Getting a college education is becoming more and more expensive, but it is essential for people who want to have a top-paying career. Of course, there are famous billionaires who dropped out of college, but this is not the usual way to wealth.
A student loan is what is required for most people, and it is worth looking into several before applying, so as to get the best deal. The Federal Direct Loan Program is the largest student loan program. The three main loans are the Federal Stafford Loan, the Perkins Loan and the PLUS Loans.
The Federal Stafford Loan
The federal Stafford Loan is the most popular because it offers a low origination fee and has a low fixed interest rate. It can be used for both undergraduate as well as graduate studies. For 2015 – 2016, the origination fee is around one percent and the interest rate is 4.29 percent. The interest rate is the same for all students and does not depend on the borrower’s credit score or income.
Federal Stafford Loans can be subsidized and unsubsidized. The student needs to qualify for a subsidized loan, but if he or she qualifies, the federal government will pay the interest on the loan while the student is enrolled in college. It is easier to get an unsubsidized loan, and the student must pay the interest. The repayments will start just before graduation.
Perkins Loans are for students who have the greatest financial need, and only these students will qualify for these loans. The interest rate is five percent, and the maximum total amount is $20,000 per student. They have no origination fees, and the interest is paid by the government as long as the student is still enrolled in college.
Perkins Loans are considered the best type of student loan because the terms are the most generous. These loans are operated by schools and repayment usually starts nine months after graduation.
A PLUS loan is for parents and not for students. It will cover the amount not given by other loans or financial programs and is available to all parents of undergraduate college students. There are similar loans for graduate students. The maximum amount given is the difference between the cost of the college minus the aid and loans the student already has.
It allows the student to completely pay for their college education without spending any of their own money. These loans have higher interest rates, usually 7.9 – 8.5 percent, and some have origination fees of up to four percent.
To qualify for a PLUS loan, the parent needs to have a good credit score, and the repayment options are not very flexible with the first payment due just 60 days after the loan’s disbursement. PLUS loans are available from online lenders and commercial banks.
Private Student Loans
This is called the No Alternative Loan because students are advised to look for any other type of loan before agreeing to a private loan. They are given by banks and private lenders and usually have a variable interest rate of 3 – 12 percent as well as origination fees and other charges.
Parents and their child should compare private loan deals before choosing one. The Consumer Financial Protection Bureau collects data on private lenders, and the terms vary widely between them. This is why it’s important to choose carefully.
Another avenue for parents who own their home is a home equity loan. This is basically a new mortgage on their house, and often comes with a lower interest rate and a shorter repayment schedule. The cash they get is the difference between the amount they owe on the first mortgage and the amount they get on the second. The money can be used to finance a child’s college education.
Life Insurance Loans
Certain life insurance policies have a cash value component that the policy holder can borrow against. Insurance companies charge different rates of interest but most are between five and nine percent annually. As long as the policy holder repays the loan, the insurance policy will stay intact, but if payments are not met, the value of the policy could drop even if the regular premiums are paid.
The same can be said for loans against a retirement fund. Parents may only borrow 50 percent of the vested account balance and it must be repaid within five years. Parents can also borrow money from family members, but this can cause a rift in the family if it is not repaid as promised.
If a student receives a scholarship or grant that partially pays for his or her college education, but it doesn’t cover all the costs, they should consider a federal loan first before considering a private loan. Any of the above federal loans will have lower interest rates and more flexible repayment schedules than any private loan.