Answers To Your Questions on Finalizing Student Loan Options
We recently did a Facebook Live with Pete Wylie of CommonBond Student Loans and the response was so overwhelming that Pete came back to continue the discussion on finalizing your student loan options.
The original Facebook Live contained critical information about student loans.
Here, Pete discussed how to help families figure out how much they need to borrow and the options available to borrow. He also responded to questions from our followers and members of our Paying For College 101 Facebook group.
Here’s a summary of answers to questions members had during our Facebook Live with Pete.
Student Loan Options For College
Here are the questions some of the parents posed:
Can you comment on loans offered by state agencies?
The state options can be great. They have the benefit of many protections, however, a great many state lending agencies have been defunded and have had their requirements tightened. Those that are still in existence should absolutely be put into the same “basket” as all the other loans to be explored after the Stafford Loan has been maxed out. Some state loans are only offered to residents of that particular state or to students who attend scools in that state, so make sure to ask questions about eligibility when researching
Can a Parent PLUS loan be taken out only in the spring semester?
Parent PLUS loans (basically, any loans) can be taken out at any time during the school year. Make sure you are aware of tuition due dates, however, as you should be cognizant of when they are and when you will need the money.
Why can’t we get student loans without a cosigner?
The short answer is credit history and risk. Most students at 18 to 22 have not yet established a long credit history. They really need someone who has a credit history to participate with them (not necessarily a parent) in order to get access to what are potentially lower rates. To find out more about cosigning a loan and how it impacts both the student’s and cosigner’s credit check out How Student Loans Impact Cosigner and Student Credit .
Can private loans be put in a student’s name as well as in parent’s name?
All CommonBond private loans are in the student’s name with a parent or guardian cosigning..
Can lenders check each parent’s credit score to see who would be better off as a cosigner, and would this be a hard inquiry?
Most lenders will pull a hard inquiry to ultimately establish a person’s credit profile. Pete recommends anyone who has access through their checking accounts or through a credit service like Credit Karma to utilize their offer of free credit reports (they usually offer this once or twice a year). Asking for a free copy of your credit report does not impact your credit. Anyone who has a better credit score should be offered a better rate.
Will being a cosigner on my son’s car loan impact my own credit score?
That will most likely be factored in and certainly if there is a delinquency, it would impact the loan as well.
When a student takes out a student loan do they also need a life insurance policy?
This is may not be a necessity and it depends on the benefits offered by the lender. Make sure you have an understanding of which loan policy will offer you the best interest rate coupled with the best protection – so find out what the lender’s hardship policies, deferment policies, and auto debit discounts are. (CommonBond has a full death and disability policy.)
Can the origination fee be paid outside the loan?
No, unfortunately not, so be prepared that the amount you end up with to use will be less than what you borrowed.
Should we use the money that grandparents have put away or should we tap into home equity?
You can use the same checklist used for general loan queries:
1) Have I maxed out my Stafford Loan money from the government?
2) What is my expectation for what the four full years of college costs will be?
3) What are the various sources of money I have today that I can apply toward the tuition, and if it’s not enough for what’s needed, how do I allocate the savings I have for college over 4 years so it will result in the lowest total cost?
It comes down to cost, protection, and whose name the borrowing option should be in.
I have twins and a younger child. When they all complete college, will they have 12 loans?
If loans for the twins are borrowed each year, they will have eight loans. These can be consolidated, bundled or refinanced, if necessary, but you won’t have to worry about that until your kids are done with college. Each individual loan for each year may have a different rate. If the loans are all with the same lender, it will understandably be easier to manage. (You can potentially consolidate Federal loans as well, but there is more to know there, and you will need further research before doing so.)
My tuition bill was the exact amount of our EFC and that was already AFTER the Stafford Loan offered to my son. Should the Stafford Loan be considered?
I would have to see the exact statement to be sure, but I would want to verify the Stafford Loan funds have been used to cover outstanding expenses. If that’s the case, then I would inquire as the school should not be including Unsubsidized Stafford Loans in the EFC calculation, and those funds should be able to be used to cover the EFC.
The Course and Fee Statement I received from my son’s school was just for the fall semester. Am I applying for loans twice a year or am I doubling what I see here and just applying now for the full school year?
Yes, you should expect to need the same amount you need for the fall in the spring. You can borrow all the funds now, or you could choose to do separate loans per semester.
What’s better in the long run…paying back interest only for four years or paying towards the principal but accruing compounding daily interest (which should go down as principal is paid correct)? And is it even possible to do this?
It’s not possible to do this. Almost all student loans use a simple daily interest formula (interest does not “compound,” it “capitalizes” into the principal balance after periods of deferment or other non-payment, and then accrues interest on the new principal balance using the simple daily interest formula.) Your student loan servicer will always use your payment to satisfy outstanding fees and accrued interest before applying the remainder to your principal balance.
Basics of Student Loans
Pete also discussed loan basics as well…
Student loans, on the surface, may appear to have lots of different components, but at their core, they work the same as a car or home loan: You receive an amount of money now that you are obligated to pay back in the future. (Keep in mind that student loans are not dischargeable in bankruptcy.)
These federal loans are the most attractive as they are offered at a low interest rate: 4.53% (for the 2019-2020 academic year) and they are in the student’s name.
A fee of 1.059% is deducted from your loan before the funds are sent to your school.
The freshman year cap on Stafford Loans is $5,500, and increases slightly more than that each subsequent year. The downside to these loans is that the amount a student is allowed to borrow is rarely enough to cover the tuition gap.
Student will have the advantage of all the Federal payment protections upon exiting school. This loan is even recommended for families that have some savings and know that what they’ve saved will not cover the entire cost for four years.
Even if you have funds available, maxing out the Stafford Loan in the student’s name is important because you cannot go back in time to access it. This loan is an important piece to getting the lowest cost possible for the four to five years the student will attend school. It may seem counter intuitive to borrow if you have funds available, but the interest is so low, that it makes sense from a financial standpoint.
Parent PLUS Loan
The interest rate for the 2018-19 academic year is 7.08% with a 4.236% origination fee.
These are federal loans that are available to any parents (in their name) on behalf of their dependent child attending any accredited university. (Keep in mind that this is the case as long as you have filled out the FAFSA…so make sure you do it!)
Parent PLUS loans cannot be transferred back to the student, so anyone who is not comfortable with a loan being solely in parent’s name may find this to be a problem. In addition, anyone who wants their student to have some “skin in the game” may also choose a different option.
The drawback to the Parent PLUS loan is that the same rate of interest is offered to all borrowers regardless of credit worthiness, and that usually comes out to a relatively high rate when the origination fee is factored in.
Payments can be deferred until after student graduates. This is a more lenient loan.
The benefit of the Parent PLUS loan is that you can borrow up to the remaining cost of attendance. The loan has a credit component to it: If you’ve had a significant negative credit event, you can be denied.
The sticker price of what the government shows you as the interest rate for the Parent Plus loan and what you will actually be paying (when the origination fee is factored in) can be quite different. For the 2019-202 academic year, the true APR of the Parent Plus loan is closer to 8.5%.
Private Student Loans
Private student loans can be beneficial if you can secure an interest rate that is lower than the options in the Federal market, particularly as compared to the Parent Plus loan. There is also more variety in terms of options: 5, 10, 15-year terms, and there are a variety of repayment plans. Most lenders offer the lowest loan interest rate for the shortest duration option. And, if you pay immediately, your risk is the lowest. The longest dated loans, fully deferred until after graduation, will naturally have the highest rate of interest.
For parents who do not want a loan in their name directly or who have enough of a credit history where they can access lower prices by going with loans from private lenders (of which CommonBond is one), researching loan options with private lenders is something to consider.
When looking at private loan companies, compare not only product considerations, but experience considerations as well. Check out the reviews on how easy it is to work with particular companies and evaluate the quality of their customer service–remember, you may be dealing with them for seven to eight years and each lender will have a different approach to customer service. (CommonBond has a Net Promoter Score that is in the 70s.)
Consider your ability to repay when thinking about the type of loan product that will work for you, and focus on the APR. When you are comparing loans make sure you are comparing apples to apples from an APR perspective.
Once families have maxed out federal borrowing options in the student’s name, it is recommended that they research and compare loan options they have from the federal vs private student loan markets.
If you borrow something for the first year, it is highly probable that you will need to borrow for future years as well, so plan for that. Ultimately, it is rare that the EFC changes dramatically and it is rare that the student earns a lot more aid and scholarships than they have for the first year. So, it’s a safe, conservative assumption that whatever you are borrowing for the freshman year will be needed for the following years of study.
Many schools will assume parents will take out a Parent PLUS loan and thus automatically plug it in on the student’s financial aid award letter. This ultimately results in what looks like a low number for the net college cost and very often lulls parents into a false sense of security that they can afford that college. For this reason, it is imperative to read each line of the financial aid award letter very carefully.
The federal government deducts slightly more than 1% origination fee from the balance of Stafford loans, so the money received from a loan of $5500 will be lowered by about $60. The Parent PLUS loan operates the same way, so with a larger origination fee a larger amount will be deducted from the total. This can add up!
Financial aid offices are often at their busiest and unfortunately at their least responsive to parents’ questions during the summer months. As luck would have it, this is the time when many parents need the most assistance. Pete invites anyone who needs help deciphering their award letters to contact CommonBond. Their customer service reps can walk people through all their options.
Watch the full Facebook Live with Pete Wylie from CommonBond:
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