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Student Loan Guide for Military Members and Veterans

Figuring out how to pay for the soaring costs of higher education is a daunting task, and navigating student loans can be a source of anxiety for many students and graduates.

If you are a military member or a veteran, this comprehensive guide has everything you need to know about student loans, including the pros and cons of private versus federal loans, benefits and programs for military members, and tips for managing student loan debt.

What are student loans?

Student loans are a type of financial aid that allows students to borrow money to pay for higher education. Student loans can cover the cost of tuition, room and board, books, and other costs associated with obtaining a degree.

What makes student loans different from scholarships and grants is that they need to be paid back by the borrower. Depending on the type of student loans, there are different repayment options and conditions of the loan.

What Types of Student Loans?

Student loans are categorized into two types: private and federal. A federal loan is money that is borrowed from the Department of Education. Private student loans originate from financial institutions and assist students who have exhausted other funding options.

According to Forbes, the total student loan debt in the United States is $1.75 trillion.

Federal loans make up about 92 percent of student loan debt, with around 8 percent coming from private student loans. While 8 percent seems low, in terms of student debt, graduates owe private lenders approximately $131 billion dollars.

Federal Student Loans

There are four types of federal student loans that undergraduate, graduate, and professional students can access.

• Direct subsidized loans are based on financial need and determined by the educational institution. This loan type has the lowest interest rates and overall costs.
• Direct unsubsidized loans have no financial need requirement, and the amount is determined by the educational institutions. Interest on these loans begins accruing immediately and is higher for graduate students.
• Direct PLUS loans are for graduate or professional students or the parents of undergraduates. If a parent borrows on behalf of a student, it is called a Parent PLU loan. This loan type has higher interest rates and requires a credit check.
• Direct consolidation loans allow borrowers to lower their monthly payments by combining eligible student loans into one single loan servicer and access forgiveness programs.

Pros & Cons of Federal Student Loans

Federal student loans have various pros and cons associated with them. They have more protections and are more flexible than private student loans, but still have drawbacks.

The pros include:

• No credit checks on most loans besides the Direct PLUS loans
• Income-based repayment plans that enable the borrower to pay back the loan at a pace that is comfortable with their financial situation
• Payment deferment and forbearance options for borrowers who may have trouble repaying the loan.
• Lower interest rates than private student loans.
• Access to student loan forgiveness programs such as the Teacher Loan Forgiveness or the Public Service Loan Forgiveness program.

The cons include:

• Loan limits for undergraduate and graduate students, including lifetime limits could affect covering the cost of education in the long run.
• An origination fee that cuts into the loan amount that is distributed to pay for the cost of education. The fee is low for undergrads but higher for graduates, professionals, and parents.
• Borrowers have no control over their loan servicer as the Department of Education assigns one to the account. If a borrower has a negative experience with their loan servicer, there are limited options for switching.

Private student loans

Private student loans are issued by financial institutions like banks and credit unions such as Sallie Mae, Citizens Bank, or Navy Federal Credit Union. This loan type requires a credit check and often a co-signer, especially for undergraduate students who do not have a credit history.

In fact, according to Forbes, 92 percent of undergraduate borrowers require a co-signer on private loans. Private loans are an option for students who still need to fund the cost of education after exhausting scholarships, grants, and federal student loan options.

The interest rate on private student loans can be variable or fixed and depends upon the credit of the co-signer and borrower. It is important to note that private student loans are less flexible than federal, and have heavily contributed to the student debt crises due to their high interest rates and low flexibility.

Pros & Cons of Private Student Loans

There are various pros and cons associated with using private student loans to fund higher education costs.

Pros include:

• Borrowers can receive higher loan amounts than federal student loans that can typically cover all of their educational expenses.
• The possibility of low interest rates depending on the credit score of the borrower and/or cosigner.

Cons include:

• Obtaining private student loans requires a credit check, so undergraduate students who have not yet had a chance to build credit will require a co-signer.
• Unlike federal loan programs, private lenders do not offer loan forgiveness programs that can ease the burden of student debt.
• Private lenders do not offer flexible income-driven repayment plans for those who may be struggling financially.

Benefits and Programs for Active Military

The extraordinarily high cost of higher education in the United States is a barrier for many students and professionals who want to obtain an undergraduate or post-secondary degree. Thankfully, for service members, veterans, and their dependents, financial support and aid is available that make it possible to ease the burden of higher education costs.

Military members have various options in getting assistance for the costs of higher education such as benefits from the GI Bill, ROTC programs, and state based tuition programs. However, for military members who have to take out federal loans to cover the cost of their secondary-degree, there are several benefits offered by the Department of Education.

SCRA Protections

The Servicemembers Civil Relief Act (SCRA) Interest Rate Cap ensures that interest on private and federal student loans obtained prior to military service are capped at 6 percent during periods of active duty.

Another interest related benefit is that military members who are serving in a hostile area that qualifies them for special pay do not have to pay interest on Direct Loans for up to 60 months.

Student Loan Deferment

Military service also enables certain loan deferment benefits. Military members on certain periods of active duty can postpone their loan repayment due to their military service. Additionally, those who are in the National Guard and Reserves (current or retired) who are called to active duty while they are enrolled at least half-time or within six months of being enrolled half-time may qualify for deferment of their federal student loans.

Another benefit for active military members is the HEROES Act Waiver, which waives many of the documentation requirements for federal student loan benefits. This enables those who are on active duty, who may be unable to provide updated qualifying information to access benefits such as the income-driven repayment plan.

Additionally, it is important to note that military service counts towards the Public Service Loan Forgiveness Program, which forgives the remaining balance on direct loans after making the equivalent of 120 qualifying monthly payments.

For more information, check out the CollegeRecon Education Guides for Active Military Members and Veterans.

Tips for Managing Student Loans

Having student loan debt can sometimes feel like you are trying to dig yourself out of a bottomless pit, but with these tips, managing student loans can feel achievable and less of a herculean task.

• Having an understanding of your total debt amount, including interest, can help you develop a plan for paying it down. This also enables you to understand the terms of loan including interest rates, fees, or penalties.
• If you have federal student loans, seek out any of the loan forgiveness or assistance plans that are listed above. The Department of Education is more flexible in what it offers borrowers in terms of assistance than private lenders. While private lenders do not have the same robust programs as federal loans, it is still worth calling to see if they have any programs that could ease the burden of repayment such as graduation rewards or hardship programs.
• Consolidate your loans and refinance at a lower interest rate to save on monthly and long-term costs. It is recommended to shop around and compare lenders to ensure that consolidation is beneficial for your particular financial situation.
• Employ the debt avalanche strategy, which uses the method of budgeting an amount above the monthly required payments and allocating the overage amount to the loan with the highest interest rate. Those who use this strategy pay off the highest-interest rate first, then the next, until they are free of the debt.
• The opposite of the debt avalanche strategy is the debt-snowball strategy, which involves paying off the smallest amount of debt first and building momentum to tackle larger debts.
• Pay extra on the principal balance where you can to reduce the principal loan amount and lessen the interest over the life of the loan.
• Set up automatic payments to your loan servicer or lender if you are in the financial position to do so. Some lenders may offer a small reduction in the interest rate for automatic payments, which will benefit you in the long-run.