If you ever watched the cartoon G.I. Joe as a kid, you may remember that every episode ended with Joe proclaiming, "Knowing is half the battle!"
Knowing is half the battle when it comes to debt, particularly student loan debt. As of early 2019, there were 5.2 million student loan borrowers in default on their federal student loans. That's 5.2 million former students with unpaid debt hanging over their heads and poor credit scores impacting their lives.
The more information you have about taking out student loans, the better equipped you will be to handle them in a responsible manner. Here are six things you may not know about student loans.
1. Student loans cost money right off the bat
The moment you sign on the dotted line, agreeing to repay most federal student loans, it costs you money. Before you have time to utter, "Wow, that was fast!" loan fees are deducted from the amount you receive, meaning you will pay interest on money you never actually had. The same is true of some private student loans.
And if you take out a private student loan or an unsubsidized federal one, you'll start to accrue interest from day one. That fact alone underscores the importance of shopping around for a student loan with the lowest possible interest rate and fees. Sure, you're busy choosing classes, a place to live, and making dozens of other decisions -- but few decisions matter as much as the student loans you're saddled with.
2. Federal loans nearly always trump private loans
Federal loans are preferable for several reasons:
- You don't need a credit history to qualify.
- Federal loans come with fixed interest rates, unlike many private loans that have variable rates that can change during the course of your repayment period.
- Federal loans offer a variety of repayment plans, including an income-driven repayment plan.
- Federal loans offer forgiveness programs to those in qualifying professions.
- Federal loans also offer deferment and forbearance options for those facing financial hardship.
While we're on the subject of federal loans, there are two types: Subsidized and unsubsidized. Subsidized loans are available for students with financial need and do not charge you interest while you're still in school (the government covers the interest until six months after you graduate). Unsubsidized federal loans begin charging interest from day one.
3. It doesn't matter if your parents are not U.S. citizens
Before you take out a federal student loan you are required to fill out the Free Application for Federal Student Aid (FAFSA). No need to worry if your parents are not citizens. The form never asks about citizenship status, although it will ask questions about your family's finances.
4. It is possible to lose your driver's license or professional license for non-payment of student loans
Laws vary by state, with some being more punitive than others. In Florida, a healthcare professional can have their license suspended for failure to repay state or federal issued student loans. If you've stopped paying student loans in Massachusetts, all licensing boards are required to deny you certification, regardless of your profession. And South Dakota will revoke your driver's license and may deny you a hunting or fishing license if you fail to repay student loans.
5. Death changes things
Depending on who dies and the role they played in securing the loan, expectations for student loan repayment can change upon death. For example:
- If all your federal student aid is in your name, your outstanding balance will be forgiven through what's called a "death discharge," if you die.
- If a parent took out a Parent PLUS loan to help pay for your education, their loan will be discharged if they die. You will bear no responsibility for repaying that loan.
- Private lenders discharge loans on a case-by-case basis, meaning you must do your due diligence and read the fine print. Some private lenders forgive loans, while others do not. Be particularly careful if you have a cosigner. Private lenders often have a clause in their loan agreement stating that the loan will go into automatic default upon the death of a cosigner.
- Depending on whether you live in a community property state, you may be on the hook for student loans taken out by your spouse after you're married. Community property states consider all debts the responsibility of both partners. When one passes, the other becomes fully responsible. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. States that allow spouses to opt into the community property system are Alaska, South Dakota, and Tennessee.
6. Your employer may help pay student loans
In order to attract talent, some companies have now included student loan repayment in their benefits packages. Most have a cap on how much they will pay, but every bit helps. Ask your human resource department if they have such a benefit in place. Keep in mind that you will probably have to pay taxes on the benefit.
If your goal is to keep student loan debt at a minimum, your first step should be to arm yourself with as much knowledge as possible. The more you know, the more costly mistakes you can avoid. It's safe to say that G.I. Joe would agree.