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Various studies have shown that when students are at least partially responsible for paying for their own college education – by way of work-study, using their own money or taking out student loans – they tend to do better academically than students who are not responsible for any share of their education costs. As parents, if you want your child to be responsible for paying a part of her college costs and she will need a loan to do so, you can either lend her the money yourself (Intra-family loan) or let her take out a student loan. Depending on whether she demonstrates a financial need for student aid, exceptional financial need or no financial need at the college that she attends, she will end up with a Subsidized Stafford loan, a Perkins loan, an Unsubsidized Stafford loan and/or a private student loan. In general, the best loans are the Subsidized Stafford and Perkins loans followed by the Unsubsidized Stafford loan, and as a last resort, private student loans. Special offers from lenders change constantly for private student loans, so it may require some homework using the internet and by talking with your college to determine which lender has the best overall rates, origination fees and repayment terms.
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BruceMesnekoffDiscuss VariousTypes Student Loans Various studies haveshown that when students are at least partiallyresponsibleforpaying for theirown collegeeducation– bywayof work-study, using theirown moneyor taking out student loans – theytendto do betteracademicallythan students who arenot responsible for any shareof their education costs. As parents, ifyou wantyourchild to be responsibleforpaying a part ofhercollegecosts and shewill need aloan to do so,you can either lend her themoneyyourself (Intra-familyloan) orlet her takeout a student loan. Depending on whethershe demonstrates afinancialneed forstudent aid, exceptional financial need orno financial needat the collegethat sheattends, she will end up with aSubsidized Stafford loan, aPerkins loan, an Unsubsidized Stafford loan and/or aprivate student loan.In general, thebest loans arethe Subsidized Stafford andPerkins loans followed bythe Unsubsidized Stafford loan, and asalast resort, privatestudent loans. Special offers from lenders change constantlyfor privatestudent loans, so it mayrequiresome homework using theinternet and bytalkingwithyourcollegeto determinewhich lender has thebest overall rates,origination fees andrepayment terms. Parent PLUS Loans This federal loan is offered through colleges to parents with relativelygood credit. Theinterest rate on this loan is 7.21% forthe 2013-2014academicyear, but is variablebased upon the ten-year Treasurynote. Therate is cappedat 10.5%, and repayment begins shortlyafter the funds aredisbursed. Themaximum PLUS loan amount is thedifferencebetween thecollege’s cost ofattendance and all of the otheraid thatyour childhas been awarded. Perkins Loans ThePerkins loan is awarded byparticipating colleges to students with exceptional financial needand has an interest rate of 5%. Themaximum amount forthis loan is $4,000 peryear with anaggregatemaximum of $20,000 per student. PrivateStudent Loans Theseloans areoffered to students byavarietyofbanks and privatelenders and typicallycarry variable interest rates of 3-12%, origination fees and othercharges. Almost all private student loans thesedays require a cosigner. Theyshould be called“No AlternativeLoans”becausetheyshould beyour last resort. TheBookTheUltimateGuideto StudentLoansis good resourceto get Private StudentLoans. Mortgageand HomeEquity Loans It is not uncommon for parents to takeout a newmortgageon theirhome in order to payforcollege. After all, most parents havethe majorityof their net worth tied upin their homes and their401k orotherretirement plans.
A cash-out refinanceofamortgageis when the borrower refinancesan existing loan bytaking a new mortgage foranamount that is higherthan the existing loan. Thelender then pays offtheexisting mortgage and gives the borrower “cash-out” oftheirhome in the amount of the differencebetween thenew higher loanand whatwas owed on theexisting loan. Bycontrast, re-mortgaging a homesimplymeansto takeout a new loanequal to what iscurrentlyowed, but usuallyat a different interest rate and adifferent periodof repayment. Essentiallythe goal in re-mortgaging an existing loan is to reducethepayment bygetting a lower interest rate, stretching out thepayments over alonger period oftime, orboth.Instead of taking a mortgage againstyour home,youcan alsotap intoyour home’s equitybytaking ahome equityloan whereyou get cash-out up front and haveavariable or fixed interestrate forafixed period of time. Oryou can get ahome equitylineofcredit (HELOC). AHELOC is alineof credit thatyou can draw on whenyou want, and then makepayments according to the amount of theavailable credit thatyouuse. Theinterest rate is usuallyvariable. Mortgages can come with fixed, variable and adjustableinterest rates,and typicallyoffer longer terms of repayment thanhome equityloans. Onegood thing is that the interest can betax deductible for most taxpayers who itemizetheirdeductions on their tax return. However, ALLoftheseloans are collateralized byyour home,and ifyou can’t makethepayments onthe loan, the lender can foreclose on theloan andyou can loseyour home. Intra-Family Loans Thetwo big advantagesof this typeof loanare–typicallylower interest rates and little ornopaperwork to get “approved”fortheloan. Theyalso haveonebigdownside, which is thefactthatyou areborrowing fromyour familyand ifyou don’t repaythe loan according to thetermsagreed upon it can causestress within thefamily. ContactBrucemesnekofffor anyfurther assistance StudentLoanHelpCenterGeneralManagerBruceMesnekoffjoinsus toDiscusstheStudentLoanSituationinAmerica
