Student loans may be needed now more than ever. Here’s how to navigate the options

The coronavirus-induced economic recession may have more Americans turning to student loans for college these days.

The good news is that, if you have to take out a federal student loan, the interest rate is a favorable 2.75%, said Stacey MacPhetres, a college coach with Bright Horizons.

“If families are looking to borrow in any way, it definitely feels like a reasonable opportunity,” she said.

What college will ultimately cost you varies, depending on whether you attend a public or private college, and how much in financial aid or scholarships you receive.

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Tuition and fees at a four-year public college averaged $10,440 for in-state students for the 2019-2020 school year, according to the College Board. Out-of-state, four-year public colleges averaged $26,820, and private, nonprofit four-year schools averaged $36,880. 

Navigating the student loan process tends to be confusing for a lot of students and parents, said Michele Streeter, senior policy analyst with The Institute for College Access and Success.

“It can be overwhelming,” she said. “There is a lot that goes into it from every stage of the process.”

Here are the steps to take and options for student loans.

In order to know how much money you’ll have for expenses, first go through your family spending plan.

Have everyone sit down and track what is being spent for any given period of time, suggested MacPhetres, who formerly worked at JPMorgan Chase as vice president of education finance/student loans and as a senior financial aid officer at both Emerson College and Elms College.

Look to see if you can make any adjustments to come up with some additional cash flow.

Then, do that same analysis and see what is being spent on the student who is going away to school. Those expenses should clear up once the student leaves and can leave you with extra cash.

“That is the most important first step when you think about financing college: What can we, as a family, afford?” MacPhetres said.

The first thing you should do is fill out a Free Application for Federal Student Aid form, which you’ll need to access any federal money including financial aid, grants, work-study and loans.

“You don’t want to leave money on the table if there is something available,” MacPhetres said.

Also, make sure you are getting all the merit money you can in the form of private scholarships. School counselors and colleges coaches can help, as can websites like Scholarships.com.

If you decide you need a loan, turn to a federal student loan first, MacPhetres said.

“The rates are always lower and the terms are extraordinarily generous under the fed student loan program,” she explained.

It’s up to the school to determine the loan amount you are eligible to receive each year. However, there are borrowing limits on both subsidized and unsubsidized loans. For first-year undergrads, the subsidized loan limit is $3,500 and the unsubsidized limit is $2,000, bringing the total to $5,500. The total goes up to $6,500 for second-year undergraduates and $7,500 for third year and beyond.

With subsidized loans, based on financial need, the U.S. Department of Education pays the interest while you are in school at least half-time, for the first six months after you leave school and during a period of deferment.

Unsubsidized loans are available to undergraduate and graduate students with no requirement of financial need.

Then, decide if you want to borrow more than the federal student loan will give you. This goes back to your budget and whether you can pull more cash flow out of it after making some adjustments.

“Always really look at all of your options,” MacPhetres advised. “Borrow conservatively if you can.”

Parents can take out a Direct Plus loan to fund their dependent child’s undergraduate education. The loan has a higher interest rate and higher fees than the federal student loans, but there is a minimal credit check, Streeter said.

The interest rate for loans first disbursed on or after July 1, 2020 and before July 1, 2021 is fixed at 5.30% for the life of the loan.

While there have been years when families with exceptional credit could get better rates through a private loan, MacPhetres said he believes this year the Plus loan has an attractive rate.

With private loans, you’ll go through outside lenders, like banks.

First, decide who will be the borrower, the parent or the child. If the child is on the loan, they will more than likely need a cosigner, said MacPhetres.

There are also a variety of repayment options, such as starting monthly payments once the loan is dispersed, interest-only payments and deferring payments until school is finished.

The rates vary, depending on the credit history of the parent or student’s cosigner, as well as the type of repayment option you chose. Rates can also be variable or fixed.

You can compare rates first if you aren’t sure what options are best for you. Sites such as LendingTree’s MagifyMoney and Credible compare different loans. 

“If looking to rate shop private loans, you can apply for several as long as you do in a 30-day span,” MacPhetres explained. “It is recorded only as one credit hit.”

Streeter believes private loans should be a last resort.

“A family should explore other options before going into the private loan market,” she said. “They typically have far worse terms than federal plans.”

However, in some cases parents with good credit may be able to get a lower rate in the private market, although the terms still aren’t as good as federal loans, she said.