What Kind of Student Loan do I Have - COLLEGE 101 - YouTube

Welcome back to College 101! Last time we  talked about loans and debt, how they work,  

and what a typical loan might look like. There  were those four parts we talked about, Principal,  

Rate, Term, and Amortization that help you  determine how much you’ll be paying on those  

loans, depending on how much you take out. There’s  also that really important statistic that I shared  

with you, that I wanted you to remember.  As a refresher, that was that student loans  

cost the average person $8.5 per month per $1,000  borrowed for 15 years assuming a 6% interest rate.  

That was important because it lets you do some  rough, back-of-the-napkin calculations when you’re  

trying to determine how much you might have to  pay for college for years and years to come,  

even once you’re done. Today I want to go into  specifics about where these loans might come from,  

and specifically the source of government  loans. These loans typically come from a  

program called FAFSA, which is the Free  Application for Federal Student Aid.  

This is great because it’s a single application  that applies no matter where you go to college.  

The way it works is that you fill out some  information about your family’s income  

so that they can use a formula to determine what  they call your Expected Family Contribution.  

You also input information about the school  you’ll be attending so they can estimate a  

Total Cost per year. They then try and close the  gap between your expected family contribution  

and the total cost through their various different  programs. Now I’m not going to debate how fair  

it is that whether or not you can get a loan  depends on how much money your parents make,  

because I know plenty of people who, just  because their parents make good money didn’t  

mean they were getting help for school, or as  much help as FAFSA might have expected them to.  

However, it’s the way the program works right  now, and it’s more important to learn how it works  

and learn to work with it than to complain  about it. There are three main types of  

federal student aid that come through FAFSA that  I want to talk about today. The first one is Pell  

Grants. Pell Grants are the best option and the  most preferable option for student aid from FAFSA.  

What they are, is they’re a grant. A grant is  a type of student air or scholarship or however  

you want to think of it, that basically means you  don’t have to pay it back. It’s granted to you.  

That’s great because then you don’t have to  pay it back, there’s no loan burden on you,  

there’s no debt associated with it. However,  grants can be kind of hard to qualify for.  

In order to qualify for a grant, your family’s  expected contribution has to be less than$6,000.  

I don’t know exactly the ins and outs of the  formula, and maybe I’ll dive into that in a  

future video, but I do know that qualifying for  Pell Grants was a pretty hard thing to do more  

most people to do who went to my school. There  are a few other ways to qualify for Pell Grants.  

The first is that once you turn 26, FAFSA  considers you an independent adult, and you can  

evaluate based on your own income (and probably  empty bank account). If you don’t want to wait  

until you’re 26, the other way that FAFSA will  consider you an independent person is if you get  

married. At that point, I guess they figure you’re  your own family unit, so they need to evaluate  

you based on your own income, not your parents.  Again, it’s not a perfect system, in fact it’s  

pretty flawed I think in a lot of people’s eyes,  but it is what we’ve got to work with right now.  

Pell Grants are so great, but there is a limit  to them. For one thing, you can only qualify  

for Pell Grants for up to 12 semesters, after  that they cut you off, no more Pell Grants.  

Pell Grants also aren’t available to Graduate  Students, so this is only for undergraduates.  

There is also a limit to how much grant you can  receive, and for this school year, 2021-2022, that  

amount if $6,495 for the year. So that’s going to  pay your whole tuition bill at a lot of schools,  

but it is going to make a pretty big chunk out  of it that you don’t ever have to worry about  

paying back. Alright, why did the volcano get so  angry and erupt? Because it was taken for granite!  

Because that sounds like grants, and you know  we’re talking about grants today. Remember, if you  

like the video so far and the content we provide,  or that joke, please like the video and subscribe  

to the channel. If you really just hate these puns  with a burning passion, click the notification  

bell after you subscribe so you can come and let  me know on every single video. Now let’s get back  

to it. For most people who don’t qualify for Pell  Grants, there are other options for student aid.  

The other options are federal loans, and there  are two types I want to distinctuate between.  

I think I might have just made up  the word distinctuate. The first one  

is subsidized loans. Subsidized loans  are better than unsubsidized loans,  

because a subsidy is when an entity or a person  wants to incentivize you to do something,  

so they help cover the cost of something or  make it cheaper. In the case of student loans,  

the government subsidizes your loan by making  you pay 0 interest until after you graduate.  

That may not sound like a big deal, but when  we run some numbers here in a little bit,  

you’re going to see how big of a deal that  really is. Just to illustrate the point,  

if you take out a $5,000 loan your freshman  year and every year there after for 4 years,  

when you graduate, you’ll have $20,000 in loans,  no more and no less. Once you graduate, that’s  

when you’ll calculate your payment and start  paying on them. The other kind of loan that you  

really want to avoid if you can are unsubsidized  loans. Like I said, an unsubsidized loan starts  

collecting interest from the day you take it out.  So if you take out that $5,000 loan on the first  

day of your freshman year to pay tuition, by the  time you start your sophomore year, it will have  

already collected interest. If we’re assuming  6% interest like we did in the last video,  

that $5,000 loan you took out is going to be  $5,300 before you even get to your sophomore year.  

If you take out another $5,000 for your sophomore  year, you now have $10,300 in student loans.  

If we do this again it starts to rack up a little  more each year. That $20,000 you borrowed is going  

to end up being $23,185 before you even started  to pay on it. If you go to school for 5 years and  

borrow $25,000, it’s going to be $29,876, which is  almost 20% than you borrowed to begin with. Again,  

this is before you even start to pay on it,  and you just barely graduated and hopefully  

found a job in your career field. There is also a  limit to how much of these loans you can take out  

each year. Depending on your expected family  contribution, and the total cost of your  

university, the FAFSA formula will figure out  how much they want to give you for that year,  

and what ratio of subsidized to unsubsidized  loans, but it will usually be somewhere between  

$5,500 and $12,500 in total loans. If the cost of  school is still too much, there is also a federal  

program for parents to take out loans for their  students who are going to school. These are called  

Parent PLUS loans, and they’re going to have an  even higher interest than your student loans. So  

now let’s take a look at total cost of college and  put it in reference for today’s interest rates.  

If you were to apply for FAFSA today and get  a loan approved, then your interest rate for  

an undergraduate loan would be 3.73%, which is  quite a bit lower than the 6% I talked about  

in the video yesterday. That’s good news  for you. That changes that $8.5 per month  

to $7.25 per month per $1,000 borrowed, so that’s  a little bit of a break, but not a whole lot.  

Let’s say that you’re getting your graduate  degree, then your loan is going to be 5.28%  

interest rate, and if your parents  take out a Parent PLUS loan for you,  

the interest rate would be 6.28%which ends  up being $8.60 per month per $1,000 borrowed.  

If that’s still not enough to cover the cost  of school, you can still get a private student  

loan the same way you would get any other loan.  The interest rates on these loans will typically  

be higher and it really just depends on you and  your credit score. If your parents are willing to  

sign with you, they probably have a little bit  better credit history than you, but if you’re  

on your own as an 18 who may have just gotten a  credit card and began making monthly payments,  

your credit score isn’t going to be super  great and the bank will see you as a “riskier  

investment” and charge you a higher interest.  So if you can avoid private student loans,  

definitely do that. There are some programs I want  to mention, I might dive into them in a future  

video as well if you guys would be interested.  The first one I want to talk about is the GI Bill.  

The gist of the GI Bill is that if you serve  in the military for a minimum amount of time,  

I believe it’s 3 years, they’ll cover  your tuition for an in-state school.  

The other programs I want to talk about are  called Income Based Repayment. These programs  

are for people who have student loans that are  disproportionate to how much they make, so you’re  

going to be able to pay them back, even if you  have a great job in your chosen career field.  

Then there are a few options, especially for  certain healthcare workers or for teachers,  

if you go work in an underprivileged community  for a certain number of years depending on the  

program, and you make minimum payments all  throughout, then you’ll be able to have the  

rest of your loans forgiven. I wouldn’t always  count on these programs if you don’t have to, but  

they are good to know about and have in your back  pocket just in case they’ll come in handy later.  

And lastly, I want you to keep in mind that  all the numbers we talked about today are  

for Undergraduate degrees only, even the  average that we talked about of $30,000 in  

student debt is for undergraduate degrees. For  higher degrees like a Master’s degree, an MBA,  

a PhD or professional degrees, the amount of  student is higher, especially for those costly  

professional degrees like doctors and lawyers. The  interest rates for these loans are also higher,  

so it’s a more expensive investment, but  you also might have a greater return on it.  

These degrees also have lower unemployment  rates, so it means you’re less likely to  

be without a job, whether for a few months or a  year or two or more. Life can be unpredictable,  

like we’ve all learned with COVID-19, and it’d  be nice to have a profession where you have more  

flexibility and more employability. Hopefully this  gave you some insight into how student loans work,  

so that you can make an informed  decision and set proper expectation  

for how student loans work, where you can get  them, and how much is out there you can get.  

Especially when you look at the cost of college  over 4 to 5 years, these loans can rack up,  

and if you can get the subsidized loans or get  Pell Grants, it will make a world of different for  

your future. I would also strongly encourage you  to weigh your options when looking at colleges,  

especially when you’re comparing the  costs of them vs the benefit of attending.  

Thanks for watching this episode of  College 101 here on The College Guide.  

Please let me know if you have any questions or  things you would still like to hear more about,  

and I’ll do my best to keep making  content to help you guys as best as I can.