But there is a limit on how much you can take out with federal loans, says McGurran. For instance a first year undergraduate who is a dependent student, meaning receiving financial support from a parent, can only take out $5500 a year. If you are an undergraduate and have no financial help, you can take out $57,500 over the course of your whole college career.
Private loans should be your last resort after you have exhausted after every other funding option including scholarships, says McGurran. They can then fill a gap, but they generally come with higher interest rates and less flexible payment terms. Federal loans can offer you loans based on your income, and you can actually pay less when you graduate if you have federal loans whereas with private you’re pretty much stuck with the payments and it’s very hard to get modifications.
A lot of people don’t know the difference between direct subsidized and direct unsubsidized loans, says Tim Lavelle, who runs the site ForgetStudentLoanDebt. With a subsidized loan, the U.S. Department of Education covers the interest for you while you’re in school so it is not accumulating. It’s harder to qualify for these loans because of the income requirements.
An unsubsidized loan can be obtained by anyone, regardless of their income levels, and how much you borrow is determined by your school based on all other financial aid factors, and you get no cuts with interest, and it will continue to build even while you’re in school.
What Forbearance and Deferment Entail
If you can’t afford to make your federal student loan payments, you can apply for a deferment or forbearance. They both enable you to postpone or reduce payments but they’re not the same thing.
Deferment you can get if you’re unemployed, and it can be good for up to three years, says McGurran. Forbearance is a bit squishier. You can get it if you experience a financial hardship such as medical issue, but really it depends on the circumstances. The key with forbearance is that if you have an unsubsidized loan, your interest will continue to accrue.
This last point is a stickler, as Makenzi Wood, a 2013 liberal arts college graduate https://badcreditloanshelp.net/payday-loans-sc/ who blogs about student loan journey for Picky Pinchers found out the hard way.
[My husband and I] did forbearance because we couldn’t afford the monthly payments right out of school, Wood says. Forbearance sounds like a great feature when you’re strapped for cash, but I didn’t realize interest continued accruing during forbearance. It increased my debt load and made it more challenging to pay off the debt.
It’s Tricky To Qualify For Loan Forgiveness (And You May Still Have To Pay The Taxes On It)
Public Service Loan Forgiveness enables graduates to have outstanding loan debt erased completely. But there are two big caveats: you need to have worked in public service, the non-profit sector or the government for 10 years (or made 120 student loan payments), McGurran says, adding that only federal loans are forgiven – not private loans. This program is poised to be eliminated under the Trump administration.
It is on the chopping block based on the [House Republican’s HEA Bill], but borrowers don’t need to be worried just yet, says McGurran. It could be eliminated but if so, it would likely become effective for future borrowers, and most likely those working toward forgiveness would be grandfathered in. If you do qualify and have outstanding debts forgiven, you do not have to pay taxes on the unpaid sum.