<p>My D's school offers a multiyear loan option that allows us to borrow one initial amount at the start of her freshman year to cover all or a portion of four years of tuition, activity fee, room, and board charges. This option freezes the charges at the entering-year rate. It has a fixed interest rate of 6 percent per year on the balance of the loan with up to 10 years to repay. There is no penalty for prepayment.</p>
<p>Does this sound like a good deal versus a PLUS loan for instance?</p>
<p>It sounds like a better deal than PLUS and the interest rate is slightly less than Staffords as well. </p>
<p>Who takes out the loan? Is there insurance built in there so that if the student or borrower dies, the loan is forgiven? Is there an origination fee? Do they check your credit?</p>
<p>How flexible are the terms if you can’t make a payment? What are the penalties? Can the loan be extended? What are the chances that your DD might enter some program that would forgive some loans when comparing them vs Staffords? </p>
<p>Just a few questions.</p>
<p>Good questions Cpt - I guess I have some homework to do.</p>
<p>If you have good credit, and a good relationship with your bank/credit union and if you are lucky enough that your bank has some student loans, you can do better than the horrible almost 8% that PLUS imposes. I believe I can get close to half that rate. </p>
<p>But, the loan requires that the student AND parent both sign for the loan and both are equally responsible for its repayment. If either party dies, the loan is all on the other party. The terms of the loan are not flexible at all, and if you miss a payment or need it restructured, you are going to be in big trouble looking at what they are offering for those in trouble right now who took the loans years ago and need some form of forbearance or extension in time period.</p>
<p>A major disadvantage would be if you are taking out large amounts, is that they will be reported on your kids’ credit report. This can be an issue for them when they are looking at certain jobs or trying to buy large ticket items. My friend’s son got married two years ago, and is now 26 years old. Employed for 3 years with a pretty good job and his dad is paying off his loan for college that he got at a very nice 3% interest rate some years ago through USAA or something like that, due to a military connection. At that rate, his dad borrowed all he could. He’s not been late on a single payment and the loan will be discharged in about 4 years. But the outstanding amount was flag on the mortgage app and he was denied. The way the lender looked at it was that he would have to pay this loan if for ANY reason his dad stopped, like if he became jobless, died, disabled, had some catastrophes, and the debt is every bit the young man’s as it is his father’s. </p>
<p>You also may be passed over for jobs that require handling of money or security when you have large debts because it puts you in a high risk category of doing some bad things for money. Yeah. they don’t, won’t always say right out, but yes, they do consider that. </p>
<p>PLUS has it all on the parents. My friend (whose age I never knew while he was alive) died after taking out about $300K in loans for his two daughters for ug. He was 80, looked 60, and had been ill for a while. Never paid a dime on those loans either as he put them on hold when he was dxed and died before they came out of that status. The girls are homefree.</p>
<p>Interesting story. I hadn’t really thought about the impact of high student loan balances on my kids’ credit report. </p>
<p>I am near retirement age myself and a little concerned about repayment once I retire - although on paper it appears doable.</p>
<p>Yeah, it’s not that simple. You never know what your student is going to be interested in doing and what vetting s/he will need. High balances on an older person’s credit report who has been doing well on payments and a job history is a whole other story than on a young person looking to put even higher balances or going into a position where he has access to funds. When a kid is looking at jobs in the $30_40K range, and has a $100k nut on the credit report already, with payments that dad is making but that he is equally responsible for, it is a flag. It will be a flag when buying a house, I can tell you personally form my friend here. His Dad has the money, well to do, took the loan because it was a good deal, cash flow reasons, and it’s hurting his kid because his job and pay doesn’t “fit” the loan amount–there is a pay/debt ratio that is examined. Especially for mortgages these days. </p>
<p>My guess is that the school loan will ask for both kid and parent. If not, it’s a good deal. But when you compare with PLUS, you gotta put the apples with the apples. Also some of these loans are more binding than marriage as I’ve noted–at least getting married, it’s “until death do us part”. The loans usually have parent AND kid bound by the ankles together even if one is gone.</p>
<p>Am I reading this correctly- you would borrow all 4 years up front the first year? So interest on the entire amount would begin to accrue immediately? If so, you might want to carefully do the math and decide if it really is a better deal. It may very well be, especially if you are protected from tuition hikes by doing this. What happens if the student drops out or decides to change schools? Do you get a refund?</p>
<p>Cpt - I plan to give the school a call tomorrow to ask all the questions you posed.</p>
<p>and Cali - thanks for jumping in - I will add your (very valid) concern to the mix.</p>
<p>How does prepaying the tuition affect your ability to claim the American Opportunity Credit on your taxes for the four years your child is in school?</p>
<p>hoosier - I don’t qualify for the credit - but it’s a good question. I will add it to my list anyway…</p>
<p>We are also doing a pre-pay financing program with a school (maybe the same one). We figured out we would definitely pay less over the life of the loan to go this route versus PLUS (which has a higher interest rate and an origination fee). If you have all the relevant details - monthly payment, number of payments, projected increases in tuition, etc you can compare the final costs of a few options.<br>
Good luck!</p>
<p>Wordy - I did gather some facts today from the school but probably have a little more research and analysis to do. First, they estimate the future EFC using this year as a baseline, the loan amount covers all 4 years at origination, and payments begin immediately (August), no deferrals. It is my decision to set the number of payments (up to 10 years). There is no loan origination fee, no early payment penalty, and the rate is less than PLUS. However, I am not yet convinced that this works out better since all 4 years would begin accruing interest immediately. I guess I will just have to run the numbers…</p>