By William Wright
Over the past year student loans have been at the forefront of discussion amongst major news outlets, family dinner tables, newspapers, academic research, and college students. Terms such as forbearance, deferment, zero percent interest, and loan forgiveness have all been circulating. In normal circumstances these terms can be confusing, never mind trying to make sense of it all during a pandemic.
This post is aimed to make it easier and much simpler to understand the various terms and ideas being floated around the news. If you are a college student with federal or private student loans it is important to understand some of these terms so you can make choices about your finances with a concrete understanding of all the options.
We are going to cover:
- Understanding the different types of loans
- Student Loan Forgiveness
- Loan Forbearance and COVID-19
Breaking Down Foundational Terms
When students take out Federal Student Loans they take out two different types of loans. One of the types is called Federal Direct Stafford Subsidized Loans. While this name may feel cumbersome, these types of loans are commonly referred to as ‘Subsidized Loans’. A subsidized loan is one where the government pays the interest on the loan throughout the duration of your undergraduate career.
The next type of loan is called Federal Direct Stafford Unsubsidized Loans. The unsubsidized loans are similar to the subsidized loans, but the key difference is the government does not pay the interest on the loan. This means that while you are enrolled in school the loan is earning interest. Interest accrues, meaning accumulates on the loan while you are enrolled. Additionally, students can defer payments on federal loans until they graduate so they do not have to make payments during their time in school.
Another type of federal loan is a Parent PLUS loan, which is a loan taken out by a parent to help their student pay for school. When a parent applies for a PLUS loan they only apply with their credit score, in addition to meeting other general eligibility requirements. This is different from private loans which require credit checks and income verification.
The last common type of loan for students are Private Student Loans. A private student loan is taken out at a local or national bank/credit union. The primary difference between private and federal loans is that private loans usually come with higher interest rates and do not offer the same level of flexibility as federal student loans.
Now that you have an understanding of the types of student loans, we can dive into understanding some more specific information about them.
Understanding the Term: ‘Student Loan Forgiveness’
To begin the conversation of Student Loan Forgiveness it is important to look at what is being said by lawmakers. There have been multiple lawmakers that suggest anywhere between $10,000-$50,000 in loan forgiveness. Currently it is hard to prepare for hypothetical situations that do not have guaranteed certainty of coming to fruition. The fact of the matter is that lawmakers stand divided on the issue and the process is complicated. The legislation, if passed, would require specifics that look to address all types of loans. There is also discussion about income-driven repayment plans, bigger Pell Grants, and free tuition at some universities.
The biggest take away from all the noise about debt cancellation and free college is that it is all conjecture at the moment! It is too early to definitively say that any loans are going to be cancelled. If you are a student with private student loans that are not eligible for COVID-19 forbearance, then it is best to start working to understand your loans and look at making payments to keep them manageable–if able. Even if you have federal student loans it is a great time to start working towards repayment or just understanding who the loan service provider is.
While student loan forgiveness would be helpful to millions of students and sounds like a great idea, it has not been passed and is still awaiting further discussion among lawmakers. While everyone waits to see what happens it is best to see what options are available.
COVID- 19 Federal Forbearance
As previously written in a prior SAM Blog post regarding COVID-19 forbearance:
“ Forbearance means that for government loans you do not need to make loan payments. The interest rate on those loans is now at 0%!’
Forbearance has been extended until September 31, 2021 which will keep interest rates at 0%.
According to the Department of Education:
“From March 13, 2020, through the end of the COVID emergency relief period, the interest rate is 0% on the following types of federal student loans, but only if they are loans owned by ED:
- Defaulted and non defaulted Direct Loans
- Defaulted and non defaulted FFEL Program loans
- Defaulted and non defaulted Federal Perkins Loans
- Defaulted HEAL loans”
This is great information and a great time to get on top of making payments to your loans, if possible. Forbearance is a great tool to utilize and has already passed which can help you start making plans for the future.
Conclusion
This was certainly a lot of information! If at any point you feel confused, please reach out to Smart About Money and set up a 1:1 appointment with a peer-financial-coach to discuss this information. After reading over all this information, here are the key takeaways:
- There are four main types of student loans:
- Federal Subsidized
- Federal Unsubsidized
- Parent PLUS
- Private
- COVID-19 Forbearance has set the interest rates on all federal student loans to 0% until September 30, 2021.
- This means it is a great time to get ahead of paying your student loans, if you are able, so when the interest rate does get higher you are paying less in interest on the principal amount.
- Student loan forgiveness is very uncertain and you should not wait for Congress to make a decision about forgiving student loans. It is best to start understanding and making payments to your student loans, if you are able, so when you graduate it is all familiar.