Many students rely on the Federal Government for school loans, for which they may be eligible for any of the following: subsidized, unsubsidized, and PLUS loans. If a student is not eligible for Federal Government school loans, or those loans do not cover their full tuition balance, students may apply for private loans. The main differences between subsidized and unsubsidized loans are that students must demonstrate a financial need to qualify for a subsidized loan.
Direct Plus loans are only available to graduate/professional students and parents of dependent undergraduate students.
Federal Direct Subsidized Loans allow students that qualify for financial aid to borrow money for school payments with the Department of Education covering one’s interest while enrolled at least half-time in school. Direct subsidized loans have a relatively low-interest rate of around 2.75%. The downside to subsidized loans is their relatively low cap, which was $3,500 for 2020-2021.
Federal Direct Unsubsidized Loans are offered to undergraduate and graduate students without a demonstrated financial need. Consistent with subsidized loans, unsubsidized loans offer an attractive interest rate of 2.75%. However, unsubsidized loans also have a low cap relative to the aggregate cost of a college education. In addition, the interest on an unsubsidized loan begins accruing as soon as the loan is made.
Federal Direct PLUS Loans are for graduate/professional students or the parents of undergraduate students. The benefit of PLUS loans includes no specific caps on loan amounts. However, the typical maximum for PLUS loans is the school’s cost of attendance (i.e. tuition and fees, room and board, books and other supplies) less other financial aid received. Students will want to max out subsidized and unsubsidized loans prior to a PLUS loan given their higher interest rate of 5.3% and higher origination fees.
Private Loans are loans that students should only consider after exhausting all of the above federal loan options. When applying for a private loan, financial institutions will evaluate the student’s credit quality (i.e. credit score and history) and offer financing terms accordingly. Typically, the terms on private loans will not be as lenient or as favorable as the above federal loan options.
Is college worth it?
We will not be going in-depth on the recent “Is college worth it?” debate, but the data below makes a compelling case for the very positive impact of a college education on an individual’s long-term earnings potential in the workforce. As illustrated in the charts below, the average earnings and unemployment data for college-educated individuals paints a favorable picture relative to high school-only graduates. There is a caveat to the debate about whether to attend college or not.
What is the caveat?
The trick to navigating the college finance question is a clear understanding and plan for education prior to enrollment. Key college planning considerations include:
Community College for General Education Classes – This option can be a great way to cut down on the overall price of college, particularly for the general education classes most colleges require. According to the American Association of Community Colleges, for the 2019-20 academic year, average annual tuition and fees at community colleges were $3,730, compared to $10,440 average annual tuition and fees at public four-year institutions.
Consider Trade School – Trade schools focus on teaching skills and abilities directly related to a specific job such as electrician, plumber, and HVAC technician. Given the lower cost of trade school education, paired with the expected increasing demand for skilled labor, trade schools are increasingly becoming an excellent choice for students looking to forego large student debt balances while securing employment with a living wage.
As student debt balances continue to balloon, having a plan in place coupled with a clear long-term vision is crucial in effectively managing student debt obligations. If you have questions about managing student debt that you’ve already incurred or are preparing for a child or grandchild to go to college, please reach out to one of our Schneider Downs Wealth Management Advisors.
You’ve heard our thoughts… We’d like to hear yours
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.