“As a freshman, the most students can borrow with Direct Loans is $5,500,” says Keith Babich from lender CommonBond. “Anyone looking at college costs knows that’s probably not going to come close to cutting it.”
There’s a good chance you’ll need to find additional funding, beyond the “regular” Direct Subsidized and Unsubsidized loans. As you piece together your college funding, here’s what you need to know.
Student Loans as a Family Funding Puzzle
“Once your student has their Direct Loan squared away, it’s time to look around at other ways of funding their education,” says Babich. “For many parents, the first stop is the Parent PLUS loan. However, that might not be the best option.”
Babich points out that with the Direct Loans for students, interest rates are reasonably competitive. The interest rate for federal undergraduate loans during the 2019-2020 school year, for example, is 4.53%.
It makes sense to start with federal undergraduate loans because they are guaranteed to just about anyone, regardless of income and credit, and they have relatively low rates.
But once you’ve exhausted those loans, it’s time to compare other loan options. Babich suggests taking the step of looking at private lenders, like CommonBond, before turning to the parent PLUS loan, which has a rate of 7.08% for 2019-2020.
“One of the issues is that parent PLUS loans are debt for the parents, and some parents are a little uncomfortable with this,” Babich says. “Instead, consider cosigning on a private loan. The student is still the borrower, but parents can use their better income and credit situation to ensure that the funding is there and get a competitive rate.”
For many families, Babich points out, it’s about looking for ways to get the funding needed, without putting too much undue hardship on parents — who might have other obligations including additional children that will attend college.
What to Look for When Comparing Student Loan Options
Because there are so many private student loan options available, Babich suggests comparing different lenders and looking for the loans that best fit your family’s needs. Every family has its own priorities as to what’s most important. Here are some of the features to look at as you compare your options.
“Everyone starts with the interest rate,” says Babich. “It’s a big deal. It determines what the education loan will ultimately cost you.”
He points out that many private lenders, including CommonBond, offer lower interest rates on private loans than what you’d get with a parent PLUS loan. Ultimately, your rate depends on your credit score, along with other factors, like your loan term. Students who can’t qualify can borrow with the help of their parents or others as cosigners.
Find out what rate you can get from three or four private lenders, and compare that to the parent PLUS loan. In some cases, where parents might have a lower credit score, but not have major adverse items, a PLUS loan might be the lowest-cost option. But, Babich says, for many families, there’s a good chance a private loan can do just as well, if not better.
Not only does the Parent PLUS loan have a rate of 7.08% for the 2019-2020 school year, but there’s an origination fee of 4.264%, which can make the effective interest rate higher. For parents with higher credit scores, private loans can be a better option.
Total cost of the loan
Once you look at interest rate, it’s important to understand the total cost of the loan. For example, if you borrow $10,000 through a parent PLUS loan, with a 10 year term (and you start making payments immediately), you will repay about $14,400. That’s an extra $4,400 in interest over the course of 10 years.
Anytime you borrow, you’ll have to pay interest. However, it’s important to consider the total cost of the loan. CommonBond offers a calculator that allows you to adjust various terms so you can compare the total cost of the loan. Factors that impact the total cost of your loan include:
- Interest rate
- When you start making payments
- Origination fee
- Loan term
Use a student loan calculator to keep the term the same, but then adjust interest rate and origination fees to get an apples-to-apples comparison based on numbers. After you’ve looked at interest rate and total loan cost, you can begin considering other factors and perks.
Some private lenders require borrowers to begin immediate repayment, putting hardship on families. Instead, look for companies that offer grace periods similar to what’s offered by the government.
“CommonBond and some other lenders have options that allow you to put off making payments until six months after the student leaves school,” says Babich. “This can make a big difference in family finances, especially if the expectation is for the student to make payments after they graduate.”
Hardship protections are something you hope you’ll never need to use, but it’s good to know your options ahead of time.
This is where you need to do your research and consider whether this is one of those must-haves for you. You’ll find that many private lenders offer forbearance that is on par with federal student loans (forbearance means you can press “pause” on payments for a period of time).
Federal loans do offer a bit more flexibility when it comes to things like loan forgiveness (for those who work in public service for 10 years), and income-based repayment. But depending on your family’s situation, it may not be worth the extra cost of the loan to pay for a protection you may never need.
It’s also worth noting that parents who get PLUS loans can get a Direct Consolidation loan and be eligible for various income-based and forgiveness programs. However, even so, it still might not be the best choice, depending on the family situation.
Instead of hoping for protections, Babich suggests looking to see what types of programs are offered by private lenders.
“CommonBond has a forbearance program that provides for a measure of relief when needed,” says Babich. “Check with lenders to see what kinds of programs are available when you run into trouble.”
Because it’s unlikely that a student will qualify for the best rates and terms on their own, there’s a good chance that a parent will have to cosign. While cosigning accepts responsibility for the loan if the student doesn’t pay, the loan is still in the student’s name.
Many private lenders won’t release the cosigner at all. However, CommonBond is one of the few that offers a cosigner release program. Make 24 on-time payments, and show you’re ready to take on the loan by yourself through your credit score and steady income, and the cosigner can be released.
This is a great benefit to parents who want to give their children help funding college, but can’t be responsible for the debt for years to come.
Don’t forget to look at flexibility. Some private lenders only offer terms of five and 10 years. However, that might not provide families (or students) with affordable monthly payments. Consider lenders that offer longer repayment terms. CommonBond even has a handy tool that allows you to compare different options for term lengths and interest rates.
“It’s about transparency and understanding what your options are,” says Babich. “You can take a look at different scenarios and figure out what’s going to work best with your financial situation.”
Don’t forget to look at other perks that might be important to you. Some lenders offer career development or networking events.
CommonBond makes it a point to offer live customer service via phone calls. “We’re a high technology company, but some people also like that high touch service we offer,” Babich says. “You want to feel comfortable with your lender.” You should feel absolutely entitled to ask questions before, during, and after applying for a loan.
Additionally, you might find it important to work with a company that offers a social good. CommonBond sponsors an education program in Ghana, and for every loan that’s approved, a child receives an education.
Carefully think about what items matter most to you, and compare loan options in light of your family’s finances, and choose loans that meet as much of your must-have criteria as possible.
While you’re best-served when you can get scholarships and grants, as well as rely on savings, there’s a good chance that you’ll need to look into loans to cover any funding gaps for your student’s education.
The right combination of federal and private loans can help you meet those needs in a way that best supports your family. At this point, it’s worth a little extra research to understand what fits your family best.
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This post is sponsored by CommonBond.