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Benefits of Federal Student Loan

The goal for every parent of students seeking higher education is to have their child graduate debt-free. The unfortunate reality of life is that college is not free. Therefore, many students will graduate with some debt burden. The amounts they carry will vary based on the institution they attend, the type of degree obtained, and how much student loans they borrow. If parents are not fiscally sound and prepared to cover their student’s tuition expenses through 529 Savings Plans, home equity loans, or retirement savings, then loans will be their student’s only option.

In this economy, it may be difficult for parents to save for retirement and those that can risk endangering their future trying to assist their students. Withdrawing from retirement accounts can leave parents in a financial bind, causing them to be short on funds when they retire. Therefore, this may not be a favorable option. Prioritizing your retirement and securing your future does not make you a bad parent. It makes you a wise one who wants to ensure you can support yourself and your household in your old age which will decrease the likelihood of your children having to help you.

Having your student take out the maximum in federal student loans is a good idea for a fundamental reason

In the U.S., education is the State and local government’s responsibility. The federal contribution to help fund education is relatively small and is distributed through the Department of Education (ED) and their awarding of Title IV funding, more commonly known as federal student aid. Federal student aid includes the Pell grant, work-study, and student loans. Student loans are the only part of a student’s financial aid package that must be repaid.

ED offers a variety of repayment options for students to assist them in their endeavors to repay their loans successfully. Unfortunately, some of these repayment options have not lived up to their purpose due to ineffective roll-out, not properly communicating the requirements to eligible borrowers, and purposefully and willfully misleading them. ED is aware of the issues that have plagued some of their repayment programs and have implemented changes to remedy years of failures in the administration and servicing of their federal student loan programs.

While it is true that you never want your students to default on their student loans, it is doubtful that will happen if your student works with their loan servicer. Loan servicers are responsible for providing borrowers with the resources and support they need to keep their loan(s) in good standing which will ensure successful repayment of their loans. There are many repayment options, including consolidation, Income-Driven Repayment (IDR) plans, alternative repayment plans, deferment, and forbearance, to name a few. Under IDR plans, a student is given a payment calculated using their family size and income. There are four IDR plans to choose from, but eligibility is based on loan type (FFEL or Direct).

Consider this:

Monthly payments on an $80,000 debt are the same as those on a $30,000 debt.

Under “Pay As You Earn,” your student only has to pay back an amount equal to 10% of their discretionary income each year. (The government defines discretionary income as adjusted gross income minus 150% of the federal poverty line income.) Accordingly, regardless of the size of the debt, the payments remain the same.

Under Public Service Loan Forgiveness (PSLF), the government will completely forgive any student loan balance in as little as ten years.

A student who goes to work in the non-profit, education, or government sector and enrolls in an IDR plan can apply for PSLF. The remaining balance after making 120 payments (10-years) will be forgiven. Students working in the for-profit sector will have their loans forgiven in just twenty years under the same Program.

3.6 Million Student Loan Borrowers are Closer to debt forgiveness Due to the Overhaul of Federal Loan Programs

That’s a considerable number and was reported by the CNBC this year. The decision to borrow student loans is an individual choice that each student has to make. My best advice to you is:

  • If you borrow, borrow responsibly! Never over-borrow or borrow more money than you can afford to repay.
  • Parents, don’t exhaust your retirement savings to help your students pay for college.

Federal student loans offer a wide variety of repayment options, including loan forgiveness, cancelation, and discharge.  With these options, you won’t have to do either.

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