Paying for School
Expected Family Contribution
Your expected family contribution (EFC) is an estimate of how much you'll have to pay out-of-pocket or through a private loan. This is determined after you fill out the FAFSA with your family’s tax returns. The school and government will determine how much you can get in student aid and that's subtracted from the school’s cost of attendance to calculate your EFC.
The Free Application for Student Aid (FAFSA) is a form that both prospective and current student have to fill out every year, using their family’s tax returns, to determine what type of financial aid they're eligible for: grants, loans, and/or work-study. Schools also use this information to determine what your award letter will look like. So, make sure to know when the deadline is for your school because some states and schools have different deadlines.
A cosigner is someone who's creditworthy and is basically taking responsibility for the borrower if payments become an issue. With a cosigner, you have a better chance to qualify for a private student loan (you don't need a cosigner for federal loans) and getting lower interest rates, because they often have a better credit score than the borrower.
Parent PLUS Loan
The parent PLUS loan or PLUS loan is a federal loan that parents can take out to help their student pay for college. A parent PLUS loan has no cap on how much you can borrow, allowing you to take as big of a loan as you need. This can be very helpful in some cases but like all loans, have its downfalls. The interest rate is fixed at 7.00%, which means it will stay the same over the life of your loan. An additional fee is added to PLUS loans called an origination fee. The fee is 4.264% of your loan amount and is added to your loan when you take it out. Along with the fee you're also expected to start repayment right away, there's no grace period.
Your Loan Numbers
Principal Loan and Capitalization
The principal is the original amount of the loan you'll take out before any interest or additional fees. Capitalization is the addition of the interest onto your principal loan. Over time, interest builds and adds onto your original loan which makes those large loan amounts you hear about.
The interest rate is a percentage of your loan that's accumulated daily or monthly and added to your original loan amount. Your required payment to your loan will always be the same each month, but before your payment reaches your principal, it'll go towards the interest. After the interest is paid, then the remaining amount you paid will go towards the principal.
To calculate your interest cost, follow the formula: Interest Rate x Current Principal / 365.
For example: I have an interest rate of 5.05% and a current loan balance of 25,000. So, 0.0505 x 25,000 / 365 = 3.45. This means that a total of $3.45 will be added to your loan every day, making it $25,003.45 after one day. This'll continue until you have completely paid off your loan.
Lender vs Loan Servicer
The institution you borrow money from is your lender. They provide the money and the loan servicer works with you to repay the lender. The servicer is who you go to when you need to track down payments, adjust your repayment plan, or when you're having trouble with payments. The lender and servicer are usually different institutions; however, they can sometimes be the same one.
The grace period is the six months after you graduate and before payments on your loan are due. This period offers a chance for the borrower to find work after school, as well as an opportunity to relax after they graduate. However, this only applies to federal loans and a few private loans. Interest won't stop accumulating during this time unless it's a subsidized student loan.
The repayment term is the length you have to pay off your loan. Federal student loan borrowers are automatically placed into a standard repayment plan that gives them 10 years to pay back the loan in its entirety. Most federal loan borrowers have options in repayment plans and can contact their servicer to find out more.
Consolidation puts all your loans into one basket, making your loans easier to manage. Instead of making multiple payments, you'll only have one loan to make payments to. Consolidation averages all your loan rates, but if you have private student loans then you won't qualify for consolidation. You also won't be able to put your focus on a single loan, say the one with higher interest that might be more important to pay off first.
Refinancing is the process in which a borrower can get a new loan with possibly a lower interest rate and a more manageable repayment term through a private lender of their choice. You can refinance with both federal and private student loans, but if you have a federal loan that you are refinancing, you will lose the perks of that loan.
Refinancing is similar to consolidation in the way that you'd be combining all your loans. A big difference between the two has to do with the interest rate. By refinancing you can get a lower interest rate, which means you save money that can go towards your principal and get out of debt quicker.
Discretionary income is the leftover money you have for yourself every month after paying for rent, utilities, food and all the “important” things. Your discretionary income is an important part of looking into different repayment plans, as the movement will look to it to figure just how much can be taken off your loan payments. But, it's important to know that purchases on your credit card doesn't count towards that income!
Loan forgiveness basically means your federal loans disappear. The federal government can cancel some or all of your student loans. However, there are many requirements to be eligible for loan forgiveness.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness program or PSLF is a federal program set up to forgive federal student loan debt for people working in certain public sectors and non-profits. It's geared towards people who're working in a field that pays less than most, giving them a fighting chance against their loans. To qualify for this program, you must 1) be signed up for one of the following repayment plans: standard, Income-Contingent, Income-Based, Pay As You Earn, Revised Pay As You Earn, or any plan that results in monthly payments higher than standard, and 2) must have made 120 monthly payments. To be considered for PSLF you must be working full time in one of the following areas of employment:
• Federal, state, local, or tribal government organizations
• A 501(c)3 nonprofit
• A nonprofit that’s not 501(c)3 designated but meets other requirements related to public service
• AmeriCorps/Peace Corps