Ultimate Student Loan Guide for 2021

Written by: Matt Kuncaitis
Updated: 9/02/21

If you’re like most students and parents facing a tuition bill, student loans are going to be part of the equation. According to the College Board, 60% of graduates of 4-year colleges used student loans to help pay for their education. 

The College Finance Company specializes in helping families make the right student loan decisions. This guide is designed to give you the information you need (together with guidance from your school’s financial aid office) to make the best student loan choices for your family.

  1. Figure out the monthly payment amounts your family can afford.
  2. Reduce college costs.
  3. Optimize which student loan programs you use.
  4. Balance student loan and parent loan borrowing.

Figure out how much your family can afford to pay for college

Before borrowing your first dollar or figuring out how much you can pay for tuition, you need to figure out what your family can afford to contribute and repay.

This can be done in three parts: savings and investments you have as parents, cash and investments your student has, and monthly payments you can make towards student loans or tuition payment plans.

Savings and investments you have as parents

Savings and investments as parents refers to any money or accounts you specifically earmarked for your student’s education. A typical example is money you saved in a 529 plan college savings plan. 

Anything from your savings or investments beyond the amount reserved for your student’s education should only be withdrawn with the advice of your personal finance advisor. Then, it won’t impact your own goals retirement.

Write down the total amount you have and how you would divide it among all four years. For help in calculating this number, you can speak to your financial advisor or a free credit or budget specialist at your local credit union.

Savings and investments your student has

Your student may have saved money from birthdays, holidays, graduations, part-time jobs, etc. Even $500 could equal a year of textbooks. Use the same method you used when figuring your contribution amount as a parent to see how you could spread this amount over a 4-year time span. 

The American Opportunity Credit, Bonus Money from the Federal Government

The American Opportunity Credit can help your family out with up to $2,500 back on your annual tax returns for yourself if in college and each dependent college student you’re supporting.

The credit is applied dollar for dollar on the first $2,000 in tuition, fees, equipment and textbooks. The next $500 is applied at a 25 percent rate. Thus, your family could get up to another $500 back on the next $2,000 spent.

To qualify for the full tax credit, families must make less than a Modified Adjusted Gross Income (MAGI) $160,000 or $80,000 as individual tax filer. Families make between $160,000 and $180,000 and individuals making between $80,000 and $90,000 qualify for a partial credit. 

Next, figure out monthly payments you and your student can afford in tuition payment plans and student loans.

Parents

When calculating how much you can afford to contribute, think carefully about how your budget and life goals such as retirement will be impacted. 

One safe way to calculate available monthly funds is to base funds on what you currently spend on your student to live at home: car insurance, food, entertainment, sports and school activities, clothing, phone bills, and electricity.

Don’t include any expenses you still plan on paying such as if you will stay have your student on your health insurance or cell phone plans.

Students

For your student, you really don’t know what they’ll be able to afford to pay post graduation. A safe estimate is to go by the federal student loan limit for undergraduate, dependent students: $31,000.

 If you are okay with your student borrowing any more than$31,000, make sure you have carefully evaluated as a family the choice of school and program. If the program is amazing and they have done shadow days and internships in their career field where they are absolutely confident about their career choice, a unique program such as NYU’s film school may be worth the expense and extra borrowing.

If in doubt on whether the extra spending is a good idea, your student should contact the career services office at the school they’re applying to. They can ask real questions about post graduation salaries for students who pursue a similar major. They can also put your student in touch with alumni in their career field. Then, you go over with the school’s financial aid office how much student loan payments would be compared to expected salaries. 

Add it Up

Yearly contributions from Investments, Savings and Federal Tax Benefits

Now, take the amount you’ve calculated from yours and your students savings and investments that are earmarked for paying for college and add it to together. This is your base amount you can afford to contribute an annual basis before thinking about student loan borrowing and payments.

After the first year, you can add the money you’d expect to receive from the American Opportunity Credit to this number.

Paying for College Monthly Payment Affordability for Parents

Add up the amount you can afford from your monthly income and reallocating money that you spent from your student living at home to college expenses. This is the maximum monthly payment you can afford as parents towards monthly expenses, a monthly student loan payment, or a tuition payment plan. 

A tuition payment plan is a plan directly from the school to pay tuition. The fee is normally low and an alternative to student loans if parents are able to pay tuition in the same year, possibly with the help of the American Opportunity Credit. Plans vary and can give you a few months to a year to pay tuition. 

How to Estimate How Much a Monthly Payment Equals in Real Student Loan Dollar Amounts

Use the federal student loan Repayment Estimator calculator to estimate student loan payments for students or on Parent PLUS loans. 

To use the calculator, you’ll need to input interest rates. While rates can change in the future, current rates are helpful for estimations:4.5 percent for undergraduate students, 6.1 percent for graduate and professional student loans, and 7.1 percent on PLUS loans for parents and grad students. Grad students use PLUS loans when they’ve reached limits on traditional federal student loan borrowing to make up the difference.

For the type of loan, pick subsidized or unsubsidized for students and PLUS for parents and any additional money grad students may need beyond the unsubsidized cap. We’ll go over the difference between unsubsidized and subsidized loans later in this guide. We’ll also talk about when to compare PLUS loans with private students to save on interest paid. 

Make sure you think about the total you might borrow over 4 years. Thus, calculating an affordable amount to borrow through graduation.

When calculating payments, add $5,000 at a time so you can figure out a good range of total loan debt and monthly payments. For instance, your affordable monthly payment on PLUS loans may be equivalent to $45,000 borrowed in a 10-year repayment period. You put in $30,000 at first and realized you could afford more than you added another $5,000 until you saw that $45,000 in student loans resulted in your max payment.

Minimize how much student loan debt you take on

Reduce College Costs

Next, let’s think about how to keep education expenses low. If your student hasn’t chosen a school yet, do what you can to select the college with the lowest net price and best fit.

The net price is the price after grants and scholarships from the state, university, and federal government. While it’s not exact until you apply, you can input GPAs, test scores, family income, etc. into a net price calculator to get a good estimate of how much your family will have to cover between private scholarships, savings and investments, income, student loans, and tuition payment plans.

 To find the net price, use net price calculators on school websites. You can also find calculators that help with multiple school like this one from the federal government

To find the best fit among schools that match the net price your family can afford, do virtual and in-person college tours. This is the best chance for students and parents to ask questions of students at the college and in the student’s major about learning environment, campus activities, and budgeting.

Quick tip: Test scores matter but studying doesn’t have to be expensive. Find a tutor in the area your student needs help in for $25 an hour from your local community college. $100 to boost scores could possibly earn your student thousands more in scholarships.

Optimize which student loans you use

There are many different types of student loans and parent loans. Always start with federal student loans issued to students. These loans have the most options for repayment plans including ones based on income. They also have low interest rates. There’s a consensus that these are the best loans to borrow. 

If students need to borrow more, then families should compare parent and graduate PLUS and private loan options. 

Here are the key type of federal student loans issued to students:

Federal Subsidized Student Loan

Subsidized student loans are the best kind of federal student loans because while in school at least half-time and for the 6-months post graduation or no-longer being at least a half-time student, interest doesn’t accrue. Plus, interest doesn’t accrue during other times your student needs a break from payments such as economic deferment.

Not paying interest during school can easily save a family over $1,000. 

Qualifying is based on financial need and eligibility is determined by numbers families report on the FAFSA. Up to $23,000 of $31,000 dependent undergraduates can borrow may be unsubsidized loans.

These loans are not available to grad or professional students.

Federal Unsubsidized Loan

Interest does accrue on federal unsubsidized loans. For undergrads, they have the same interest rates as subsidized loans. They also have all the same income-driven and extended repayment plans options for affordability.

These loans aren’t awarded based on financial need. Thus, everyone has access. Graduate and professional students are also eligible but at a higher interest rate.  

PLUS Loans vs. Private Student Loans

After unsubsidized and subsidized loans are exhausted, PLUS loans and private student loans may fill the gap up to the cost of attendance. There are reasons to choose each. This wasn’t always the case. 

Several years ago, private student loans were known as the inferior option to PLUS loans for parents and graduate and professional students. The main reason was that they were mainly issued with variable interest rates that could go up or down several percentage points. 

Now, private loans may offer fixed interest rates that are lower than what is charged on a federal PLUS loan to parents or grad or professional students.

Here are the pros and cons of both loan types:

Pro: All Parent PLUS loans are offered at a fixed interest rate that never changes.

Con: Private student loans may or not have a fixed interest rate. You have to ask the lender or look up terms to make sure the interest rate doesn’t vary with ups and downs in the general economy. 

Pro: All Parent and Graduate PLUS loan borrowers qualify for  a 7.1 percent interest rate, regardless of their credit score.

Con: Private student loans may have lower interest rates, even when fixed. Those with good to excellent credit may score rates 1 to 2 percent lower than PLUS loan rates.

Pro: PLUS loans have more flexible repayment options to give borrowers more time to pay off loans or reduced payments with income-driven repayment plan options. Federal student loan forgiveness plans does not work with private student loans.

Con: Having longer to make payments could result in paying thousands more in interest than one would with a private loan with a 5 to 15 year repayment term. 

Pro: PLUS loans have easier credit approval. Instead of specific scores required for approval, you just can’t have very specific credit situations such as a recent bankruptcy.

Con: Easier approval on PLUS loans includes not looking at income to see if families can actually afford to repay the amount they are borrowing. For instance, a family with an income of $40,000 could get approved for $100,000 in student loans over the course of four years of borrowing.

Pro: There is no confusion on PLUS loans on who should pay back the loan. Parents are officially the borrowers of parent PLUS loans and grad and professional students are the borrowers on their loans. 

Con: Private student loans issued to students but co-signed by parents often come with a cosigner release where after 12 to 24 months of on-time payments, the parent can be released from legal responsibility for repaying the loan. There are also private education loans issued directly to parents. 

 

Note: You may have extra options to federal and private student loans. For example, some schools offer their own loans with lenient terms.  There may also be state loans available to you with terms better than federal or private loans.  Read your financial aid award letter.  Ask your financial aid office.  Learn about all your options.  And always shop around.

Quick Tip: If you are planning on paying off student loans while in school, private student loans are often a better choice. The reason is private student loans don’t charge origination fees, a fee on top of interest to borrow the loan. When you are repaying a PLUS loan in under 5 years, it often makes more sense to borrow privately and avoid the fee.

Summary

  • Figuring out how much you can afford to pay and repay is as important as estimating the cost of college.
  • The first step in figuring how much you can afford to pay is adding together the money you and your student have saved for college and dividing it by the number of years, they’ll attend college. 
  • You can give students academic skin in the game. If they are set on going to school for you could afford for two or three years instead of all four, encourage taking community college courses while still in high school or going to community college for a year after graduation. To pick the right courses that will transfer, they should talk to the admissions office at the school they plan on attending.
  • Factor in tax credits. If you qualify for the American Opportunity Credit, you may receive $2,500 annually in federal tax credits that could be used for your student’s education.
  • Reduce college costs by looking for colleges within your student loan, income, and savings budget. Net Price Calculators will help you find the right schools. Then, narrow choices by best academic and social fit.
  • Subsidized loans for undergraduate loans don’t charge interest while in school with at-least half time status and other circumstances.
  • Unsubsidized loans should generally by borrowed before private loans.
  • Federal student loans have more options for affordable payments.
  • Private loans may have lower interest rates than PLUS loans for parents and grad and professional students with good to excellent credit.
  • Go over the pluses and minuses carefully of private versus PLUS loans.
  • Get help when needed in understanding student loans from you high school and local college financial aid counselors.

Guest post by Reyna Gobel.