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Parents: Should you borrow for your child’s college education?
Congratulations! Your son or daughter was accepted into his or her top-choice university. You have an extra $175,000 lying around, right?
Your offspring’s education may cost that much or even more, now that the average cost of attending a private school has topped $42,000 a year, according to the College Board. If you can’t cover the whole bill with scholarships and savings, you may be tempted to borrow.
But should you? Ask yourself these questions:
How secure is your retirement?
Parents struggle with whether to put their child’s needs before their own. If you’ve followed the financial industry’s advice and prioritized your own retirement savings, you may not have been able to save much for college. Talk to a financial advisor about your retirement planning. This will help you decide whether you can handle education loans.
What’s your current debt level?
Are you still paying off your own education? If so, you wouldn’t be the only one. Many people are still chipping away at their college loans well into their careers, even as their own children near adulthood. Taking on more education debt may not be advisable if you haven’t eliminated your own.
Mortgage loans are also a consideration. Paying off your mortgage before retirement can help reduce the amount of monthly income you need once you stop working, so crushing this debt may be a big priority later in your career. If your home is worth significantly more than you owe, that equity may be a good source of college money. The interest rate on a home equity line of credit is likely to be lower than the rate on a federal loan for parents of college students. And, like other types of mortgages, the interest on home equity lines of credit may be tax deductible.
What are your other obligations?
If you buy your eldest a car as a 16th birthday present, your younger children will expect their own wheels, too. Over-extending yourself for one child’s education may be hard to replicate when the next kid enters college. Make a realistic plan that includes all your children’s likely college costs.
So should you borrow?
If your retirement savings are healthy, the rest of your finances are strong and you don’t have much debt, borrowing to pay for your child’s college might make sense. But it’s a last-resort option. Before you take out a loan, exhaust all possible financial aid options. Consider choosing a less expensive school, or having your child start at a community college and transfer to a four-year university later.
Many families find that it’s best for the student to be the borrower, rather than the parents. The interest rates on federally subsidized loans are better if they’re in the student’s name, and you can always help pay it off later if your own budget will allow it.
Your role as a parent is not coming to an end just because your son or daughter has earned a high school diploma. You still have to model good decision-making practices and healthy financial habits. That may include saying no to borrowing money for your child’s education.
5 facts about student loans that you need to know
The majority of students attending college will need to finance at least a portion of the cost required to further their education, most likely through student loans. While taking out a student loan may be a viable solution, there are both benefits and drawbacks of signing on the dotted line.
Here are five things you should know about the who, what, and how much of student loans.
1. Complete the FAFSA–NOW
FAFSA is the FREE Application for Federal Student Aid, and it’s the gateway to all federal financial aid, which also includes student loans. The Education Department offers scholarships, work-study, grants, and loans for eligible students in the amount of $150 billion each year. The only way to see if you qualify is to complete the application. The federal deadline is June 30, 2018, but the sooner you hit the submit button, the better, so don’t procrastinate.
2. Federal loan vs. private loans
Federal student loans often offer lower interest rates, a friendlier repayment schedule, and typically don’t require Mom or Dad to cosign to be your safety net. The income-driven repayment schedule is highly attractive, but if you have trouble making your monthly payments on that entry-level salary, you’ll also have deferment or forbearance options to consider. A private student loan is often used to fund the shortfall left by federal loans. They typically come with a higher interest rate compared to federal loans and your parents will need to cosign on the loan.
3. Parent PLUS loans
Every parent would love to save enough money to fund their child’s education, but if that’s not your reality, you might consider a Parent PLUS loan. This type of loan is available to the biological or adoptive parents of dependent students, and it does require a credit check. They’re not especially cheap, though. In 2017 the interest rate was 6.31%, the highest rate among all federal student loans.
4. Student loan default
Even with the generous repayment options, sometimes borrowers default on their student loan. You should be aware that if you default on your loan, you’ll lose all of the benefits that were so attractive when you applied. That includes deferment, forbearance, and any other repayment options that were offered in the past. You’ll also forfeit any future access to federal education aid while your loan is in default.
Sadly, it doesn’t end there. The lender may also report the loan default to the major credit bureaus so your credit score will take a serious hit and the government has the authority to garnish your wages and claim your annual tax refund. And don’t forget about your cosigner, if you have one. They’ll be subjected to the same actions.
5. Student loan forgiveness
Who doesn’t wish that their debt could just disappear? Sometimes it’s called loan forgiveness and other times it’s referred to as loan discharge or cancellation. They’re all a little bit different, but the result is essentially the same.
Loan forgiveness plans may be available for people in education, public service, healthcare, military and other professions. There are specific requirements that need to be met, and not all loans are eligible for forgiveness.
Student loans may also be discharged for personal reasons, although this is very rare. They include school closings, bankruptcy, disability, identity theft or false certification, unpaid refunds, and fraud.
School loans are an excellent means to help fund your education, but all options are not created equal. If you know the rules and can budget your repayment, it can be a wise investment in your future.
How fast should you pay off your student loans?
Have you seen the cost of a college education lately? It’s astronomical. And if you want to live on campus, you might as well ask your parents to mortgage their home, cause you’re gonna’ need access to some serious cash. There’s no sugarcoating it. College is expensive, and unless you’re smart enough to earn a full ride or lucky enough to have a trust fund, you’re going to have to pay for it.
It’s not surprising that most students will need to borrow money in the form of a student loan to fund all or a portion of their college education. For many, this is their first experience with high balance, long-term debt and it’s likely that all the debt management advice they’ve ever received was, “pay it off as soon as you can.”
Generally, that’s smart advice, but there are conflicting opinions about the speed at which you should pay down student loans. The basis of those differences comes down to a personal decision and the overall effect on your financial plan. We’ve looked at some important factors to help you decide which approach might work best for you:
Evaluate your overall financial picture
Consider all your income and all your liabilities. How much do you have in savings? Do you have an emergency fund? Do you have any other outstanding debt you may want to tackle before your student loan? Reducing the balance on any high interest, revolving, credit card debt before focusing on your lower interest student loan debt might be a smarter financial choice.
Once you pay your monthly bills, how much discretionary income to you have left? Can you afford to send additional money to pay down your student loan any more quickly? Would you have to forego any necessities that may affect your quality of life? It’s one thing to give up buying a new pair of shoes or going to a concert. It’s another to give up paying your health insurance premium or contributing to your 401(k) plan.
How much are your loans costing you?
The interest rate on your student loan is one factor that may help you decide which strategy to choose. Are you paying 2% or 6% interest? If your loan has a low interest rate, you may be better off tackling your higher interest rate debt because your student loan isn’t costing as much—and the little it costs you is tax deductible! However, if you’re paying 6% interest, that can really add up over time.
Not only does a higher interest rate significantly increase your outstanding loan balance, but it can also be used more wisely. Paying it off more quickly might allow you to use that money to invest in the stock market or other investments where you may find the opportunity to potentially earn a higher return.
What are your 1, 3, 5, 10-year plans?
What are your goals over the next few years? Is it paying down your debt or are you saving for some other goals? Saving for a house or starting a business? Getting married or backpacking across Europe? These plans should also be factors to consider. If you’re allocating more money toward your student loan debt, that means your devoting less to other areas of your life. Can you do both? Of course, but it’s important to create balance between the two so that you see progress in both areas. Not only does it help you reach your debt payment and your savings goals, but it also keeps you motivated as well.
Consider though, how your debt could impact some of those goals, like buying a house, for example. Paying off your student loan debt more quickly will reduce your debt to income ratio, which will positively impact your credit score and likely affect your mortgage interest rate. Your debt to income ratio is also a factor banks consider during the mortgage approval process.
What’s your repayment plan?
One way of lowering the cost of your student loan without changing your monthly cash flow is to refinance. Not everyone with a student loan is qualified to refinance and not every loan is worthy of refinancing, but it’s worth considering.
If you have the extra cash to repay your student loan, it’s definitely the wise choice. But, most graduates have to consider a number of factors when deciding whether or not to pay it down more quickly or stick with it for the long haul. Regardless of your choice, it’s important to have a plan so you can keep your financial goals front and center.
Should you borrow to get an MBA?
If you’ve decided that an MBA is an important investment in your career, then your next step should be to determine how to finance your next two years of study. While many students rely on a combination of their own savings, help from family and other outside sources, other students have only to rely on the availability of grants, loans, and employment. If you’re a member of the latter group, don’t be discouraged. There are multiple resources that can help you overcome the financial challenges.
Start where the money is free. Grants, also called fellowships, fall into this category because they do not need to be repaid. A grant is awarded from the government, a foundation, or a trust and is typically given to an institution, a business, or an individual. The criteria for receiving a grant is not necessarily achievement based and can be more general in nature.
A business degree makes you a valuable asset to your employer, which is why your company may be willing to finance your post-baccalaureate education. They may already have a tuition reimbursement program in place. If not, submit a proposal that highlights the benefits of investing in you and your future at the company. Interviewing for a new position? Consider using tuition reimbursement as a negotiating tool.
Student loans, the most popular education financing tools, fall into the opposite category because they require repayment. Federal student loans can be either subsidized or unsubsidized, which determines whether the government or the borrower is responsible for paying the interest while you’re in school, as well as the generosity and flexibility of the loan repayment terms.
Private loans designed to meet the needs of an MBA student can also be attractive options when it comes to supplementing other sources. In fact, if you have excellent credit, a private lender may be able to offer a more competitive interest rate and friendlier repayment terms. Most private lenders don’t charge application, disbursement or origination fees and you can refinance your loan if interest rates go down or your credit score increases.
While they may not be your first choice, don’t cross private loans of your list quite yet. They do have their advantages, especially when you combine them with other sources to create a flexible and smart financing package.
4 Tips to Help Manage Student Loan Debt
If you’re a recent college graduate who took out student loans, you likely owe about $35,000. As eye-popping as that average debt figure is, you’re certainly not the only one wondering how you’ll possibly get out from under your loans. As with any difficult assignment, though, research and a well-thought-out plan will help you tackle even the most challenging of debt situations.
Making use of the following strategies will help you dig your way out of student debt. Here’s a look at where to get started.
Know what you owe
First things first: Figure out what your monthly payments should be. To do that, use one of a handful of repayment calculators. These tools let you plug in the total amount that you owe along with your loans’ interest rates and term lengths. You’ll get a better sense of how much you should be paying each month if you want to take care of your debt within a certain amount of time.
Adjust your monthly budget accordingly
Knowing how much money you’ll need to put toward eliminating your student debt each month will help you adjust your budget. That may mean making tough decisions like cutting back on nonessential expenses.
Remember: Every extra dollar you put toward your debt reduces the total amount of interest you’ll end up paying over the life of your loan, so it’s well worth the effort.
Consider automatic payments
To ensure that you make your monthly payments on time, set up automatic deductions from your checking account. The way it works is easy: Your student loan servicer simply subtracts what you owe from your account whenever your payment is due. Your lender may even offer you a discount if you choose this option, which can be much more convenient than writing and sending a check every month. Just be sure that there’s enough money in your checking account so that you aren’t hit with overdraft fees.
Switch up your repayment plan
If you’re still struggling to put money toward your student debt, consider changing your repayment plan on federal loans, which you can do whenever you want. You may, for example, opt to switch from standard repayments —which have you contributing a set amount each month over a period of about 10 years — to graduated repayment, which is when your payments start out lower and increase over time.
Extended repayments, on the other hand, give you additional time to pay back your loans, sometimes up to 25 years, if your debt is more than $30,000 and you meet certain other requirements. Other plans, aimed at borrowers whose federal student loan debt is high relative to their income and family size, are income-based. If you qualify, the payments you owe are based on how much you earn every year. Although any of these plans can ease your monthly payment, you’ll end up paying more for your loan over time than you would if you had stuck with the standard 10-year plan.
Private lenders typically have stricter policies, but it’s still worth checking to see whether there’s any way to adjust your repayment plan with them.
If you’re a teacher or a public servant, you may qualify for student loan forgiveness. Otherwise, your last resort may be opting for forbearance, which means you can stop or reduce payments for a month or two. However, because interest continues to accrue, this course of action is better avoided.
With all that said, what you definitely don’t want to do is default on your loans. When you do that, the entire unpaid balance of your loan is due immediately, and you also lose the right to defer or change your repayment plan.
Breaking down the repayment process into smaller steps will make your student debt feel less overwhelming. Although it may take several years to wipe it out completely, a carefully crafted plan will set you up for success down the road.
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What are the differences between private and public student loans?
With the cost of a college education continuing to skyrocket, more students than ever depend on financial assistance to help cover their educational expenses. Financial aid is money that is available to students to help pay for attending a post-secondary institution in the United States. There are a variety of financial aid tools available to students, including grants, scholarships, need-based awards, work-study employment and student loans.
Types of student loans
Based on eligibility requirements and some limitations on the federal financial aid products, many students compliment their award package with a subsidized or unsubsidized federal student loan, both of which are offered through the U.S. Government.
Private student loans are another method students use to pay for college. These are offered through lenders, such as banks, credit unions, and companies, such as Sallie Mae, as well as through schools.
Public vs. private loans
There are substantial differences between public and private student loans, as we’ll look at here, but both are designed to help students sufficiently fund their education. As a general rule, private education loans serve as a supplement to the federal loan option.
- Federal loans offer a fixed rate that is the same for every borrower. The interest rate for a private loan varies based on an index rate plus a margin, and the margin is based on the credit rating of the borrower.
- A subsidized federal student loan doesn’t need to be paid back until after the student graduates, and the government will pay the accrued interest up to 6 months after graduation. An unsubsidized federal student loan acts the same, but the student is responsible for paying the accrued interest. Private loans, however, have a variable interest rate, so students are encouraged to repay the interest while they’re still in school.
- All federal student loans come with terms that protect the borrower if they lose their job, go back to school or experience another economic hardship. If you don’t qualify for a deferment, federal loans have an additional check, called forbearance, which can place repayment on hold due to illness or by meeting other requirements.
- Private loans do not allow borrowers to put their payments on hold. However, if you experience a hardship, you can appeal to the lender for a deferment or forbearance.
- Federal loans offer seven repayment options, including standard repayment, which satisfies the debt in 10 years, and flexible pay-as-you-earn plans that allow you make payments based on how much you earn. Private loans typically provide two repayment options, standard and extended.
- If you are disabled, go into public service or teach in some low-income areas, all or a portion of your federal loans can be forgiven or discharged. However, federal student loans are generally not dischargeable in bankruptcy. Private student loans are usually not dischargeable in bankruptcy, and the federal programs that allow you to discharge the debt when you go into public service or social work do not apply to private student debt.