<p>We did not qualify for any financial aid. D will be taking out the stafford and perkins loans offered, but the balance we are required to pay for her freshman year is $41,000.
Our college offers a program where we can borrow all or part of the tuition, room and board for all four undergraduate years at this years rate and avoid any increases. We can prepay $35,000, but will then need to borrow the balance of $130,000 at an interest rate of 6.25 However, I would have to take out the total loan to cover all four years in August and interest would be accruing from day one.
How would this compare to taking out a Federal Plus loan, at an interest rate of 8.5? Which would you recommend?
Thanks for any advice</p>
<p>That's terrible. You will be paying interest on amounts borrowed years before you need the money. You don't even need to do the math to see that -- obviously 6.5% of $130K is a lot more money than 8.5% of $6K, the amount you would be borrowing the first year. The PLUS loan interest wouldn't start to exceed the $130K loan interest until the final year of your loan - and by that time you will have partially paid down the balance with your payments. </p>
<p>Not only that, you will be locked into a loan even if your daughter decided later on to transfer to another school. What would happen to the money you owe?</p>
<p>Go with the PLUS loan. Try to find a lender that will reduce the interest rate if you sign up for automatic withdrawal of your monthly payments. You don't necessarily have to pay 8.5%</p>
<p>I ran your numbers in the loan payment calculator at finaid.org --here is what I came up with:</p>
<p>Loan Balance: $130,000.00
Adjusted Loan Balance: $130,000.00
Loan Interest Rate: 6.50%
Loan Term: 10 years</p>
<p>Monthly Loan Payment: $1,476.12
Cumulative Payments: $177,135.03
Total Interest Paid: $47,135.03</p>
<p>So you can see right there that you will pay the equivalent of a full additional year's tuition in interest. You will pay $8100 in interest in the first 12 months alone, which is more than the total amount you need to borrow for the first year if you pay that $35K up front.</p>
<p>The horse is already out of the barn on this one but it does illustrate why saving beforehand is better than borrowing later. And the beauty/horror of compounding interest.</p>
<p>Can anyone say "state school" ? Can anyone say: "live below your means" ?</p>
<p>This may sound terrible but rethink your school choice. That's a hell of alot of debt for undergrad. Are grad school or post grad studies in the mix as well? </p>
<p>And I would balk at borrowing all four years at once, that is no deal. Year by year. </p>
<p>There is absolutely no advantage to you to borrow money now that you won't use until 3 years from now.</p>
<p>On reading about the problems of many student lending companies I did a little research in another company that is little known but has an interesting concept, my rich uncle, without the spaces. Interesting concept that will cause more competition into market place. ( I offer no recommendation because we are done and unable to change our loans) </p>
<p>In our case, we have consolidated PLUS and Stafford and we have a 4 year payment history before we get a rate discount. So what happens if you give a smaller discount to clients immediately, would the borrower be ahead and will the lender make money?</p>
<p>If you and your D are hell bent on going to this college and taking loans to pay, at least check out the pre-pay plans your college offers. Most do as they like getting the $ upfront, and there are usually clauses that allow for reimbursement if your D transfers or drops out. </p>
<p>Our D's college allowed us to pay all 4 years upfront (Grandpa left D the $ for college) which locks the rate in at last years' tuition. The new tuition bill shows a 5.75% increase which we do not have to pay. The trend over the past several years at most private colleges is an increase of around 5% annually. So if you are going to do this and take the big loan, pre-pay the college. Since D's college $ was in very conservative instruments and there are no guarantees with investments, our financial advisor rec'd we go this route. It is also nice not to have the worry hanging over our heads.</p>
<p>Based on some reasonable assumptions:</p>
<p>That this loan will be amortized over 14 years, i.e. 10 years after graduating, for a monthly payment of 1163, starting freshman year, and that funds will be disbursed as needed, i.e. when tuition payments are needed, the real interest rate for this deal is 9.62 %, not the claimed 6.25 percent. </p>
<p>The difference is due to the timing of the disbursements. Or to look at it another way, you pay for all the money (interest) while the lender still keeps some in the bank to pay for following years. </p>
<p>Not a good deal.</p>