When it comes to debt, no one wants to be overwhelmed. But debt can be leverage if properly planned for. Paying for college has become increasingly expensive in recent years. You should be looking at ways to maximize scholarships, taking advantage of tax credits, and saving in tax-deferred ways. But for many, student loans are inevitable. That’s why we should go through the Federal Direct Subsidized and Unsubsidized Loans. We’re going to cover the 6 reasons to take the Direct Loans for college. You’ll also see a catch that should be considered.
Best available Student Loans on the market
When it comes to student loans, there aren’t any that are better on the market. When considering the alternatives, there are Parent PLUS loans, private student loans, and alternative loans such as home equity loans, or retirement plan loans. Each of these can be part of a strategy, but that doesn’t necessarily mean they should be.
The Federal Direct Subsidized & Unsubsidized Loans are the best loans on the market because they don’t carry a true negative that those other loans do. Bottom line: if you need a student loan, there’s no reason to start anywhere else. Granted, they’re only available up to an aggregate limit, so many may need a loan beyond these types of loans. But this is the starting point. In my opinion, of the 6 reasons to take the Direct Loans for college, this is number 1.
Fixed, Low Interest rates
Part of the reason why these loans make so much sense is that the interest rate is about as low as you’ll find on the market (speaking specifically to student loans), and the interest rate is fixed. Loans taken between July 1, 2023 & July 1 2024 is fixed at 5.50%. There isn’t any loan provider (at least to my knowledge) that will offer a student loan in the child’s name only at that rate.
The beauty of the fixed interest rate also can’t be understated. The fact that interest rates have risen so rapidly in the last couple of years only solidifies this point. For variable interest rate loan holders, the interest rate increases have caused increases in monthly payments. The cash flow planning for this can definitely be affected by this. With rising costs of inflation affecting cash flow for most young students, a fixed interest rate is a welcome blessing.
In the student’s name only
This benefit is two-fold for parents. It allows parents to not have their credit affected in any way while their child is heading to school. It also benefits parents that it allows their child to build credit and can also have “skin in the game.” Most parents want to help their children in some capacity to pay for school. But I would argue one of the most helpful ways is to have the child learn personal financial responsibility. Sure, some 18 year-old’s aren’t ready to take out debt like this. But the ones who are and who know this is a repayment he/she will have to make could give an incentive to work hard & succeed in college, and not be tempted to party every night.
By utilizing these loans, parents can keep on track for other goals such as retirement & their own debt-free plans & goals.
One thing for a near certainty is that there aren’t many repayment options friendlier than the federal student loan repayment options. Let’s leave aside the fact that there’s been an emergency freeze on payments & interest since March 2020. The different types of repayment plans allow for balancing income with your repayment. Can you imagine any other type of loan allowing for that?
It’s important to plan ahead for the types of repayment (full list here), but it makes the planning that much easier. I often recommend that borrowers consider paying off these loans last, because the benefit of paying off other loans first is so beneficial.
Eligible for PSLF
While there are state-based programs that allow for student loan forgiveness, one of the most popular & well known is the Public Service Loan Forgiveness Program (PSLF). The Direct Loans are eligible for this forgiveness program, and provides great incentive to borrowers to venture into a public job (which may pay less) but can serve more people.
There are requirements that you must be aware of, however. These requirements are strict, and planning is required. But if this is done properly, it can save on taxes & interest you’d otherwise owe. Private loans are not eligible for this program. If you or your child are planning on public careers, this should be a consideration when applying to school.
Available to everybody
What do Elon Musk, Jeff Bezos, and Warren Buffet have in common? If you guessed they’re eligible for Direct Loans, you’d be correct. Now, they wouldn’t be eligible for the subsidized loans, but they could get unsubsidized loans if their hearts desired. That’s the beauty of the unsubsidized loans, they’re available to everybody.
Parents who are considered “middle class” are often in a similar position. They “do too well to get need-based aid, and not well enough to pay out of pocket.” This is a common phrase I hear all the time. But it’s not 100% true. The unsubsidized loans can help families defray some of that cost.
The Catch You Need to Know
Something I also hear a good bit of is the following:
“I plan to use my 529 plan or cash flow the first 2 years, then I’ll use federal loans for the rest.”
I think that strategy deserves a second look. Because you cannot get the year 1 or year 2 loan amounts after you’ve rejected them. Pretty simply put, these loans are use it, or lose it. The best thing you can do is run a 4 year projection and determine if you’re going to need these federal loans at any point in the college career, and utilize them accordingly. You should be including these loans in your plan to pay for school if you need to utilize loans at all.
I cannot stress it enough – knowledge of these loans is power! There is no good debt, but this is the best kind of student loan. While there are many reasons these loans should be first, these are the top 6 reasons to take the Direct Loans for college. As always, if you have questions in your college plan, seek your financial planner or accountant for better ways to save & pay for college.