Congratulations! Your son or daughter has been accepted to the college of his or her choice! But now you have to figure out a way to pay for it. While federal college loans feature fixed interest rates, those rates have steadily increased over the past few years so it’s important to consider all your finance options and choose the one that will be the most cost effective over time, for both you, and your child.
You’d Better Shop Around
One mistake parents and students often make during the search for college financing is not being aware of all their options. Finding money for school can be so daunting that most families accept the first loan option offered, but this may not always be the best plan.
As of July 1, 2006, federal student loans, which were based on market rates in the past, have moved to fixed interest rates. For PLUS loans the rate is 8.5% and for Stafford loans the current rate is 6.8% (for unsubsidized loans, while subsidized loans have a rate of 6.0%). When market rates go up, these loans are great, but when the market goes down, a private loan may be less expensive.
As well, with the cost of education increasing annually, federal loans may not be enough to cover the entire cost of tuition, dorm fees, and books, which means private loans may be needed just to fill the gap, and it’s important to know that the loan programs recommended by the university may not always be the best choice for your family.
According to a story aired on 60 Minutes in 2006, some universities receive kickbacks from the organizations that fund private student loans, so in order to guarantee that you’re not paying more than you should for your child’s education, be sure to investigate all the options available. Check with your bank, your credit union, your employer, and your church, as well as following the leads provided by your student’s high school and prospective college.
Finding the Cheapest Loan
A seemingly obvious piece of advice that most loan seekers still ignore is to look for the cheapest available rate. In the past, many families chose private financing over PLUS loans, because the burden of repayment falls to the student, whereas PLUS loans are in the parents’ names only, even though, at the time, PLUS loans were usually cheaper.
No matter who has the burden of repayment, however, since new college students rarely have credit in their own names, and are sometimes under the age of eighteen when they start school, a parent must co-sign the loan, and is already “on the hook” for repayment if the student reneges. Because of this, it’s important to compare rates and fees, and choose the cheapest loan.
Factors you’ll want to consider include your credit scores, any origination fees (PLUS loans have a 3% origination fee, for example), and how often the interest will be compounded, as well as what the prospective payment plan will be, and how soon after graduation payments will be required. Also, be certain when comparing loans that you always compare the lowest rate you qualified for, from each financial source.
Maximizing Your Money
If after all your research, federal loans are still your best, cheapest option, there are ways to maximize your money. For example:
PLUS loans can be consolidated every year, once your student has been in school for two years, and while the rate for such loans is fixed at 8.5%, the maximum rate for consolidated PLUS loans is capped at 8.25%. By consolidating, you’ll save that quarter of a percent.
You can also limit the amount of money the government thinks you can spend on college by limiting the amount of money in your student’s name. As of July 1, 2007, when your family’s FAFSA application is analyzed, 20% of the student’s assets are assumed to be available to pay for school, but only 6.4% of parental assets are allocated.
Finally, you may be able to save money on interest if you or your student begins making loan payments while still in school, thus reducing the amount to be paid back later, once amortization begins.
As a parent or a child, student loans are the best kind of debt you can incur. By comparing programs, and considering all the options, you can save money while still being able to afford the cost of higher education.
Joanne Kwan, CollegeBasics’ guest post, is a writer for Premier Student Loans .