Today we are joined by Laura Helmich, Business Development Officer, and our resident Student Loan specialist to discuss student loans. What are they? What options do you have? How can you get the support you need with your student lending needs? Listen to learn more!
Announcer: Welcome to the "What Matters Most" podcast, presented by First United Bank & Trust. That's my bank. Visit us today at mybank.com.
Eric: Hello, and welcome to "What Matters Most," the podcast all about finances, communities, savings, and security for you, your family, and your business. This podcast is brought to you by the helpful folks at my bank, First United Bank & Trust. I'm your host, Eric Nutter, and in today's episode, what Matters most is student loans. And for this helpful discussion, I am thankful to be joined once again today by Laura Helmick, a business development officer at First United. Hey Laura, how's it going today?
Laura: Good, Eric. How are you doing today?
Eric: I'm doing very well. I appreciate you joining me. It's a little rainy out today, a little dreary, but we've got a good topic to talk about.
Laura: Oh, we sure do. And it's at the height of everything with us, having students graduating from college and also our high school seniors that are gonna be looking forward to going to college in the next few months. So yes, this is a great topic.
Erc: Only a couple more weeks for students, especially seniors, and so I know it's top of many of their minds. And many of them probably have already started down the path or have already committed to and know where they're going for college, but for people maybe in their junior year or even those who are a little late to the game in getting student loans in place, why don't we start off setting a baseline for our listeners. What is a student loan?
Laura: What a student loan is, it's basically going to be money that families, students and their families can borrow. And that this money is eligible or you're able to go ahead and pay for the cost of college along with the tuition, books, room and board, and other education-related costs for a student that is attending college.
Eric: Perfect. And it can be any kind of college. There can be two to four-year...
Laura: That is correct. Student loan program is good for year two-year colleges as far as with community colleges, trade schools, and also for your regular colleges and universities. Yes.
Eric: Okay. So what kind of student loans are available for folks out there?
Laura: Okay. For student loans, there's actually going to be two sources for student loans. The first one is going to be the federal student loan program, and these are going to be loans that the student can take out directly through the federal government. Now, for these loans, that usually does require the family to go ahead and submit the free financial aid form or the FASFA form. That FAFSA form is used by your school that you will be attending to determine your financial need. So most families will be able to...for the upcoming school year, you're able to start filling out that form beginning on October 1st before the school year starts.
So within the federal loan program for students, there will be two types of loans that are available for the students. One is gonna be the direct subsidized loan, and this is a loan that is going to be based upon financial need. And what we mean when we say that it's a subsidized loan, that means that while the student is in school, at least half time up until they graduate, the federal government is going to pay the interest on that student loan for the student. Now, with the interest rates on those federal loans, they are set every July 1st. Every July 1st, the federal government will announce what the interest rate is for the student loans, and that is going to be a fixed interest rate for the students throughout the life of their loan.
The second type of loan that is available for students is going to be the federal unsubsidized loan. Now, what a non-subsidized loan is, is it's a loan that is not based on need. But because it's not based on need and it is unsubsidized, what that basically means is, is that the student, as soon as the loan money has been sent out to the school, the student is going to be responsible for interest that will be accruing on that loan. Now, as they go through their education, and once the student on both of these loans has either graduated or dropped below a half-time course study, the payments to pay back this loan will begin six months after they have either graduated or dropped below a half-time course study.
The third loan that is available through the federal loan program is the direct plus loans. Now, the plus loans are available for parents of dependent students and also for students that are going on to graduate school. And with those loans, the plus loans, those loans are like the unsubsidized loan. The interest will begin to accrue as soon as the loan is dispersed to the school, and a parent is able to go ahead and borrow whatever may be needed to fulfill the cost of education at the school.
It's important to note that within the subsidized loans through the federal loan program, students are limited each year to what they're gonna be able to receive in that program. So for a first-year student, they will be able to, on their own, get $5,500 a school year for their first year. And unfortunately with the cost of education and depending upon what the student is doing or is the student going to be commuting or is the student going to be living on campus, most families are going to see that they are going to need additional funding other than what the student's able to get within the federal student loan.
Now, the second option after we look at the federal loans for both the student and the parent, the second option that families have are going to be private loans. Now, these private loans are loans that are usually taken out through a bank or a student loan lender.
Eric: Gotcha. So what's the big difference between the private loan and the federal loans?
Laura: Well, with the federal loan, the great thing about is that the student's going to be able to get that just based upon their financial need and them filling out the FASFA form. When you're looking at a private loan, a private loan is going to be based upon creditworthiness. So there is going to be a credit check done. So in most cases for a student that's just graduating high school and that, they have not built their credit up yet, so they are more than likely going to need to have a co-signer or somebody that has already established credit so that they could possibly get the loan through a private lender.
Another good thing to kind of go over right now as we're talking about the difference between the federal loan program and a private loan is that with the federal loan program, there are a lot of benefits that the federal government gives within those loan programs that can be very helpful for students. Right now because of what's going on with COVID-19 and everything, federal student loans has been part of a lot of the bills that have recently went out for COVID relief.
So right now, with any student that has taken out a federal loan, they right now have a 0% interest rate, and they are also not required to make any payments through September 30th on those. They also have incentives with the federal loans for income-based repayment. What that means is that the government can calculate your payments on your federal loans based upon your income. You're not gonna find that too much within the private loans. So as a lender, we always try to encourage our families to always look at the federal loans first, and then go ahead with the private loans if they still need additional funding.
Eric: Right. So they're not gonna get that same benefit with a private loan of delayed payments or no payments, no interest?
Laura: That is correct. I mean, as you go through the process and after a student graduates, I always try to explain to students if you're ever having problems making the payments or anything, granted your lender will always try to work with you to try to help you make those payments. But, you know, a lot of times it's harder to do, but the federal government loans have a nicer umbrella for protection for the students. Yes.
Eric: Right. With private loans, do the payments start right away or does the repayment schedule differ between private and federal?
Laura: Well, that's a great question. Usually, with both the federal loans and the private loans, families are going to be able to select what type of repayment they would like to do. So for most of the student loans, both federal and private, what they try to do is you can defer the payments while the student is in school and payments on the loans for both the principal and interest can begin about six months after the student has graduated. Now, the danger part of that is that with your private loans, your unsubsidized loans, and any of the federal plus loans that you may take out, the interest does begin to accrue immediately.
So as a responsible borrower, you are going to want to make sure that you are keeping up or understanding how much interest is accruing on the loans that you have already taken out. And if you're able to, try to make payments at least towards that interest that is accruing. If you don't make those payments while the student is in school, what happens is prior to the student going into repayment, any interest that had accrued during that four years that a typical college student is in school is going to be added to their original loan. So for example, if a student took out, well, let's just say they took out $15,000 during their college education and that the end of their four years, there is $5,000 of interest that had accrued on the account and was unpaid, that $15,000 now becomes a $20,000 loan.
So it's always very good to try to make the payments, but again, you will have the option to fully defer the payments. You also will have an option to make interest-only payments. What will happen is, is that your loan servicer will send you a bill, whether it's quarterly or monthly, that you can pay, that can pay that interest. Or in some cases, a lot of families like to be able to go into an immediate repayment. The immediate repayment is always going to be your best option because that way you're not accruing interest, or capitalizing interest I should say, and will always be recommended if you are able to do so.
Eric: That's good advice. Okay. So Laura, in closing, wrapping up this topic of student lending, what are some tips that you could offer? Any closing tips that you could offer to our listeners that may be, you know, in the market for a student loan or they're thinking about it? Maybe they're juniors heading into their senior year and they need to start thinking about this right now, what advice do you have for them?
Laura: What advice I would have for them is to always, if you have questions, whether you are attending a school or looking at attending a school, always feel free to contact the financial aid offices at those schools. Financial aid offices are a great resource or even looking at their website. Also as you're going through that, you know, especially with our First United customers, if you ever have any questions, please come and visit the local offices and we can get you on a right track to getting you ready and prepared for what you'll need to do.
Remember that student loans, the federal student loans do not have a prepayment penalty. So if you are going in and you're looking at some of your loan options, federal student loans do not have a prepayment penalty. But as you go shopping around for your private loans, you may want to make sure with that lender that there is never a prepayment penalty. And really all that is as a prepayment penalty is, hey, if I wanted to pay this loan off quicker or in one lump sum, is there going to be a penalty or am I going to be charged anything for doing that? Most student loans do not have a pre-payment penalty, but that's always a good thing to look for.
When you're looking at the private loans, and there are going to be many different type of private loan lenders out there, please make sure that you are checking the rates. There are gonna be rates out there that you're going to have options on. Some student loans have the option of a variable rate loan and there's also a fixed rate option. I'd like to just remind everybody as we're going through this current year, we're in a low rate environment. So your variable rates are going to look very attractive to you right now, but you need to kind of understand with that variable rate, how often will that rate adjust?
For most banks and lenders, it is either monthly or quarterly so you do want to have an understanding about that. And you also want to have a good understanding of what is the highest rate that that variable rate can go because you need to understand, even though you're taking this loan out now, you're probably not going to be paying it or when you are paying it, it may take you up to 15 or 20 years to fully pay back a loan. So even though that variable rate looks attractive right now, you really need to, kind of, look in the future, right, as far as how it can balloon. That's right.
And one of the other things that I would always say to customers as you're going through this, it is always good for families to discuss what the costs are for college. And that means mom and dad and the student all getting together so everybody is understanding the loans that are being taken out. And you need to do this on a yearly basis. Every year when you are going through this exercise of financing your student's college education, always go back and see what you already have out just so that you can prepare your student a lot better when they graduate.
We don't want our students to graduate from college in May, and then 6 months later, they find out that they have $500 worth of student loan payments to make. Always be aware of what your finances are and get estimates on what these payments are gonna look like for your student after they graduate. They don't want to be blindsided with it.
Eric: And as parents, you don't want them living in your basement.
Laura: Exactly. That's usually what I tell people. If you speak with your students early and have them involved from day one in what you as a family are doing to help finance the education, that's the difference between them moving out or staying in your basement. You are correct.
Eric: Laura Helmick, business development officer First United and our resident, student loan specialist. Laura, thank you for joining me today. I really appreciate you coming on and providing such helpful insights, especially at this time of year when it is...like you said, it's that time of year. People are thinking about this hot and heavy right now. So if any of our listeners have a question or want to learn more, how can they get support, you know, from you, or what's the best way they can get the support they need?
Laura: Well, first thing would be that they can always go to our website at the mybank.com website. And if you use the /students, you will go directly to our student loan page. And as you scroll through the page, you will see my contact information along with my email. You can also call me directly at 301-533-2333. And that is for anything that you may have questions on in regards to the student loan process. Even if you're looking for student loan refis or consolidations, I've been doing this for about 30 years so I am pretty comfortable in answering any type of questions or concerns you may have.
Eric: Awesome. Laura, thank you again so much. I really appreciate it.
Laura: You're welcome, Eric. Hope you have a great day.
Eric: You do the same. Well, that brings us to the end of our show. You can always find more episodes by visiting mybank.com/podcast or find us on your favorite podcast app. You can also leave feedback, ask questions, or request a topic for us to discuss by sending an email to [email protected] Thanks again for listening, we'll be back next week with more helpful content, but until then, we wish you the best in focusing on what matters most to you.
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