<p>Calmom, thanks for the information.</p>
<p>I would love to borrow at 2.38%. Are rates really that low? Are there income limits?
I don't see anything on Sallie Mae's web site that indicates 2.38% loans are available.</p>
<p>Calmom, and others, I should be able to figure this out on my own, but I have some confidence in the good people on this board. We will be paying full freight for our daughter. My business is such that I take a monthly salary which covers ordinary living expenses, but about half my yearly compensation comes in quarterly dividends ( roughly4 months worth of salary received 4 times per year). Her college gives us the option of pre-paying her tuition, and saving the average 5.5% yearly tuition increases. We are considering this option, and still have a lot of info to gather.
What are the origination fees, upfront charges, whatever on the PLUS loans? We have an already open home equity line of credit that is, according to DH, prime +2%. We have a rapidly decreasing mortgage (only 4 years to go) and essentially no other debt - carry a balance on 1 credit card out of pure laziness (yes, all you finance mavens, I know). We were planning on using cash reserves for 1 year's tuition and essentially charging the rest on the home equity line (We'd like to pay with a Visa, please - it's nuts!) - now I'm wondering if we should open a PLUS loan instead. We will be doing some belt tightening no matter what, our alternative being paying on the 10 nomth schedule, but if we pay out of monthly income, cash flow gets tricky because so much of my actual take home comes in quarterly.
Is there a good alternative that we don't know about? We are trying to avoid liquidating investments.</p>
<p>Hell, I want some 2.38% money, too. I could send it to my 4.375 fixed mortgage that I was until now pretty pleased with.</p>
<ul>
<li>she is not paying 2.38% ---- it is 2.17%!!! I am my niece's guardian (her father is dead) and I logged on just now - here is a cut and paste from one line of the table of her loans at Salliemae.com (she had a number of loans totalling $17,000, all at 2.17%):</li>
</ul>
<p>1-07 Stafford-UNSUB
SALLIE MAE TRUST - LSC/FL Repayment 4,041.00 1,904.11 2.17%</p>
<p>Apparently, if you make 48 consecutive payments to Sallie Mae on time, the interest rate is lowered by 2%.</p>
<p>Cangel, you are right - there is an origination fee with Stafford and PLUS loans. The Department of Education charges a 3% fee, and lenders have the option of adding an additional 1%. So that is definitely something to factor in.</p>
<p>What istoomuch fails to factor in is simply the added buying power you get with a loan -- yes, of course it costs MORE if you borrow -- but who among us would have been able to buy our houses with cash up front? We rationalize buying our houses over time by recognizing that we do need housing, and comparing the cost of a mortgage with the cost of rent. Yes, I am paying many tens and thousands over the purchase price of my home in mortgage interest.. but at least I am not throwing the same money down the drain while enriching some stranger who happens to be my landlord. </p>
<p>With education, it's a question of what you can afford. As parents, we know that when our kids graduate from college, we will have a significant drop in expenses. While it is very expensive to support the kid during the college years, we can look forward a decade to see a time when all those expenses evaporate. Those of us who are in our 40's or 50's may still have 15-25 years of good earning capacity ahead ... and face it, once the kids are grown, what else do we have to spend the money on? If anything we'll be downsizing -- smaller house, smaller car -- family vacations that cost less because there are fewer travelers, etc. So it makes sense to look at extenting the cost of a 4 year college education over 14 years (the PLUS loans are 10-year loans, but you can consolidate each year into the next if you want).</p>
<p>Yes you pay more -- a LOT more - with borrowing, but you can buy more as well -- and there is a definite value to preserving your investments. Also, simply in terms of sound financial planning you should have enough assets so that you can weather interruptions in income (such as loss of employment) or short term financial emergencies. I mean ... we could all make ourselves very poor by paying college costs up front -- but unlike istoomuch's car example, we do NOT need to buy a new college education for our kids just as soon as we get done paying off the first one. </p>
<p>I think I have a different perspective than istoomuch in part because I have always been self employed, so I look at income and borrowing from the standpoint of running a business -- and monthly cash flow is an important part of the equation. Yes, it is true that when I figure "I can afford a $400 monthly payment but I can't afford $800 a month" (for any purchase), I end up paying more in the long run... but there is a value to that extra $400/monthly in my pocket.</p>
<p>I am NOT and employee but self-employed and struggling. Growl. </p>
<p>Years ago when I was an employee, someone approached me in being a financial guru. He showed me some principles of money and the LIGHT came ON and all was revealed. Hallaluha!</p>
<p>The interest equation is not a static equation. The variables are always changing- Daily. The trick is to use the variables to your advantage.
In my particular case, It pays me to borrow for kid's education. Not borrowing costs me and kid money and opportunities. We use various the loan strategies to manage cashflow, investment opportunities and tax benefits. </p>
<p>Calmom, your post says that you try to manage cashflow like me. </p>
<p>When I look for interns I try to impress upon them that a business is not selling widgets or a particular service but any business is to make money. The worst propects are business majors-they see the trees (accounting, marketing, product, advertising, etc) but they don't see the forest (making money.) Try to look at loans as the trees and the forest in making and saving money, time, and effort.</p>
<p>all of this is my opinion. Your particular situation may vary.</p>
<p>How fast can you make 48 consecutive payments?</p>
<p>The 2.17% will probably jump to a higher amount in July. How can you mitigate the higher interest rate and subsequent higher payment? My question has already implies that you can. I am assuming niece is out of school(?).</p>
<p>Have you not been reading the literature that college is sending you?</p>
<p>I personally am frustrated to come across people who will change banks for 1/4% on their savings account but forego 1% or more interest rate savings. I also said that the rate is not the only factor in a loan. Particular situations may vary.</p>
<p>Your window of opportunity is fast closing. Unsubsidized staffords and PLUS will probably exceed your fixed mortgage interest. However, the terms of student loans are more flexible and open ended. Subsidized Staffords could be a possible alternative, if you qualify.</p>
<p>The prediction for the July interest rate is something like 5%. Minus her 2 points would still be only 3%. Yes, she is out of school.....</p>
<p>If it goes up too much, we'll probably just pay it off.</p>
<p>BTW, itsoomuch, I really like all your posts. As an aside, we are happily paying a 15-year mortgage, and wow, what a difference from the 30 year! It means that well over $2,000 per month is now going into equity, rather than practically nothing. We are saving a fortune on interest.</p>
<p>I am learning so much from this post.
Thanks especially to itstoomuch for making me think about our situation.</p>
<p>Our son is college freshman and took the Stafford this year ($2625?)......
We have a NJ loan with good repayment terms with a FIXED rate about 5.99%, I think. Any opinions whether it would be smart to borrow that fixed vs. variable?
We also have option of our home equity with variable rate, of course.</p>
<p>I'm a heretic. But I'm glad to say a heretic with my head above water and speak the truth.</p>
<p>There are a large proportion of people who would have been better off refinancing to a 30 year mortgage and take the difference that you would have paid on a 15 towards the 30. You would be able to pay off the 30 in 15 years and saved money, AND give youself more flexibility.</p>
<p>Do not believe your mortgage broker-banker. He does not understand the equation. He is paid to sell a mortgage, not to save you money. The bank makes about the SAME amount of $ on a 15 vs a 30 in the early years. The bank could care less how much equity you are accummulating-it only cares how much interest $ they are collecting! </p>
<p>You have to THINK like The bank! You have to think like the CFO of your company...which is your family. The chairperson is of course the wife, even though she does't understand the numbers. She can't however ignor the numbers and must have a grasp of the concepts. (he/she are general terms, but you know what I mean)</p>
<p>For large loans, mortgage, student loans: BORROW LONG. [Banks want to] Lend Short. This analagous to "[buyer] buy low, [seller] sell high. </p>
<p>Go look at Consolidation, NOW!</p>
<p>I'm not nedad, but I am interested, and I did not quite get what you said here:</p>
<p>"There are a large proportion of people who would have been better off refinancing to a 30 year mortgage and take the difference that you would have paid on a 15 towards the 30. You would be able to pay off the 30 in 15 years and saved money, AND give youself more flexibility."</p>
<p>We also have a 15 year mortgage at a much lower rate than our former 30 year...but are you saying here that I would have been better off to keep the 30, but paid the extra (say) $1000 a month the 15 puts into equity, to the 30? I don't get it, sorry! Can you try again, for dummies like me? :)</p>
<p>(another thing is that I probably WOULDN'T have put the 1,000 toward the 30! This way it is forced savings!)</p>
<p>I have the same question as voronwe....are my out of pocket expenses lower if I take out a 30 year mortgage and pay it off like a 15 year mortgage, even if the interest rate is higher on a 30 year than a 15 year?</p>
<p>We refinanced into a 30-year mortgage from the second year of a 15-year mortgage, but are paying it off as if it was a 13-year mortgage (to mimic the 15-year mortage we bailed out of...) We did it when worried about DH's job security, and worry over college costs - to give us some flexibility if needed. And, as the rates had dropped some, our payments are actually a couple bucks a month less than they were with the 15-year. (Wheeeeha!) Not a rock-bottom rate, but a good one. I read about all the borrowing and leveraging and such - but it just makes me uneasy. We'll eat beans, drive the old car and live as frugally as possible to get through the seven years of DD and DS's combined undergrad years - and if I have to draw down our (teeny) Roth IRA a little bit to do so, I will. The thing about loans, is that you have to pay them back - and I don't have a magic mirror to let me know if husband and I will be alive and kicking and earning money in 7 years. Better that we live within our means and go loan-free. (We both participate in a mandatory state or city defined benefit retirement plan, so it's a little different from those of you who are self-financing your whole retirements...) I'm sure our method does not "actualize the most profits" or something, but I'm just not comfortable with borrowing.</p>
<p>If you take a $100k mortgage for 30 years at 5%, our required monthly payment would be about $536.82 per month for 30 years. The same $100K at 5% for 15, would require a $790.79 monthly payment. So if you take the 30 year mortgage and pay the 15 year amount, the excess payments would go towards principal each month. which would mean the the interest accrued would be the same as the 15 year mortgage, and the amounts would be the same as if you had take the 15 year mortgage IF the bank calculates on a monthly basis with the same compounding factors. So there is no advantage of taking a 30 year mortgage and paying on a 15 year schedule other than the flexibility of not having to make that full 15 year payment amount. The disadvantage is that the bank may well have its own way of accounting and crediting payments which can cause a lot of confusion and mistakes. But because the interest and principal amounts are not double the 30 year required payment, you will have paid less into the mortage over 15 years.</p>
<p>Putting an extra $1000 each month towards your principal does nothing to change your monthly payments, or the amount of interest and principal that is already calculated, until you reach that last payment, and finish paying off the principal.
So, if you have the willpower, you may as well put the extra $1000 each month anywhere safe and earning interest, and when it reaches the lumpsum that will pay off your principal balance, only then hand it over to your lender.</p>
<p>I agree with chocoholic. Also there are always little zingers that the bank has for anything out of the usual. And if there is a mistake, try figuring out when you made that extra payment 7 years ago! Better you watch the payoff amount at the end of each year, and have an account running parallel with savings and when the savings equals the payoff amount, make the payment.</p>