What You Need To Know About Student Loans

The biggest changes in student loan history happened in 2022. It’s more important now than ever to understand the impacts these changes have had on individual borrowers and the overall economy. There are two main types of student loans – Private & Federal. The unfortunate reality is that many high school students dreaming of attending college in California have no clue what they are doing when someone tells them they should take out student loans. Financial education is key when planning for your future. Let’s break it down!

Private Loans

Private loans are loans provided by banks, credit unions, or online lenders rather than the federal government. Private student loans work like most types of loans; once your application is accepted, you will receive a lump sum to pay for your education program. You will repay the loan plus interest over a set length of time.

Federal Loans?

Federal student loans are provided by the government, with terms and conditions set by law. Oftentimes, interest rates are fixed and can be less expensive since they can be subsidized, eligible for forgiveness or forbearance, lower penalties, and beneficial repayment plans.

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There are a few key differences to consider between federal and private loans:?

Repayment

Federal student loans often have a grace period, during which you are not required to make payments after you graduate, leave school, or drop below half-time enrollment. On the other hand, private student loan lenders may require you to make full payments while you are still in school or may allow you to defer payments or only charge interest, depending on the lender.

Interest Rate

Federal student loans have low, fixed interest rates that are the same for all borrowers and do not change over time. With subsidized federal loans (if one qualifies), the government pays the interest while the student is in school or at least going to school on a half-time basis. On the other hand, private student loans may have either fixed or variable interest rates, which are based on your creditworthiness and may fluctuate.?

Credit Requirements

?Private student loans are typically only granted to borrowers who have good credit. This can make it difficult for college students who do not have a lot of credit history to get approved for a loan without a cosigner. In contrast, most federal student loans do not require a credit check or cosigner.

?Postponement Options

If there is any difficulty making loan payments in the future, federal student loans offer options to temporarily postpone payments. That same flexibility may not be available with private student loans.

?Repayment Plans?

Federal student loans come with the benefit of flexible repayment plans, including ones that enable you to pay based on your income. Private student loans do not have the same flexibility.

Loan Forgiveness/Forbearance?

One of the biggest negatives with private student loans is that they do not offer loan forgiveness programs. Federal student loan forbearance has arguably been one of the largest economic policy changes over the past few years as a response due to the COVID-19 Pandemic. Many are still benefiting from borrowing at 0% interest and no required payments, set to expire on June 30, 2023. As financial planners, Gerber Kawasaki has helped many clients with student loans navigate the best strategies. For example, federal student loan borrowers that have not worked with a planner may have consolidated their federal student loans into private, forcing them out of forbearance. This example is a disastrous mistake for those who can’t afford to incur thousands of dollars in interest. ??

Here is a link to the most recent updates with federal student loans.

While we think private student loans can be more beneficial for certain situations, federal student loans often provide more flexibility. If you would like a breakdown of how this all applies to your situation, or how these changes impact the overall economy and markets, feel free to reach out to Sage and Robby at Gerber Kawasaki. We are happy to help you most effectively reach your financial goals in 2023!

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Robby Lewis and Sage Casaga are Financial Advisors of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately ~$1.8B billion in assets under management as of 09/30/22. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results.