Best case loan options

Paying for College
1

Hello all, this is our first going to college in the fall, and had some questions about loan options.

For starters, we believe that loans are a bad thing. Ideally, we wouldn’t need any. But, we may need to take some just to play it safe. We don’t have full college expenses already saved away in a 529 plan (which just means we’re like most Americans). We do have some money set aside.

The net cost for our child to attend will be 36K. She had an offer from a good school that was 10K cheaper than that per year, but my wife shot down the school based on distance (an argument for another day).

We have 18-24K available in our budget (per year). Let’s just say the target is 24, but I am trying to be realistic. We expect and desire our child to take out the $5500 loan, because we think our children should have some financial stake in this process, and I am OK with as much as them borrowing 10K per year.

I feel that having a loan option - ideally at the best rate possible - would be ideal in the event one of us loses our job, we run into a major home or auto issue, etc.

Originally I had assumed a parent plus type loan would be super competitive … (ok, I will wait for you to stop laughing here) … but turns out the rates are borderline idiotic. No wonder the country is in a student loan crisis, at 7.x% and a ridiculous 4+% origination fee, these barely seem competitive.

HELOC: This is potentially an option, but we don’t have a large amount here. We bought at the peak of the housing market in 2006 and live in CT (where housing did not ever recover), so our equity here is limited. We do have some, however.

IRA: Originally I had thought that the idea of taking money from retirement would be insane, especially with the 10% penality, but I recently read that the 10% penalty is waived if the money is used for college education expenses. That just means paying the income tax on the amount. Still want to avoid this, but in some ways, this seems better than borrowing at 7.5% and a 4% origination.

Are there are any great competitive private loans for people with great credit (we are around 800 credit score)?

This is mainly because I would rather have some of this money in loans, giving us liquidity now and having the option to pay down the loans later, rather than pay all of our liquid cash out now, and then being backed into a corner later.

2

Do you have whole life insurance? If so, call your broker and ask about borrowing against your equity in the policy. Not recommending this- just pointing out that it’s sometimes a low cost option that people don’t know about. (if you only have term insurance, you have nothing to borrow against).

Do you have two full time employed adults in the family? If so- take a look at your tax return. If you get a refund, you’ve just given the federal government an interest free loan. Go adjust your withholding to get close to the mark so that you’re within spitting distance of your actual tax liability, which will increase your take home every month.

Again- take a look at your health insurance. Some people are over-insured (yes, that’s a thing) if both adults are paying for family coverage at work. If you haven’t switched jobs in a long time you probably aren’t too up to speed on what you’re paying for- you check a box on your first day and then forget about it. You may be able to free up serious cash if you move to the minimum allowed plan for one parent, and the family plan for the second parent. You may end up with the same or similar coverage, but with less monthly outlay.

Have both parents asked the benefits team if there is a college scholarship program? Once of my kids qualified for a “merit” award (it required nothing in terms of merit) from spouse’s employer. It was supposed to be for one year only, but we got a letter in September of sophomore year to say that since the program was under-subscribed, they were awarding another year’s worth of scholarship. It wasn’t a lot- but a few thousand dollars for basically doing nothing isn’t bad, right? Nobody even knew about the program. (fine print and all that).

Has your D lined up a summer job yet?

3

Thanks for the feedback blossom:

1 - Only have term life
2 - On tax returns, our current president sort of took care of that for me. I used to get a larger return, but since we live in the northeast, his 10K max deduction approach really hurt us.
3 - We’re all on my plan, spouse works part time and doesn’t have insurance
4 - No benefits for college, not even for existing employees
5 - D has not lined up a Summer job. We’ve been harping on this, but a lot of places are saying that they only need help once the Summer is over and kids go off to college. We will keep looking. We have an emergency backup option if all other options fail, just not a first choice.

4

I hate even typing this out but I know I’ve been getting a lot of credit card fixed rate credit offers (6% rate on up to $40-50k borrowing for a payoff term of 36 months on several of them - American Express and Discover seem to be the biggest offers right now) which would be a better interest rate for you than the parent plus loans. You would need a plan to be able to pay the balance within 3 years which may well be a deal breaker but if it isn’t -that would be an option.

It sort of seems, though, that the school chosen is unaffordable if anything goes wrong. Is the cheaper school really completely unacceptable?

5

Three years- that suggests that the second wage earner has a plan to go back full time (in which case- terrific) or Rich Uncle Jerry is 106 years old and on life support and you’ve got a copy of the will which was updated last week which shows you’re inheriting X dollars.

Otherwise- how does a three year repayment plan help? Unless you’ve got an asset which for whatever reason you can’t sell right now but can in two years (share in a family business- waiting for a cousin to put together the funding to buy you out?)

If it were me- I wouldn’t be harping on a summer job. I’d simply explain the facts on the ground which is that the job is what’s going to cover lab fees, books and incidentals, so with no job, there are no books i.e. no college. One of mine ended up with a smelly and gross job which was the kind of thing no other teenager would do. (It wasn’t unsafe, just smelly). 'dems the breaks. Once your D is motivated (no job, no college) you will be surprised how enterprising she can be. Your pediatrician may need a summer nanny. Your local library may have a grant to pay a HS kid to build a web and social media presence. The hospital coffee shop may need a fulll-time “sub” for the summer to cover the vacations of the permanent dishwashers, bus-people, servers. The vet down the street may decide to hire a kid to clean out cages or update patient files if a polite and confident young person shows up to ask “how can I help you?” . Bed and breakfast in town need someone to clean rooms and serve? Check Airbnb for your zipcode- a lot of those property owners need someone to clean, change sheets every time a guest checks out…

Be careful with that HELOC. You don’t want to be two paychecks away from losing your house. The equity in the house (as limited as it is) will be your best friend in case of a real emergency (Kid going to a more expensive college because your wife didn’t like the location is not a real emergency in my book). I live in New England so know exactly what you mean about the post-2008 recovery. People in Dallas or Atlanta don’t comprehend how the region is still circling the drain in some housing markets.

6

A 7% rate is low for an unsecured, easy to qualify for, loan. You get forgiveness on death of the borrower or student, which is a benefit you don’t want to use but does cost the government some money and has to be figured into the loss ratio. Look at what other unsecured credit costs - most credit cards are at 17-29%. The origination fee does bite.

If you can get a better rate, go for it! I have a 9% rate on my credit union credit card, and I’ve been a member for 35 years and have a 800+ credit score. That’s a ‘good’ rate on unsecured debt. I do know some people who have been able to get a good rate for an unsecured loan at their credit unions (not me) or from a school or state loans program (again, not me).

If you have security and can take a HELOC, that might be your best rate. You might get a better rate at Sallie Mae or Discover, but the benefits may not be as good, like deferring payments while in school, forgiveness on death, consolidation. So-Fi advertises good rates.

Or you can vote for a candidate who is going to forgive all your loans — okay, I’m laughing now.

7
  1. Your daughter can only take $10,000 in loans if you are willing to co-sign any amount above the $5500 she can take as a freshman.
  2. Your daughter needs a part time job NOW. Since finances seem tight, it seems reasonable to ask her to contribute towards her own discretionary spending, and books. She needs a job. And really, I would be a stick in the mud about this. No job...and she will have no discretionary spending because any money YOU have will be going to the college.
  3. This is going to sound rough...but since your wife shot down a school that was fine, and was $10,000 less costly, I would suggest she bump her job up to full time...or get another part time job in addition to the one she has now.
  4. IIRC, you and your family didn’t want to look at the less costly instate public options in your state (which happens to be my state). You have made a decision to have your kiddo attend a college where the net cost is $12,000 more than the most optimistic amount you can contribute each year. If this $12,000 difference doesn’t already include the Direct Loan...have your kid take that. That leaves you with $6500 more to fund annually (in addition to the $24,000 you say you can stretch and cover). Can your wife earn an additional $600 a month? If so, that would cover the bill.
8

We took out a PLUS when oldest went to college. In retrospect, not our brightest idea. However, we started paying it back as soon as we took it so we were paying that interest rate to extend a payment over 10 years. You can prepay the amounts due at no penalty. You can extend the payments ad Infinitum, though not recommended, if things go wrong. The obligation to repay if you or the student dies. If your income is in a certain category, the interest is deductible.

You can take that loan anytime during the year so, you can wait till end of year to pull that trigger.

For a small tax advantage, one we have used, if your state gives deductions or credits to contributions to a 529, funneling money through it before you pay the college can net some savings.

It’s imperative a your student work. Loans don’t register with a lot of kids. Working does. A lot of college kids have no clue how expensive college costs are. Until they are paying them or get strapped. I’ve seen this repeatedly.

When I’ve told kids to find a job NOW because there is a gap for paying college, they balk, because they want to enjoy that full last month in highschool and summer fun. They just don’t get it that their parents who may have always been able to cover costs comfortably are now putting themselves on the financial limb.

It’s difficult to go into an austerity regiment as one should when embarking on a high cost journey. Easy to talk yourself into enjoying each moment fully when you really are endangering the future with the disregard for its cost. I’ve done it.

9

I left my senior prom early because I had a shift at the 24/7 restaurant where I worked.

My kids did not believe me when I told them that story as they were growing up. Once they started college and started assuming more responsibility for themselves- financial and otherwise, it started to make sense. And now that they are professionals… they get the fact that you don’t jeapordize a well paid job because it interferes with your social life. Took a few decades, but they are now on board with reality!

But I wish I’d learned long before I did that nagging/harping/reminding is not the way to go with teenagers. A simple 'you need to contribute $2500 in early September" (or $1800 in late August, or whatever the number and timing is). We can’t pay your bill without knowing that you’ve got books and incidentals covered, so let me know when that happens". My kids became super industrious when they needed to be, and were super “all the good jobs are gone; you need to be able to work through September 10th to get a lifeguard job and I’m leaving August 30th; I can’t start a job until after senior week” when I was still in nagging “get a job” mode.

10

On the job front, we will ensure she has something. She already has a job if she wants one, working for her grandmother - grooming and bathing dogs for cash. It pays well, but I personally want her to get a job where the boss isn’t a family member, just for the experience. She just turned 18 and has only baby sat, and worked with her grandmother part time. She’s been focusing on school (lots of hard classes), and had been doing sports, so I was OK with that at the time, but now she needs to get a job. Ideally, for me, she would get another job AND work for her grandmother (since that pays better than minimum wage). We live in a very different world now. When I was 12-14 I was working construction with my dad. The day I turned 15 I got a job scooping ice cream at baskin & robbins. At 16 I switched to a deli job that paid an extra buck an hour. At 17 and 18, when I was in college, I worked back with my dad summers as a stone mason, making 2-3 times per hour what minimum wage was.

You and I are on the same page here. I don’t mind that it sounds rough, it’s a reality. My income is maxed out, she has lots of opportunity to start and grow a career, and add income. My wife shot down the college (U Buffalo) because it was 7+ hours away driving. She said that was too far for a kid with anxiety issues. I contested that she was going to have to make that work at some point anyway (living alone, not having mom nearby), but I lost the battle on threat of divorce :smile: … and D agreed to borrow the difference - she also much preferred the closer and more expensive school. It is a better school, as well, if that’s worth anything. But I do plan to demand my wife brings in more income if she wants to make such demands.

In terms of budget, in ANY scenario we have enough to cover the costs, whether it be through taking money from our retirement funds (which fortunately we have been very diligent about making a priority for the last 20 years), or through higher than desired interest loans. But ideally, if things go well at end of year, we may be fine without the loans. I may wait until 2020 starts to look at the loan options for this reason.

11

I admire the commitment here!!!
Honestly, in the same situation when I was 17, I would have quit that job - unless the pay was amazing - or I did not like my prom date :smile:

On principal I would have quit. I would have explained that prom was once in a lifetime, and I needed the night off. If they couldn’t do that, I would have decided it wasn’t right for me, and found something else.

But, your real point here, which is commitment, is much appreciated. Back in my day, I had a deli job and they made us choose every year between one of the three following options:
a) work Christmas Eve
b) Work New Years Day morning
c) Hit the bricks

I always chose b, because a was a family thing. I worked with a few nasty hangovers at 6 AM doing food prep (worst thing to is cook pastrami and make seafood salad when you are queasy).

I don’t want to sound like an old man … but kids these days … from what I see, none of them do this stuff. They live in much more of a bubble, and their expectations are whacked. My kids are on the better side of the spectrum from what I have seen, but even they are soft.

12

i wouldn’t worry about the experience right now for your daughter. She should be putting in the hours and making the money, as much as she can. She is going to a school that is likely going being paid for out of her parents retirement. It’s s serious matter that is difficult for young people to comprehend.

I am not advocating causing strife and endangering family relationships over this, particularly marriage. But you arecwuse to see how this situation can get out of hand financially. Sadly, in my experience, a lot of things blow up when a financial crisis renders a barely affordable college plan undoable.

Still, you are doing as ever so many families are. You are ahead of the game, being aware of the pitfalls and looking for options.

Look at student loan options other than PLUS too. I don’t like the ones that require co-signing because it ham strings both parties into payment as long as either is alive. I don’t know what the interest rates on those are.

13

@HankCT Not all kids are like that these days. My D17, now finishing her sophomore year at college, has been working since she turned 16, first at a thrift shop, then at Chipotle, as well as babysitting. She has to pay for all of her personal expenses, including her cell phone. Her friends can’t believe I make her pay for her cell phone. My S17 has been working two and sometimes three jobs, also since age 16. Neither one complains; it’s just how it is in our family. If they want luxuries (meals out, going to concerts, lots of clothes, trips to visit friends, etc.) they have to pay for them. Even my 15-year-old has a job walking an adult friend’s dog. In contrast, I never worked until the summer after I graduated from high school. Just wasn’t expected of me or encouraged by my parents. However, I had very frugal tastes and contributed the vast majority of my earnings to college expenses. (I spent my first paycheck on a summer college course.)

14

I wouldn’t worry about your daughter having a ‘real’ job - babysitting and dog washing are real jobs and now pay more than the 50 cents an hour I got. My daughter had a job as a summer babysitter after her sophomore year of college and made $135 per DAY. The next summer she had an internship at an engineering firm and made $10/hr. Good experience doesn’t always pay the bills but a lot of dirty dogs might.

My niece and nephew made a lot of money house sitting, pet sitting, and watering yards of their neighbors even after they started college. They often had other jobs too, but getting $200 for the ‘sitting’ jobs was bonus money. Literally pays to live in the right neighborhood.

My nephew became a lax referee and has done pretty well for himself on his own schedule. When in high school he could ref the little kids, and once in college could do the high school games. He could make $700 working a weekend tournament. When in college he’d pick up $150 working 3 games on a Saturday morning.

15

Of course! I didn’t mean to imply all kids were the same. I just think there is a trend.

My middle is 15 and she is dying to be able to work. She already had a job in the fall where she worked at a haunted hayride for 4 weekends. Long nights, very cold weather, and she loved it, banked about $450 for those weekends as a 15 year old. She wants a job, a car, and is very frugal with her money. She even claims when we eat out that she prefers to eat the cheaper menu options to save us money, and gasps are pricey trinkets as if one would have to be insane. She has money already saved in the bank.

My oldest, however, is quite the opposite. No amount of mentoring and parenting can change a person’s makeup. All we can do is provide the information and the rules. My oldest would prefer to have no money to buy anything rather than go out and hunt down a job. She works when she has to (when money runs out), here and there. She also tends to buy things that are edible, or temporary. A lot of money wasted there.

Two kids, same parents and parenting, couldn’t be any more opposite!

Back to my original point, however. Many of the kids in our neighborhood and school system, they are exellent students (my daughter is a pretty good student as well), and their parents discourage them working, with school being the focus. These kids are being groomed for top colleges and careers, and they apparently don’t feel that a menial minimum wage job is worth the potential impact on their children’s ability to SAT prep, do extra homework, ECs for college, and all that. I don’t have a full opinion on the matter, I see pros and cons to each. But I do know things are indeed different. In the same town and neighborhood, when I was a kid, every 16 year old had a job. Now, few do, and those who do, just babysit for a family friend periodically, and if they have some tests coming up they skip work as a low priority.

16

@cptofthehouse and @twoinanddone , good information and thank you

17

I agree with @blossom

You need to set out your expectations very clearly. “We are paying over $24,000 a year towards your college costs. You have gotten some aid from your college which you must keep in order to continue attending there (this if it’s merit aid and a GPA requirement is required). We will not make up the difference if you lose your scholarship.

In addition, you will be taking the $5500 federally funded loan. We also expect you to earn enough money for all of your books, supplies and any discretionary spending.

We made it very clear to our kids that we expected them to work. If they hadn’t done so, we wouldn’t have given them any spending money at all. Both had decent jobs, and we did send them little gifts every so often to supplement their earnings…because we could. If you can’t…then don’t.

You are giving this kid a $100,000 or so gift over four years. I don’t think it’s too much to ask her to earn some money towards something needed at college. The college jobs will also give her something to put on her resume. A blank resume isn’t going to help her get jobs in the future.

Nothing wrong with her working for grandma…but I hope she is getting a w2 form for this work and isn’t being paid under the table. But that’s a whole other discussion.

This money talk needs to happen ASAP…and you and your spouse need to be on the same page. If your daughter really doesn’t work and really doesn’t contribute…maybe she would prefer the local community college or CT directional university (which is within your price point).

18

OP- I feel for you. If you are the member of the family who is reminding everyone else that stuff costs money, it’s a tiring role to play. Your oldest will get there though, especially if you maintain cheerful neutrality. Some kids like $4 lattes, and some kids like to take ubers instead of walking home in the rain. Neither good nor bad, as long as your college kid knows that when the well runs dry, she will be the only kid in her dorm eating stale waffles for Sunday night dinner (leftovers from Sunday breakfast in the cafeteria) while her friends are out getting a pizza, if she doesn’t hop to it and get a job once she gets to campus.

Buffalo is a great school btw, if you’re starting to think about your middle kid. It doesn’t get enough love among HS kids for some reasons but employers love it. And the school has great grad school results as well.

19

I agree that wife and daughter need to work- wife fulltime or 2 jobs, and daughter, either with grandma or nannying or dog walking or pet sitting or what have you. Does she have computer skills? My s’s made a fortune fixing computers (software and hardware) and helping to create websites. What is she good at? Can she also maybe tutor someone over the summer? Babysitting can be very lucrative. Someone somewhere said they paid $15-20/hr PER CHILD. Thats a lot of $$. Can she advertise in our neighborhood that she will house sit? Pet sit? Help with getting kids to swim team? Sew? She needs, with mom. to take ownership of what she (and mom, who. kibashed the affordable school) need to fix. OR mom can sell her engagement ring!

20

@HankCT I think it’s also prudent to discuss any belt tightening your family needs to do to afford this college. Vacations? Dinners out? Cars? Your parent discretionary spending? Who is going to give up what to make this sort of not affordable college…affordable.

Something has to give…to the tune of $12,000 or so.