What do we need to know before taking student loans?

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Q. My son will have to take student loans for college when he starts next year. We’re still not sure where he is going to go. What do we need to know with higher interest rates and all this uncertainty about loan payback?
— Dad

A. Congrats on your son’s decision to go to college.

There is a lot to consider, especially with rising interest rates and President Joe Biden’s proposal to cancel some federal student loan debt.

It is crucial to be informed about student loan strategies and updates that can help students and their families navigate this complex landscape, said Leo Chubinishvili, a certified financial planner with Access Wealth in East Hanover.

Financial assistance may include grants, scholarships, work-study programs, and even negotiating financial aid packages with schools, he said. It is also important to understand the different types of student loans available, including federal and private loans, and their respective interest rates and repayment options.

For federal loans, income-driven repayment plans can help manage loan payments, Chubinishvili said.

“These plans allow borrowers to make payments based on their income and family size. This can result in lower monthly payments — capped at 10 to 20% of the borrower’s discretionary income — and loan forgiveness after a certain period,” he said. “Borrowers can also consider consolidating their federal loans to simplify payments and potentially lower interest rates.”

For private loans, it is important to shop around and compare interest rates and terms from different lenders, he said.

Generally, the interest on your son’s loans will be higher than in previous years, Chubinishvili said.

He will not have to make any payments until he graduates college, he said, and many loans provide a 6-month grace period, allowing individuals time to transition from student to employee.

“At that time, he could also refinance the student loans if the interest rates dropped,” he said. “However, refinancing federal loans with a private lender means losing access to federal loan benefits, such as income-driven repayment plans, loan forgiveness programs, and federal deferment and forbearance options.”

Chubinishvili said the key to managing student loans is to be proactive and informed, as there are many moving pieces.

For example, he said, recent federal legislation known as the SECURE Act 2.0 allows employers to match employees’ student loan payments into their qualified retirement plans such as 401(k), 403(b), and SIMPLE IRAs. This provides a great advantage, he said.

“By exploring all available options for financial aid, understanding the different types of loans and repayment options, and staying up-to-date on changes in interest rates and loan policies, you can make informed decisions and navigate the complex world of student loans with confidence,” Chubinishvili said.

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This story was originally published on June 23, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.