I hear my son/daughter can get a loan to pay their college tuition bill. I even hear they can be the primary borrower. Yes! True enough, however, there are a few more details.
The average student and family bound for college in September may find themselves in need of a way to assist in paying the remaining Net Educational Cost. College loans are part of the resource available to student and families to help supplement one’s ability to pay for school.
Federal Direct Student Loan
Loans, specifically the Federal Loan Programs have been a long-standing resource for students and families. Born out of the 1960s, updated and revised as the years have gone on, students and parents have been able to access the Federal Loan Programs as part of applying for financial aid. Today, the filing of the Federal Free Application for Student Aid (FAFSA) determines a student and family’s eligibility for need-based aid. The Federal Direct Student Loan (also known as the Federal Stafford Loan) is one resource awarded to students via this process. Packaged and disclosed on a student’s Financial Aid Award, 99.99% of all undergraduate and graduate students, dependent and independent receive some amount of Federal Direct Student Loans. Based on a student/family’s demonstrated need, a portion or all of the loan may be interest-free (subsidized) or interest due (unsubsidized) while the student enrolled. 4.53% is the interest rate for 2019-2020 with a 1.06% origination fee for undergraduate and graduate students. A Direct Student Loan is awarded a six months grace period after a student graduates or separates early and a wide range of repayment benefits to choice. Not a bad gig.
However, when the Federal Direct Loan is not enough, students and families must turn to other resources, including additional Federal and Private sponsored loan programs that require credit approval and are generally more expensive.
Federal Direct PLUS Loan
Offered to parents and managed primarily by the Financial Aid Office, the Federal PLUS Loan Program is a credit-based loan available to parents of dependent undergraduate students. Known in some circles as the Parent PLUS Loan, creditworthy parents can apply for a loan to help pay for school. Applicants must demonstrate good credit with no adverse credit for 90 days before the loan applications as well as no loan default, discharge, lien, and bankruptcy. The loan interest rate, set by the Federal Government is a fixed rate valid from July 1, 2019, to June 30, 2020 -7.08% with a 4,24% origination fee. Loan repayment begins with 30-45 days following the full disbursement of the loan and can be scheduled to run between 10 – 20 years.
Federal GradPLUS Loan
Grad PLUS loan is a credit-based loan available to independent graduate students. The loan is a credit-based loan with the student demonstrating creditworthiness, no adverse credit for 90 days before the loan applications, default, discharge, lien and bankruptcy. Applicants for these loans are required to complete the FAFSA, access their maximum Federal Direct Loan benefits before borrowing under the GradPLUS Program. An applicant can borrow up to their remaining net educational costs. The loan interest rate, set by the Federal Government is a fixed rate valid from July 1, 2019, to June 30, 2020 – 7.08% with a 4,24% origination fee. The loan is generally placed in an in-school deferment unless otherwise requested by the borrower. All GradPLUS Loans are eligible for a six (6) month grace period following their separation from school to establish a repayment schedule amortized between 10-20 years.
Private Education Loans
The rise in educational cost in the 1990s and throughout recent years opened up the need for alternative, private educational loans. Designed as a loan of last resort private educational loans fall into two categories, a private loan for students and one for parents. A private student loan is a credit-based loan available to a student who is enrolled at least half-time at 4-year public or private college or university*. Students who have no credit or minimum credit may be required to obtain a creditworthy co-signer. Interest rates are set based on variable and fixed rates, ranging from as low as 3.8% to 14%. Varies repayment programs are available including deferring the loan payment until six (6) months after the student separates from school. Most loan programs provide a co-signer release, which generally discontinues a parent’s (or other co-signer) financial obligation after 24 or 36 months of on-time. Loans are available through a national, regional lender and other institutions like AAA Northeast Bank.
Protecting the Co-Signer
Parents, grandparents, sibling, and relatives called upon to serve as a co-signer to assist a college student to secure education financing. The co-signer assists with determining eligibility and the interest rate. Typically, there is a co-signer release provision built into the terms of the loan. The release, generally after 36 months of on-time payments, allows the co-signer to be removed from the obligation. Unlike the Federal Direct Student Loan, a private educational loan does not carry a cancellation for death. If the unthinkable were to happen, the co-sign is held liable and will be called upon to pay the loan. Having worked on many in my career, attempting to overturn the lender’s policy is a hard road to travel. To protect the co-signer, all parties involved should consider the use of term-life insurance policy. The policy protects the co-signer during the in-school and initial stages of repayment. With the watchful eye of the holy spirit, a student has protection and resources as they grow old.
* Private loan programs for community college, continuing education, and professional development are available, but individuals need to check with their school for resources.
A private education loan specifically for a parent is also available through some national and regional lender. This loan program is similar to a standard consumer loan, credit-based in nature and where the parent enters repayment within 30-45 from disbursement.
Be a Wise Borrower
Before diving into a private loan application, consider a few things. As stated in another article on creating a payment strategy, this is an annual exercise that is part of a four-year experience. It warrants forecasting one’s four-year needs, the total cumulative cost of borrowing and how it factors into one’s career outcome. Adjusts and changes based on a student’s enrollment status, modifications in educational expenses and changes to a family’s financial profile may require less or more resources. Education Loans can be an expensive resource and should be used as a last resort. Buyer beware and when in doubt …ask questions, inquire and of course, call me