start to panic about their debt levels and repayment options.

Here are a couple of tips for a productive start to repayment:

• The first federal bill may be quite large – It is based upon the 10-year repayment plan, but many more affordable repayment options exist.
• A Notice of Unpaid Interest is not a bill – Many graduates cannot afford to pay all of the unpaid interest right away. As long as they have a strategy to eliminate debt, the unpaid interest notice shouldn’t be a concern.

A common mistake during this portion of the student loan cycle is ignoring student debt. Many former students ignore their loans entirely in hopes that they will just disappear. Others assume that they can’t afford payments, so they don’t bother with the loans. These are huge mistakes. There are many options for lower monthly payments, and ignoring student loan bills will only make problems worse.

Repayment Phase One: Survival

When you first enter the workforce, your salary may be small compared to your student debt. Simply making payments is often a struggle.

This phase of repayment is a struggle for two reasons. First, from a purely accounting perspective, high monthly bills and a smaller income present a considerable struggle. Second, from a psychological perspective, it might seem like the debt will never be paid. This double-whammy makes it hard to stick to a student loan plan.

If there is good news, it comes from the fact that just $10 a month extra can make a difference in student loan repayment.

The survival phase typically lasts until that first student loan is paid off. Even if the first loan eliminated is small, it is a huge milestone. For many borrowers, knocking out the first loan is the hardest part.

Repayment Phase Two: Debt-Elimination

As borrowers find a groove with repayment, debt elimination becomes the focus.

Those with smaller balances or higher incomes often adopt an aggressive repayment strategy. Other borrowers have to learn to balance their debt elimination goals with other financial goals, such as buying a house or saving for retirement.

A couple of resources also enter the equation. Borrowers with high credit scores often refinance their loans at a lower interest rate. Other borrowers may pursue student loan forgiveness. These resources can be helpful in repayment, but it is critical that students do not borrow and assume that they will be able to refinance at a lower interest rate or get their loans forgiven.

The Cycle Repeats

Perhaps the most depressing part of the student loan cycle is how it repeats from one generation to the next. Many parents struggle to help their children pay for college because they are still paying off student loans of their own.

The best way to avoid a student loan nightmare is to make intelligent decisions when picking a college and when borrowing.

The post The Student Loan Life Cycle appeared first on The Student Loan Sherpa.

Schools take tens of thousands of dollars worth of expenses and fit everything into a short document. Many families make the mistake of deferring to the Financial Aid Office’s assumptions without doing any additional investigation on their own.

Not understanding financial aid packages can lead to students borrowing too much money. While there are ways to fix a student loan that is too large, the ideal approach is to address it before the loan is issued.

Cost of Attendance, Estimated Family Contribution, and Other Terms to Know

The Office of Financial Aid will first calculate a student’s Cost of Attendance or COA. The important thing to understand about the COA is that it includes far more than just tuition and fees.

The Cost of Attendance will factor in the following:

• tuition and fees
• housing and food
• books and other supplies, including a computer
• transportation expenses to get to and from school

The Cost of Attendance may also include adjustments for study abroad programs, child care, and costs related to a disability.

The next number that a school will use is the Estimated Family Contribution or EFC. The EFC is calculated based upon calculations from the FAFSA.

The Financial Aid Office will then calculate the Financial Need of a student by using the following formula:

COA - EFC = Financial Need

The Financial Need will also be adjusted to account for merit-based aid such as scholarships.

Finally, the school will put together a package to provide the student with the resources necessary to meet their financial need. This package may include federal grants, work-study, student loans, and Parent PLUS loans.

An Important Detail on Financial Aid Calculations: Most financial aid calculations are done following a very rigid formula. This formula may be more accurate for some students than others. Finding more affordable housing, or being able to contribute more than the EFC may change a student’s need to borrow student loans.

Do I Have to Accept the Full Student Loans Offered by My School?

No. Students do not have to borrow the full student loan package offered by the school or the federal government.

In many cases, the formulas used by the school overestimate the assistance that a student may need. The idea behind an aid package is to help every student afford the cost of attendance. Students that have resources that are not factored into the EFC will find they probably don’t need the full student loan offer. This outside help could include college contributions from a grandparent or earnings from a higher paying summer job that has yet to start. Additionally, students that can live more frugally may need considerably less than the room and board number used in calculating the Cost of Attendance.

Students that wish to borrow federal loans smaller than what is offered by the school should contact their financial aid office so that adjustments can be made.

Borrowing Extra to Play it Safe

Many students and families elect to borrow a little more than they anticipate needing.

The theory behind this approach is reasonably sound. If a student borrows more than necessary, they can always repay the debt at the end of the semester.

Additionally, it is probably better to borrow a little more than necessary than it is to borrow not enough. No student wants to be broke a few weeks before finals.

While it is a good idea to leave a bit of a cushion, it is essential not to get carried away.

Borrowing Too Much is a Mistake

Assuming things go according to plan, the students that borrow extra still end up paying a cost. First, because interest accrues daily on most student loans, the debt will have generated some interest during the course of the semester. Additionally, in the case of federal loans, there are loan origination fees. Parent PLUS loans and Graduate PLUS loans have exceptionally high origination fees. These fees are accessed the moment the loan is borrowed, and early repayment does not reduce the fee.

The other problem with borrowing extra is temptation. Student loans should only be used to pay off essential expenses for attending school. Using the money to pay for non-essential items like travel can make repaying student debt nearly impossible. In the moment, it might not seem like a big deal, but by the time the true cost becomes apparent, it is far too late to fix the mistake.

Thus, while having a bit of breathing room on student loan borrowing is fine, students should not assume that the full student loan offered is necessary.

Final Thought: Understanding Aid Packages

Financial Aid Offices have a huge challenge. They need to process aid packages for thousands of students in a short period. By necessity, they are not able to factor in the unique details that apply to each individual student.

The aid package may be a good starting point for determining how much a student should borrow, but it certainly shouldn’t be the final say.

The post Navigating Financial Aid Offers from Colleges appeared first on The Student Loan Sherpa.