As we’ve helped parents and watched folks assist each other in our Facebook group, Paying For College 101, we’ve noticed there are some common questions that come up about student loans. We’d like to answer those here so that when the time comes in May (and that time will come faster than you think!), and schools have been chosen, financial aid packages will have been finalized, and it will be time for families to close the financial gap, you will be prepared! being armed with this information will make it easier for you to navigate what for many will be a very challenging time.
(By the way, in our Facebook group, parents and other professionals share tips and tricks to make the process easier. If you’re not yet a member of the group, you should be! You’ll find priceless advice and relatable stories, all for free.)
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How Do You Balance Student Loans and Savings?
One parent asked the group about how to handle federal student loans. They didn’t need the money until later in school due to family savings, but there is an annual limit on how much can be borrowed.
One of our helpful members replied:
“For my son, he will need the maximum loan amount of $27,000 but since you can only take a set amount each year he will need to take the $5500 freshman year, $6,500 sophomore and $7,500 the last two years even though he technically won’t need it until senior year.”
We think this is a great strategy. Even if you have enough savings to pay for three years, we recommend mixing federal loans with savings to avoid needing expensive financing at the end of school.
Which is Best, Parent PLUS or Private Loans?
This is one of the most common questions in our group during May. Here’s the simple answer to whether Parent PLUS or private loans are better:
Parent PLUS is best IF:
- You have less-than-stellar credit
- You want to take advantage of the flexibility of repayment that federal loans have
Private Loans are better IF:
- You have excellent credit and can get a fixed rate lower than the PLUS+fees rate
- You want to avoid origination fees
- You can find a lender that offers some flexibility or aren’t concerned about repayment
Where Should You Look for a Private Loan?
You can talk to your local bank, but keep in mind that many national lenders offer these loans as well. You can quickly and easily apply online. We recently did a series of Lender Profiles that will give you the specifics on each lender.
Keep in mind a private loan will probably be in your name, or your student’s name with you as a cosigner. If you cosign, make sure there are provisions for cosigner release after a number of timely payments.
To get the best rates on private loans, compare lenders to each other. Many offer a prequalification without a credit hit, or you can call and give your credit score to get an estimate on interest rates.
How Can You Compare Loans Accurately?
It’s vital to make sure you compare loans “apples-to-apples,” taking into account the full cost.
This was recently shared in our group:
“Compare TOTAL COSTS of loans against each other. The total cost changes depending on interest rate, length of the loan, and origination fee. This is the only way to compare apples to apples from a numbers perspective. This year I created an excel spreadsheet that’s in the article posted below. It may not be slick, but it does the job and lets you compare up to 5 loans. You should compare private loans (both for students and parents) against the Parent Plus loan. With the 4% origination fee, the effective interest rate of the Parent Plus loan is higher than the 7% APR that most parents think of, so any private loan that you can get below that effective interest rate will cost you less money.”
Whose Name is the Loan In?
Many parents get frustrated when they realize that their student isn’t likely to get approved for a private student loan on their own.
The loan can still be in your student’s name. However, you will probably need to cosign. Be sure to choose a private lender that allows the cosigner to be removed after a certain number of on-time payments. Your student will need to work on building credit as well.
You can choose to get a private parent loan, which would be only in your name. You would need to decide whether you want your student to have primary responsibility, and how having the loan in only your name would impact your long-term future.
How Do You Sign Up For Parent PLUS if You Didn’t Select it Originally?
Many parents begin considering PLUS loans in the summer. Don’t worry, if this is you, you didn’t miss the boat. You want to apply for PLUS loans closer to school time to avoid multiple credit checks.
One parent shared their experience:
“I have applied for PLUS loans as close as 2-3 weeks before a semester starts once we were established. If you are going to go PLUS route, I don’t think you need to take out any private loans in addition to PLUS. My personal experience has been that we have been approved for up to the amount due that is not covered by financial aid. So you can take the full balance due, or you can specify an amount less than that if you want to pay some out of pocket. If there is an overage of funds, they will refund them to the student or the parent (you specify when applying).”
How Can a Student Afford Books and Supplies if a Refund is Delayed?
Some parents in our group have been nervous about how their student can pay for books and supplies. Many schools refund any overages from loans and aid to the student, but state that it can take a couple of weeks.
Keep in mind that it’s useful to go to the first class before purchasing books and notes so that your student can be sure they’re getting what they actually need.
In addition, many schools have a “University Bill” or “U-Bill,” which is a line of credit extended to students for educational purposes. This line of credit can be used at the bookstore and paid off when the financial aid is refunded.
If you’re still concerned, be sure to talk to your student’s financial aid office to determine how this is normally handled.
What’s the Best Way to Use Home Equity?
Many families plan to make use of their home equity to pay for school. There are a lot of ways to do this wisely.
One parent shared their experience using a home equity line of credit:
“We have set a certain amount for their schooling that we feel is within their budget and our budget – so for us, we aren’t planning on using the HELOC to Pay FOR college with money we don’t have, but rather help us stay financially aware and on track.”
HELOCs are very popular among families in our Facebook group. However, there’s also a program called Unison we highly recommend you look into, where you partner with investors and share the appreciation of your home when you sell. With this method, you can get cash without making any payments!
You Can Do This!
Thousands of families every year navigate their way through student loan questions. You aren’t alone. If you’re feeling isolated or would like some help from a knowledgeable community, come join our Facebook group! We’d love to have you there.
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