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.
Parent PLUS Loans
This federal loan is offered through colleges to parents with relatively good credit. The interest rate on this loan is 7.21% for the 2013-2014 academic year, but is variable based upon the ten-year Treasury note. The rate is capped at 10.5%, and repayment begins shortly after the funds are disbursed. The maximum PLUS loan amount is the difference between the college’s cost of attendance and all of the other aid that your child has been awarded.
The Perkins loan is awarded by participating colleges to students with exceptional financial need and has an interest rate of 5%. The maximum amount for this loan is $4,000 per year with an aggregate maximum of $20,000 per student.
Private Student Loans
These loans are offered to students by a variety of banks and private lenders and typically carry variable interest rates of 3-12%, origination fees and other charges. Almost all private student loans these days require a cosigner. They should be called “No Alternative Loans” because they should be your last resort. The Book The Ultimate Guide to Student Loans is good resource to get Private Student Loans.
Mortgage and Home Equity Loans
It is not uncommon for parents to take out a new mortgage on their home in order to pay for college. After all, most parents have the majority of their net worth tied up in their homes and their 401k or other retirement plans.
A cash-out refinance of a mortgage is when the borrower refinances an existing loan by taking a new mortgage for an amount that is higher than the existing loan. The lender then pays off the existing mortgage and gives the borrower “cash-out” of their home in the amount of the difference between the new higher loan and what was owed on the existing loan.
By contrast, re-mortgaging a home simply means to take out a new loan equal to what is currently owed, but usually at a different interest rate and a different period of repayment. Essentially the goal in re-mortgaging an existing loan is to reduce the payment by getting a lower interest rate, stretching out the payments over a longer period of time, or both. Instead of taking a mortgage against your home, you can also tap into your home’s equity by taking a home equity loan where you get cash-out up front and have a variable or fixed interest rate for a fixed period of time. Or you can get a home equity line of credit (HELOC). A HELOC is a line of credit that you can draw on when you want, and then make payments according to the amount of the available credit that you use. The interest rate is usually variable.
Mortgages can come with fixed, variable and adjustable interest rates, and typically offer longer terms of repayment than home equity loans. One good thing is that the interest can be tax deductible for most taxpayers who itemize their deductions on their tax return. However, ALL of these loans are collateralized by your home, and if you can’t make the payments on the loan, the lender can foreclose on the loan and you can lose your home.
The two big advantages of this type of loan are – typically lower interest rates and little or no paperwork to get “approved” for the loan. They also have one big downside, which is the fact that you are borrowing from your family and if you don’t repay the loan according to the terms agreed upon it can cause stress within the family.
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Student Loan Help Center General Manager Bruce Mesnekoff joins us to Discuss the Student Loan Situation in America
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