Understanding Your Student Loan Options
by Howard Freedman
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Howard can be reached at firstname.lastname@example.org
Student Loans (Federal are offered by the US Department of Education) There are two types of federal student loans that require a FAFSA available each October. The FAFSA requests prior years last filed income tax data for both the parent and student.
Stafford loans are not based on credit score, are offered to all students regardless of EFC, have varied and unique repayment plans and can be forgiven based on certain criteria for high demand professions especially in low-income communities. Needy students can receive a combination of subsidized loans in which interest is paid by the US government while the student is in college and unsubsidized loans in which interest accrues or accumulates and paid by the borrower. Under certain circumstances, repayments can be deferred or postponed or eligible for forbearance. Forbearance allows the borrower to temporarily stop making payments make smaller payment or extend the repayment schedule. Another unique feature of the Stafford, (Perkins loans) are the repayment options that are not available with alternative loans. Here is a list of the repayment options that can be explained in greater detail by visiting the Federal Student Aid website
• Standard Repayment Plan
• Graduated Repayment Plan
• Extended Repayment Plan
• Revised Pay As You Earn Repayment Plan
• Pay as You Earn Repayment Plan
• Income Based-repayment
• Income Contingent Payment Plan
• Income-Sensitive Payment Plan
• The beauty of the Stafford loans is they are easy to obtain and repay and gives the student an ownership stake in their education.
• The downside is that the student can only borrow between $5500 and $7500 per year, which, in most cases will not cover the total cost of college.
Colleges also award Perkins loans to needy students at only a 5% interest rate. The federal government subsidizes the interest on the loan while the student is in college.
Bottom Line: Always accept Stafford and Perkins loans before any others.
Parent PLUS Loan (7.6% and 4% Origination Fee)
The Parent PLUS loan is fully the parent’s responsibility to repay. It has liberal credit terms and unlike alternative loans does not use the debt to income ratio. If a parent is denied a PLUS loan the student can receive an additional $4000 in unsubsidized Stafford loans. Since it is in one parent’s name, the parent with the stronger credit score may be in a better position to borrow. The PLUS loan is also like a life insurance policy as the loan is canceled in the event of the parent or student’s death or if the parent becomes totally and permanently disabled. The downside of a PLUS loan is that the parent is fully responsible for repayment even I the student should drop out.
These are all of the outside loans offered by banks, credit unions, employers, state agencies, etc. Since most students do not have an established credit score, co-signors with good credit can cosign for the student to protect the lender from a loan default. Usually, the co-signor is off the hook if the student makes timely payments for at least 2 years to 3 years after they graduate. Repayment terms are not as flexible and are not subject to loan forgiveness, deferment, and forbearance. Fixed rate loans are the best way to go for those with marginal credit since variable rates can be much higher. The best thing is to check with the college on programs they offer but shop around. Bankrate.com is an excellent site from which to begin.
Home Equity Loans or Lines of credit provide great flexibility, are subject to less interest but are getting harder to obtain as credit requirements have become more stringent.
Credit Card payments can also be expensive but can be used for books and pay other expenses not paid directly to the college. Using a credit card makes sense for incidental expenses that can be paid within each billing cycle rather than over many years.
Borrowing against a 401 (k) or other retirement plans should be used as a last resort Parents also need some financial security for their future and can ill afford to sacrifice it to pay for a college education.. Many years ago, I had a client that cleaned out his retirement account to pay for his son’s education. After only one semester the student dropped out. That was a costly mistake especially when things are not well thought out.
Paying for college will take a variety of borrowing options for which both the student and parents should decide. Look at college as a four-year expense for the student and their siblings before deciding on borrowing options.