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5 Ways to Avoid a Bad Student Loan

Are you stuck in a bad student loan or at least feel that way? You are not alone. With the national student loan debt reaching over $1.7 trillion in 2023, many people have made poor decisions in terms of bad student loans. Making mistakes choosing between all the various student loan options can be costly for borrowers and even their families.

Knowing the difference between a good and bad student loan option will not only most likely save you money, but will also provide you with peace knowing that you chose the right student loan option for your specific situation.

What makes a student loan good or bad?

Are there good student loans and bad student loans? The truth is that almost every student loan can be good or bad. It all depends on the person. Because every person is different, has different career and life goals, and comes from different financial situations, borrowing for post-secondary education needs to be specific for your own situation. To help you see what I mean, let’s look at student loans available right now.

Stafford loans

Federal student loans, in the form of Stafford loans, are the most common student loans given, with over 34 million borrowers in the U.S.. They are government-backed loans given directly to students.

These student loans have a fixed interest rate and generally, have a lower interest rate than private student loans. They also have flexible repayment options. Stafford loans are available in two variations: subsidized and unsubsidized.

  • Direct Subsidized Stafford loans are only offered to students with a financial hardship.
  • The government pays interest fees on subsidized loans while borrowers are in school and during periods of deferment.
  • Graduate students aren’t eligible for Direct Subsidized Stafford loans.
  • Available funds are limited with subsidized loans. The maximum amount you can borrow yearly is $5,500, with a total amount you can borrow set at $23,000.
  • With Direct Unsubsidized Stafford loans, the interest is not paid by the government and accrues from the time you are approved.
  • Direct Unsubsidized Stafford loans are available to both undergraduate and graduate students.
  • You do not need to prove financial hardship in order to receive unsubsidized loans.
  • Direct Unsubsidized loans have larger limits than unsubsidized loans. Undergraduate students can borrow $12,500 yearly. Grad students can borrow up to $20,500 yearly, with a max amount set at $138,500.

One plus for Stafford loans, both subsidized and subsidized, is that there is no credit check involved. Approved borrowers get the same terms and rates as everyone else. One of the best features of Stafford loans is access to Income-Driven Repayment Plans and Public Service Loan Forgiveness. However, all Stafford loans charge an origination fee, which is 1.069% of the total amount of the loan. To apply for any federal student loan, you must complete and submit a Free Application for Federal Student Aid (FAFSA) form.

Grad PLUS loans

The Grad PLUS program is another type of federal loan available, backed by the government, offered to grad students and professional students. Unlike Direct Unsubsidized, you can borrow the full amount needed to complete grad school. Also, unlike unsubsidized loans, a credit check is required.

If you have poor credit or no credit, you will most likely need to have an endorser (cosigner) with good credit history. You can also provide documentation that there are extenuating circumstances relating to your poor credit history.

Direct Grad PLUS loans have a 4.228% origination fee (for loans disbursed on or after October 1, 2020 and before September 30, 2024). Grad PLUS loans also have a fixed interest rate, which is set at 8.05% (for loans disbursed on or after July 1, 2023 and before July 1, 2024). Similar to Stafford loans, you must complete and submit a Free Application for Federal Student Aid (FAFSA) form to be eligible.

Generally, Grad PLUS loans don’t start repayment until six months after graduation, leaving school or dropping below half-time enrollment.

Parent PLUS loans

What used to be called Parent Loans for Undergraduate Students, Parent PLUS loans are direct loans taken out by parents of students as a way to fund their child’s education. With Parent PLUS loans, parents take the financial responsibility of the student loan debt.

Similar to the Grad PLUS loans, parents can borrow as much as needed to fund their child’s education. Parent PLUS loans also require a credit check. Parent PLUS loans have a 4.228% origination fee (for loans disbursed on or after October 1, 2022 and before September 30, 2023).

Parent PLUS loans also have a fixed interest rate, which is set at 8.05% (for loans disbursed on or after July 1, 2023 and before July 1, 2024). A great feature of Parent PLUS loans is that multiple repayment plans are offered. However, repayment generally starts as soon as funds are dispersed.

Similar to Stafford loans, you must complete and submit a Free Application for Federal Student Aid (FAFSA) form to be eligible. If you are a parent with strong credit, it could be worth it to look at private loan options for parents, which might offer a much lower interest rate than the 8.05% Parent PLUS loans charge.

Private in-school loans

Federal student loans aren’t the only options available to undergraduate and graduate students. Private loans are also available to students to fund their education. Private loans are given by banks and other lenders, not the government. They are subject to credit checks and most of the time require a cosigner with good credit, depending on the lender.

Unlike federal loans, interest rates are largely dependent on your or your cosigner’s credit history. Most private student loans, unfortunately, don’t come with some of the perks of federal loans, such as income-based repayment and forgiveness programs. However, private loans often allow you to choose your own loan terms, which allows you to pay off your debt as slow or fast as you want or need.

Here are three lenders you could evaluate if you need private student loans. Keep in mind that these loans have far more risks than the federal government, and they sometimes have origination fees too. Carefully consider your future plans to make sure that private loans are superior in your case. The best reason to use private student loans is to avoid Grad PLUS loans.

Refinancing student loans

Do you already have bad student loans and are looking for options to improve your situation? Maybe you don’t have bad student loans but you still want to find a better interest rate and save money. Refinancing might be a good option, depending on the types of loans you have currently.

Refinancing your student loans is good for people who want to cut their high government or private interest rate. However, private loans are bad for someone with a high amount of debt but doesn’t make that much.

For example, say you have $400k in debt but are only making $80k a year. You have a poor debt-to-income (DTI) ratio and it will take you a long time to pay off your debt. In this case, you should be looking into Pay As You Earn (PAYE) loan forgiveness.

Is student loan debt good debt?

There is a myth being perpetuated that student loan debt is good debt. While there is worse debt out there, student loan debt is still debt and can wreak havoc on your finances for decades, depending on how much debt you have and the kind of loans you acquired.

What would make student loan debt good? The number one reason is that you financed a degree that has a high return on investment. Every other benefit is secondary to this. Another reason student debt can help you out is if you haven’t established much credit yet. Pay student loans could allow you to do just that. As you pay off your student debt on time, it shows other lenders that you are a responsible borrower.

When looking at debt and whether it is good or not, you look at what you get out of your debt. When someone purchases a house and has a mortgage, you are investing in something with value. You hope that the value of your home increases over time. With student loans, the goal is to complete your education and earn a degree, leading you towards a profitable career.

Compare that to purchasing a car and having payments for 60+ months. The minute you drive your new car off of the car lot it starts to decrease in value and continues to do so for the life of the vehicle. Credit card debt is even worse. There is no value in having credit card debt and carrying a balance over from month to month.

Student loan debt can be bad though. First, earning a degree doesn’t guarantee that you will find a job. Often, when people do secure a job, it’s not in their particular field of study or didn’t require a college degree at all. Also, earning a degree doesn’t guarantee a high-paying job. The value of your degree is lessened if you can only find lower paying jobs that don’t match up to the debt that you incurred to get to that place.

People often fantasize about what kind of life they will have once they graduate, land that big job and start earning money. Having large amounts of student loan debt, though, can rob you of that life you envisioned if every extra dollar you have goes towards paying it off.

In some fields of study, almost all student loans are bad

The reality is that certain career paths just don’t pay enough to justify the amount of student loan debt that you can occur while earning your degree in that field. Some examples of this are:

  • Veterinary Medicine
  • Chiropractic
  • Psychology

In other fields, student loans can be bad, depending on the school and career path you choose. These fields include:

  • Lawyers
  • Dentists
  • Physicians

Now that we’ve looked at the various student loans available and why they may or may not be good choices for you, let’s explore five ways to avoid a bad student loan.

5 ways to avoid a bad student loan

1. Have a plan

In order to avoid making costly financial mistakes, you should always have a plan before acquiring any student loans. Adding thousands of dollars in debt is nothing to walk into lightly. Here are some helpful questions to ask yourself when creating a plan:

  • How much money are you borrowing?
  • What are your career goals?
  • What are your goals from borrowing money?
  • What school are you attending and is it the right financial choice for your career?

All of these factors should lead you toward the right student loan decisions. Are you acquiring a large amount of debt? Then private loans don’t make much sense, because you can’t take advantage of loan forgiveness. If your amount of debt is smaller, but you are worried about cash flow flexibility, federal loans might be the best choice.

As you look to make decisions about student loans, whether for the first time or looking into refinancing, do your homework upfront and you will avoid having a bad student loan.

2. Maximize free money options available for students

When you are thinking about attending a school and pursuing a degree, spend time researching all the many ways to receive free money towards college. Free money is available in more places than you realize. There are also many programs available that are considered free money; however, you are exchanging time and energy for tuition assistance.

Think locally

You would be surprised how many scholarships are offered locally, which drastically reduces the competition to win one compared to national scholarships. Often local organizations, companies, schools, hospitals, clubs, and groups have scholarship money available every year for students.

Sometimes these scholarships have specific requirements, such as pursuing a degree in a specific field, like medicine. There are also scholarship opportunities available beyond just local level options. You would be wise to pursue scholarships wherever you can find them.

Pell Grants

Pell Grants are need-based grants available from the government. They are for low-income students going for their first bachelor degree (and some specific post-baccalaureate programs) who require tuition assistance in order to attend college. Pell Grant funds are not paid back. You must complete and submit a Free Application for Federal Student Aid (FAFSA) form to be eligible.

Other grants

There are other grants available besides Pell Grants. These include institutional grants, state grants, and private grants. Institutional grants are offered by colleges to their own students.

State grants are funded by a state government, rather than federally, and have eligibility requirements, including being a resident of the state. Private grants are also available and vary in their requirements, but often are related to your career path or degree choice.

Med students

Some medical associations offer scholarships, grants, and other free money options for current medical school students. Also, check for the same from nonprofit organizations in the medical field. These opportunities usually have specific requirements and stipulations so please check with those organizations to see what’s available and get more details.

One example is the National Health Service Corps (NHSC) Scholarship, which offers to pay for school (in certain medical fields) in exchange for working in a high-need area (usually rural or inner-city)for up to 2 years. Another program is the Health Professions Scholarship Program (HPSP), a program funded by the military for health professional students, which includes med students.

You can get free tuition and fees in exchange for one year of military service. Other organizations that offer scholarships to med students include the American Podiatric Medical Association, the American Medical Women’s Association, and the American Medical Association.

Merit scholarships

Merit scholarships are just that. They are scholarships based on merit. Most likely they are based on your grades, either overall or in a specific field. Merit scholarships can be general scholarships, available to anyone who meets qualifications, or they could be more specific, depending on your future career path or field of study.

Military options

As mentioned before, there are programs funded by the military that offer free tuition in exchange for service in the military. Beyond that, there are other military programs, more specifically, for members of the armed forces looking to attend college. Some of those programs include, but are not limited to:

  • Armed Forces Tuition Assistance Program
  • Post 9/11 GI Bill
  • Active Duty Montgomery GI Bill
  • Montgomery GI Bill Selected Reserve (available to members of the Reserves and National Guard)
  • ROTC Programs

The Federal Work-Study Program

When you fill out your FAFSA forms, there is a box you can mark if you want to be considered for work-study programs. These programs are limited and also are not available at all schools, so check availability with your school. The Federal Work-Study Program is offered through the government and participating schools.

It provides part-time jobs, available to undergraduate and graduate students. The money earned goes towards your college expenses. You won’t earn a ton of money through work-study programs, but paired with other free money options, you could avoid having to borrow as much in student loans.

3. Look at federal loans first

As covered earlier, Stafford loans are the most common student loans among borrowers. In most situations, federal loans are going to be your best bet. Government student loans normally will offer you a lower interest rate than private loans and have more attractive repayment options. Federal loans also give you access to loan forgiveness, perfect for people taking on large amounts of student loan debt.

Federal loans aren’t always the best choice though. For example, Grad PLUS loans can be very expensive if you plan to pay the debt back. In circumstances like that, it’s worth it to invest time running the numbers and then choosing the best option so you don’t end up with a bad student loan.

4. Factor in your debt-to-income ratio

Your debt-to-income ratio (DTI) is important to factor into any student loan decisions. Lenders use DTI when determining whether someone is creditworthy or not, but it’s also a formula that should mean something to you.

DTI is factored by taking the amount of debt you owe divided by your income. Why is this important when talking about which student loans to get? If you have a debt-to-income ratio at or below 1.5, you most likely won’t be eligible for student loan forgiveness.

For example, say you have $130,000 in student loan debt and you work for a private employer, making $100,000 annually. Your debt to income ratio would be 1.3. In this situation, it would make more sense for you to look at refinancing, securing a lower interest rate, and paying off your debt. If your debt-to-income ratio is higher than 1.5 and your salary isn’t likely to increase too much, you will want to take advantage of programs like PAYE, new REPAYE / SAVE, and student loan forgiveness.

5. Be aware of student loan forgiveness scams

Although the government has worked hard to clean up many of the student loan forgiveness scams out there, you still need to watch for them as you look at student loan options. What does a student loan forgiveness scam look like?

  • Contacting you through direct mailing or phone calls
  • Charging extra fees for consolidation & signing up for IDR plans
  • Claims of quick loan forgiveness
  • Collection of sensitive information
  • Pressure from salesmen to sign up for limited time offers/deals

One thing that makes Student Loan Planner® different is that we don’t prepare paperwork for our clients. The reason is that you will be an active participant in securing your financial future if you have to handle this paperwork yourself.

The value we offer our clients is in the long-term plan. Anybody who doesn’t allow you to be fully involved in your student loan repayment plan doesn’t truly have your best interest at heart. Student Loan Planner® prides itself on being able to not only help you save thousands of dollars (projected over the life of your loan) but also in educating you and empowering you with your financial decisions.

Do you feel like you are stuck with a bad student loan? Perhaps you made bad student loans decisions that you regret now. Student Loan Planner® can help. We provide professional help to help you figure out what to do with bad student loan debt and save you tons of money.

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