College Loans — An Overview
This is an overview of the college loan options typically available for most families These are loans NOT available to the general public, only to families with college students; therefore, most folks and their financial advisors do not know much about them! Clearly, a HUGE opportunity to help families pay those college bills. So, let’s learn more!
Let’s distinguish between two types: “student” college loans and “parent” college loans — we describe them in a little more detail below.
Student College Loans (“Student Loans”)
The typical student loan choices that are available are the U.S. Federal government loans – for example, the Direct Student Loan (formerly called a “Stafford” loan), state student loans (state specific, for example in New Jersey, a NJCLASS loan), and then what we call private loans which would be something like Sallie Mae private loans.
The Direct Student loan is a government loan that’s offered if you submit a FAFSA form — you will basically be offered this loan, which is currently maximum $5,500 for freshman year. This loan the student gets on their own without a co-signor! Loan re-payments are deferred while the child is in college until they leave school; so, for example, if they go onto graduate school or become a doctor or lawyer, they don’t have to start paying the loans back until they finish school altogether. Furthermore, regarding the Direct Student loan, it comes in two forms. One is called “subsidized”; one is called “unsubsidized”. Subsidized means it’s an interest-free loan based on “financial need” — the government pays the interest while your child is in college. So it makes sense for everyone to take this one — an interest-free loan is always good! The unsubsidized means the interest is accruing while they’re in college. What we often encourage is if you take the unsubsidized loan, arrange proactively to pay the interest while they’re in college, so they don’t end up owing more on the loan (as interest keeps being added) when they graduate, versus not.
We encourage families as a general rule to take a Direct Student loan because then the children have a “stake” in their college education. So we like to say, for example, “If you know you have these loans, you wake up on Friday morning and actually go to class versus not going to class!” So basically they have a piece of the action, and then for the parents we say “And if you still like your children when they graduate school, you may pay the loan for them, and if you don’t like them, well then it’s up to them to pay them back!” But you can choose not to take the loans for whatever reason – all it means is you have to pay the bill with other options.
State specific student loans may be available, so please check with the financial aid department and/or specific state “financial aid” websites for more information whether these are available or not for you. For example, in New Jersey, there is a NJCLASS loan that the student can get with a co-signor for up to the total cost of attendance of the school, minus any financial aid accepted. This loan can be deferred until the student leaves school. It is not as easy to get as say a parent PLUS loan (discussed later), but if the family prefers more loans in the student name versus a parent, or they cannot start making payments on a PLUS loan while the student is in school, this may be an option.
Another category of student loans is “private loans” – a popular source is Sallie Mae as well as many banks offer them as well…Citigroup, Chase, Wells Fargo for example. We are not a big fan unless there are no other viable options. Why? Typically, these loans are offered with a variable interest rate (versus fixed!) and require a co-signor to get any significant dollars or even an attractive rate. So right now you might be able to get it for a “low rate”, but IF interest rates go up that same loan could be much higher in cost in the longer-term. So it can potentially be a very expensive option.
Definitely check out the student private loans but be careful! The good news with these is there are potentially bigger dollars available…the typical amount you can qualify for is the total cost of attendance of the school, minus any financial aid you accept! So, if the school is $90K and you have no financial aid, you may qualify for a loan of $90K!
Parent College Loans (“Parent Loans”)
The major parent loan program to consider is the U.S. Federal loan program called the PLUS loan. The student is not involved at all except they must be in college for parents to qualify for the loan! The good news is if one of the parent’s has okay credit (not great!), you can borrow up to the total cost of attendance of a school, minus any financial aid that you have accepted. For example, if a school costs $90,000, you have okay credit, the government will subsidize you getting a loan for $90,000! As a general rule, the standard pay back on that is 10 years (but through a process called “consolidation” the payments can be stretched out). The bad news is the interest rate is currently high, and you have to start paying the loan back starting in the spring of your student’s freshman year (versus deferred)!
The PLUS loan is worth serious consideration, especially if after getting the maximum Federal student loans, there are few other options to pay the rest of the bill.
State specific parent loans may be available, so please check with the financial aid department and/or state specific “financial aid” websites for more information whether these are available or not for you. For example, as mentioned earlier, in New Jersey, there is a NJCLASS loan that the parent can get for up to the total cost of attendance of the school, minus any financial aid accepted. It is not as easy to get as say a parent PLUS loan, but it does offer different payment options, etc. and may be worth a look.
Similar to the “Student Loans” described above, there are also parent “private loans” offered by banks, etc. The pros and cons are similar to what is described above and, as a general rule, we believe if you need parent loans as part of your college payment plan, look to the PLUS and/or state specific parent loans first.
Parent Loans or Student Loans?
Besides our recommended Direct Student loans for most families, if you need more loans, should you get them in your name or the student’s name? For most of you, getting them in the parent’s name is the preferred option as most of you have decided you want to be responsible for college costs.
However, there are two fundamental reasons that we see where substantial student loans may be appropriate for families. One is there’s just no way you have the money to pay for college and you don’t have the cash flow to start paying parent loans (like the PLUS) right away; therefore, you may need to defer them for now until maybe your child graduates.
The other reason is if you decide as a family that you want your child to pick up a substantial chunk of the college cost, then you may want more student loans. For example, there’s a college bill of $50,000, your budget is $25,000, and your child could go to another school for $25,000 but he/she really wants to go to this one for $50,000. In this case, you may tell the student that they have to borrow the difference and you get the loan in their name and they are primarily responsible for paying it back. Just realize that if you do this, more than likely you will have to co-sign for this loan and if they don’t pay, you will be required to pay off the loan.
What is this Federal Direct Student Loan “Promissory Note”?
If you take a Federal government student loan (Direct Student), your child will have to ultimately go through a process that he/she will have to sign what’s called a “promissory note” before their freshman year. This is done one time as part of an “orientation” in order for the student to understand that they have a debt obligation that they have to pay back! The promissory note is the document that they have to sign. It’s a legal document, a government vanilla document, with no “got ya’s” in there! You can feel comfortable having your student sign the document. In subsequent years if they get another student loan and are at the same college, they don’t have to do the promissory note every year as it’s considered a “master” promissory note covering all years.
