Financing a College Education

Reading, Writing, Repayment Plans: 5 Things Borrowers Should Know About Financing a College Education

The Federal Reserve recently published its annual Report on the Economic Well Being of U.S. Households in 2018, confirming what most Americans already know: student loan debt is a huge issue in the United States. According to the report, a typical monthly student loan payment is between $200 and $299, and 20% of borrowers who attended private, for-profit institutions have fallen behind on their payments. Forbes recently reported that student loan debt now outranks credit card debt, coming in as the second highest consumer debt category in the United States with 44 million borrowers collectively owing $1.5 trillion. Now, more than ever, it’s critical that borrowers research financing options for college to set themselves up for success in the future. To get started, Kristi Cleveland, Branch Manager, Fidelity Bank in Peckville, shares 5 things every college-bound student and parent should know about preparing to pay for college.

#1: A little early planning can yield big savings later.

Go Green: It’s never too early to start thinking about financing a college education. For parents who want to start the process while their children are young, Fidelity Bank offers Green Team Savings plans. Designed for children under age 18, these accounts are a great way to teach them how to save for the future. Deposits of birthday and holiday money can really add up over the years, and, once a year, Fidelity matches 1% of the Green Team member’s balance.

529 Plans: Parents may also want to consider establishing 529 Plans for their children. These plans are designed specifically to save funds for tuition, offering tax and financial aid benefits. Funds in the account may be used for college tuition, or to finance tuition for students in grades K-12. Parents may establish payments as low as $25 a month, and anyone can contribute — from grandparents to aunts and uncles and family friends. To learn more, consult with a member of the Fidelity’s Asset Management team.

#2: Public vs. private loans: know the difference.

When researching student loan options, it’s helpful to understand some of the fundamental differences between public and private loans:

• Public loans are federal loans in which the government acts as the lending agency, establishing the terms and conditions. Benefits of public loans may include fixed income rates and income-driven repayment plans. Please note: federal debt is never forgiven, even in cases where bankruptcy is declared.
• Private loans are loans in which a bank, state agency, or educational institution serves as the lending agency, establishing the terms and conditions. For these types of loans, the interest rates are driven by the lender, which can ultimately cost the borrower more in the long run.

Which option is best for borrowers?

Kristi recommends consulting with the Financial Aid Office at the college or university of interest. “They’re a great resource for parents and students because this is what they specialize in, and they’re there to help,” she said.

Online research can be very helpful, too. A great place to start is the Federal Student Aid website published by the U.S. Department of Education. The site covers everything from choosing a college to financing and repaying student loans. 

#3: A word about deferments and forbearances: Avoid them whenever possible.

For most federal student loans, payments begin 6 to 9 months after the student graduates, leaves school, or changes their enrollment status from full- to part-time. This is an ideal time for borrowers to research repayment plans, and select an option that will work best for them. There are many options (so many that Federal Student Aid created an entire pamphlet devoted to Repaying Your Loans). This is an excellent resource for any student or parent preparing for those monthly bills.

Sometimes it takes longer than the 6 to 9 month grace period for graduates to find full-time employment, or earn salaries high enough to cover living expenses plus student loan payments. In these situations, borrowers may qualify for deferments or forbearances. These options allow qualified borrowers to postpone or lower their loan payments. The main difference between the two is how the interest is handled. Typically, the borrower is not responsible for paying the interest that accrues during a deferment. The opposite is true for the less common forbearance, which usually requires borrowers to pay the interest that accrues while payments on the loan are postponed.

Keep in mind:

• Deferments will not lower a borrower’s credit score, but they are reflected on the borrower’s credit report.
• Borrowers must apply for deferments and continue making payments on their loans until their deferment is approved. “You must get approval for a deferment, and until you’re officially approved, you have to make payments on your loan,” Kristi said. “If you don’t, it will be reported as ‘late’ on your credit and it could negatively affect your credit score. You may not realize this as a student, but your credit molds your life. You need good credit to buy your first car, or to buy a house. It follows you, and it’s not going anywhere.”

The bottom line: avoid deferments and forbearances whenever possible, and consider a new alternative available to borrowers: the Income Driven Repayment Plan, or IDR.

#4: New Income Driven Repayment Plans may outshine deferments of the past.

Income Driven Repayment Plan (IDR)

A relatively new option, Income Driven Repayment Plans (IDRs) allow borrowers to repay their loans based on their income level. This can be an excellent alternative to deferments and forbearances because borrowers are still paying on the interest and, because payments are being made, there is no reflection on the borrower’s credit report. In addition, payment levels are re-evaluated each year, so if the borrower’s income increases, so does the payment. That’s beneficial in the long run, because it will ultimately shorten the length of time the borrower is paying on the loan. “Everyone considering a deferment should research an IDR first,” Kristi said.

#5:Beyond the student loan: alternative financing options for parents.

Sometimes even with a combination of student loans, grants, and scholarships, students need more help in financing their education. Parents may be able to offer some assistance:

• Parent Plus Loan: These federal loans provide a lending option for parents to borrow money in their name to help finance a dependent child’s education. The parent is responsible for paying back the loan, and any late payments will negatively affect the parent’s credit score — not the student’s.
• Home Equity Loan: Parents who own homes should weigh the pros and cons of using a home equity loan to help finance their child’s college education. A benefit to taking out a home equity loan is that repayment can begin immediately, alleviating some of the burden of debt upon graduation. Interest rates may also be lower on a home equity loan than other financing options. Alternatively, this type of loan will tie up the equity in a parent’s home, so if there is an issue throughout the course of the child’s education, the parent won’t have access to those funds for emergencies.
• Stocks: Parents who have investments may want to consider cashing in stocks, offering a penalty-free option for accessing cash. This could be the best option for parents who are concerned about repaying a Parent Plus Loan, using the equity in their home, or dipping into their savings.

Since every family’s situation is unique, parents should consider all of these options carefully. Research options online, and consult with a financial advisor before moving forward. “There’s a lot out there,” Kristi said. “You just have to be willing to do your homework to find the best options.”

Fidelity Bank has multiple local branch offices throughout Northeastern Pennsylvania and the Lehigh Valley, and our full-service Client Care Center is at your service 7 days a week. Call or visit your local branch office today.

Daniel J. Santaniello, President and CEO, of Fidelity Bank, publishes Financially Fit with Fidelity, your guide to financial well-being, every Thursday. If you’re interested in a financial topic we haven’t yet covered or want to subscribe to our emails, please feel free to drop us a line at blog@fddbank.com. We would love to hear from you.