How to Understand
your Student Loans
How do my student loans work?
(edited from Bill Pratt’s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
1.
Borrow all federal money first before you even consider private loans.
2.
Bankruptcy cannot eliminate your student loan debts.
3.
The average undergraduate leaves college with $24,000 in debt- that’s
$276 a month out of every paycheck for 10 years.
4.
Student loans must be repaid even if you drop out of college!
5.
Keep an eye on your student loan amounts while you are still in school.
You don’t want a big “shocker” after graduation.
6.
If you borrow just $250 extra each year for 4 years at 6% you will end
up working an extra 120 hours after graduation to pay it back if you
make $36,000 per year.
7.
Once you graduate, you are usually given a 6-month grace period
before you have to start making payments on federal student loans.
8.
You will never find a more borrower-friendly loan than a student loan
because there are so many repayment options. Contact your lender if
you are having financial difficulty.
The Truth about Student Loans
(edited from Bill Pratt’s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
Approved Educational Expenses:

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
Tuition
Room and board
Fees
Books
Supplies
Equipment



Dependent child care
expenses
Transportation*
Rental or purchase of a
personal computer
What can I use my federal student
loan money for?
Federal Student Loans






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Government loan
Borrowing limits
Fixed interest rate
No payment while in school
6 month grace period
Repayment options
No credit checks
Subsidized / Unsubsidized
Tax–Deductible Interest
Can be consolidated
No pre-payment penalty
Private Student Loans







Unsecured funds provided
by banks
Variable interest rate
May require repayment
while in school
Based on credit (score)
Cosigner
Need to shop around
READ THE FINE PRINT –
you could be paying
interest on the interest!
Federal versus Private
Federal Student Loans
Borrow all federal money first before you even consider private loans.
Unsubsidized
Subsidized
do not accrue interest while you
are in college because the
government is paying the interest
for you
 Based on financial need (FAFSA)

2011-2012 Interest Rate = 3.4%
Accrues interest while in college,
which means you will owe more
when you graduate than the
amount you initially borrowed
(capitalized interest)
 Not based on financial need

2011-2012 Interest Rate = 6.8%
Both loan types
Must file a FAFSA
Must complete a Master Promissory Note (MPN)
Must complete Entrance Counseling
 Fixed interest rate
 Limit on how much you can borrow based on federal limits and each
college’s Financial Aid Budget
 6 month grace period
 repayment options
Subsidized versus Unsubsidized
DEPENDENT
BASE
(SUB/UNSUB
ADDITIONAL
UNSUB
MAXIMUM
Level (year)1
$3,500
$2,000
$5,500
Level (year) 2
$4,500
$2,000
$6,500
Level (year) 3
$5,500
$2,000
$7,500
UNDERGRADUATES
and beyond
(SUB / UNSUB)
WVNCC can only
award up to
levels 1 and 2 for
dependent and
independent
students
INDEPENDENT
BASE
(SUB/UNSUB
ADDITIONAL
UNSUB
MAXIMUM
Level (year)1
$3,500
$6,000
$9,500
Level (year) 2
$4,500
$6,000
$10,500
Level (year) 3
$5,500
$6,000
$12,500
UNDERGRADUATES
and beyond
(SUB / UNSUB)
ANNUAL Federal Loan Limits
DEPENDENCY
STATUS
BASE
(SUB/UNSUB
ADDITIONAL
UNSUB
MAXIMUM
Dependent
$23,000
$8,000
$31,000*
Independent
$23,000
$34,500
$57,500*
Undergraduate
Undergraduate
(SUB / UNSUB)
*no more than $23,000 in subsidized loans
AGGREGATE Federal Loan Limits
Cost of Attendance (COA)
Student Loans are Financial Aid!
Financial Aid can never exceed COA!
2011-2012 WVNCC:
In-State Independent COA $11,134
In-State Dependent COA $8,200
COA minus other financial aid = Loan eligibility
Limits per College
Do not have to pay while in college
 6 month grace period

Scenario 1 – borrowed $4000 TOTAL over 4 years
Sub Loan @ 6% = $4000 at repayment
Unsub Loan @ 6% = $4,720 at repayment
Private Loan @ 8% = $5,081 at repayment
Scenario 2 – borrowed $8000 each year for 4 years =
$32,000 TOTAL
Sub Loan @ 6% = $32,000 at repayment
Unsub Loan @ 6% = $37,760 at repayment
Private Loan @ 8% = $40,646
Paying for Your Student Loans
(edited from Bill Pratt’s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
Entrance Counseling –
CAN BE DONE EVERY TIME YOU BORROW A LOAN
Understand Rights and Responsibilities
Interest Costs
Repayment options
Keep Track of What you Owe –
Look at the total amount you already owe before you
borrow again


Review your federal loans online at www.nslds.ed.gov
Think about what you are doing when you
make purchases with your student loan
money: Since most student loans are paid off over 10 years
or more, you are essentially paying for your purchases with
interest charges that you’ll be paying for 10 years after you
graduate
Smart Borrowing
(edited from Bill Pratt’s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
Your monthly payment is determined by the
interest rate, the amount you borrow, and the
number of years it will take to pay off the loan.
The more you owe, the higher your monthly payment.
 The higher your interest rate, the higher your monthly
payment.
 The longer you take to pay off your loan, the lower
your monthly payment, BUT you will pay more
interest and use more of your monthly income over a
longer period to make your payments.

Managing Your Loan Payments
(edited from Bill Pratt’s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
Signing a promissory note means you agree to
repay the loan!
1.
2.
3.
4.
5.
6.
Standard (Default repayment plan)
Graduated
Extended
Income-Based (IBR)
Income-Sensitive
Income-Contingent
Federal Loan Repayment Options
Deferment
1.
a period in which repayment of the principal balance is
temporarily postponed if you can meet certain requirements




2.
In-school
No full-time employment for up to 3 years
Economic hardship for up to 3 years
Military service
Most Common
Forbearance
allows you to postpone or reduce your monthly payment
amount for a limited and specific period if you are willing but
unable to make your scheduled loan payments for reasons
including, but not limited to, financial hardship or illness and
you do not meet the eligibility requirements for deferment
What if you can’t make your
monthly payment?

Your credit history will be affected

You will owe late fees even for one missed payment

After 270 days of missed payments your loan will go into
DEFAULT
 Credit rating will be damaged
 Denied future educational or consumer loans
 Could be denied a mortgage, apartment, car, and even employment
 Entire unpaid balance is due immediately
 Lose eligibility for federal student financial aid
 Lose eligibility for deferments
 Loan is turned over to a collection agency
 Federal government can take your federal tax refund
 Late fees, additional interest, court costs, collection fees, attorney’s
fees, and other costs will increase your debt
 Wages can be garnished by your employer at the request of the federal
government
 Legal action can be taken against you
What happens if you miss a
payment?
Don’t ignore debt! It won’t go away!
Your credit history will be affected up
to 7 years if you do not repay your
loans.
1.
What is it?
Combine multiple federal student loans into one loan
2.
When can you consolidate?



3.
What are the advantages?



4.
Your monthly payment might be lower
Extended repayment period
Defaulted loans may be included
What are the disadvantages?

5.
During your grace period
Once you’ve entered repayment
During periods of deferment or forbearance
Total cost may increase due to longer period of repayment = more
interest
How do I apply?
www.loanconsolidation.ed.gov
Consolidation Loans
www.nslds.ed.gov
1-800-999-8219
Information about all Student Loans,
except Private loans
National Student Loan Data
System (NSLDS)
How is Interest Calculated?
Interest is a loan expense charged by the
lender and paid by the borrower for the
use of borrowed money. The expense is
calculated as a percentage of the unpaid
principal amount (loan amount), which
includes the original amount borrowed
and any capitalized interest.
What is Interest?
Number of days since last payment
X
Principal Balance Outstanding (PBO)
X
Interest Rate Factor*
=
Interest Amount
*See next slide
Simple Daily Interest Formula
The Interest Rate Factor is used to calculate the amount of
interest that accrues on your loan.
It is calculated by dividing your loan’s interest rate by 365.25
(the number of days in a year).
Interest
Converted to
Decimals
Divide by
365.25
Interest Rate
Factor
8.99%
.0899
.0899/
365.25
.00024613
8.25%
.0825
.0825/
365.25
.00022587
7.59%
.0759
.0759/
365.25
.00020780
Interest Rate Factor
PBO = $9,500
Interest Rate = 8.25% (Interest Rate Factor = .00022587)
Last Payment of $160 made 32 days ago
How much of the payment went towards your principal
balance?
32 (days) x $9,500 (PBO) x .00022587 (interest rate factor)
= $68.66 of payment applied to interest
$160 (payment) - $68.66 (interest) = $91.34 applied to
principal loan balance
New Total:
$68.66 towards interest and $91.34 toward principal balance
New principal loan balance = $9,408.66
Practice Example