@NoviceDad I assume the NW loans you mention are the loans for the student. The Parent Plus loan is for the parent and is optional. Only one of S18’s FA packages even mentioned or included the Parent Plus loan, but ironically it was the cheapest in state school where we wouldn’t even need this option. I have not crunched any numbers at all, I just know that the Parent Plus loan is an option we can look into if needed. Right now his first choice is OOS with FA grants and merit, but still maybe $10,000 gap in affordability. Actually more like $15,000 above our EFC but we can swing a little more than the EFC since these numbers were based on our miserable 2016 income.
Go to the CFPB page on student loans. There are some comparisons.
@NoviceDad see the link below. I am also assuming like @momof2boys65 that what was provided was the Federal Student Loan (for your student). In my experience, loans to the student directly are cheaper than the Parent Plus loans. A lot of folks take the student loans and supplement the rest of the COA with a PPL, cash flow, and savings.
Basically, NW is giving you nothing other than the ability to borrow money from the government, with a few loan perks that private loans won’t provide you. I know many probably feel compelled to use home equity loans to finance college, but I would hesitate to go that route as you are swapping an unsecured loan for a secured one. If you can’t repay a federal plus loan, there are options. Defaulting on an equity loan puts your home in jeopardy.
Also, if I remember correctly, the 4% fee is taken at funding so they just reduce the amount of the funded loan to cover the cost for the borrower. So, if you borrow $25K they will really only fund $24K (though you will pay back on $25K). It effectively pushes your interest rate closer to 8%.
@NoviceDad-- Northwestern meets 100% of need, so if you are being offered loans only, that is an indication that you must have a very high EFC.
So the first question is to figure out how much is the maximum you can afford to pay out of pocket.
How much money are in savings, 529 plan, or other assets that you are willing to liquidate to finance college?
After that … what is the gap left still to pay?
As a parent I think that student loans should come before parent loans, but if the student loans are unsubsidized, interest will be accruing while the student is in college – so that really needs to be tacked on when considering the interest rate — that is 4 years of extra interest running. More if grad school is in the mix – you seem to be posting also in pre-med threads, so if medical school is in the future, not a good idea to take on any more debt than is absolutely necessary.
@colorado_mom, @calmom, @twoinanddone , @momof2boys65, @lastone03, @alohasue
Thank you for your prompt and valuable insights.
Due to nature of my work, my earnings are very volatile - my EFC is artificially high because the numbers used the best year I had in ages. So, I know we will need loans to finance her 7-years for direct BS/MD program.
Since all this is new of us, I was looking at examples to make sense of numbers. I will explore the sites you have mentioned. You have been a great help.
@NoviceDad you will have the opportunity to prepare a FAFSA each year so your EFC will change. Even if you have to take out higher loans this year, you could be eligible for need based aid in subsequent years. Best of luck.
PS. If you take the student loans, begin to pay the interest immediately. Don’t let it capitalize (ie, don’t let them add it to the loan balance) because you will be paying interest on interest.
@lastone03
Thank you
Sorry, I do not have any spreadsheets to offer (but I like the way you think/plan!). I can suggest you do some multi-child “what-if” scenarios. If there are other children that will be in school at the same time, that will be a big factor. (Approx EFC/2 for each child… but that can vary by the school formulas - do some research if relevant)
Student loans and Plus loans do not capitalize interest unless you consolidate them, and then only once if you do. Otherwise it is simple interest. However, it is a great idea to pay the interest as it accrues.
@twoinanddone Sorry, I wasn’t clear. Here is a nice summary for other types of student loans taken from the Great Lakes site (a student loan processor) - I think the topic becomes confusing as private loan providers are using some of the same names the DOE uses for its products (Parent Plus loans, for example)
“Capitalization is when unpaid interest is added to your loan principal. This can happen at specific times during the life of your loan, such as when your loan enters repayment for the first time, or after a deferment or forbearance period ends. When you’re in school at least half-time or you’re in your grace period (the six months after you leave school full time) you usually don’t have to make payments on your loan. Before your first payment is due, any unpaid interest that has built up is added to the amount you borrowed (capitalized). From that point on, interest accrues on the higher balance so you end up paying interest on interest. On federal student loans, capitalization occurs only when it’s required by Department of Education regulations.”
“which apparently is one of the few ways the feds will cut parents some slack on repaying Parent PLUS loans)”
I don’t understand this common thinking. Why is it the “feds” having responsibilities to repay money YOU borrowed. The feds are us. You borrow money. You pay it back.just because your child wants to live in a mansion doesn’t mean they are entitltled to. Private schools are expensive. It’s just like any other private business. It’s not a birth right. And your neighbors don’t have to pay back your loan. You do.
Sorry if this isn’t an appropriate place to ask this, but if we can almost float the direct pay portion of son’s tuition, but we have a daughter coming through 2 years later, is it ultimately better for financial aid prospects for her applications to take out a loan and pay that back as we can? I mean, paying direct will have us watching Netflix instead of going out and no vacations save traveling to see him, so a loan would give us temporary breathing room but add to the ultimate cost of it.
@overbearingmom The FAFSA doesn’t consider the debts you have. It looks at assets and income to determine your EFC. If you were to take out a small loan for breathing room (which is perfectly acceptable), the best would be the Direct Student loan in your son’s name. Our kids did it to have skin in the game (in and out in 4 years) and to give us a little breathing room when the 2 older ones were in at the same time. The Direct Student loans come with lower interest rates and grace periods, and some are also subsidized based on the EFC. Those were important considerations for us as we knew we would be paying off their loans. An additional perk for our kids was the creation of a solid credit history which goes a long way when looking to buy a car, sign a lease, or get a job.
https://creditcards.usnews.com/articles/when-do-employers-check-your-credit
@lastone03 don’t you have to be granted the ability to have a student loan? He was offered student loans by one or two, but not at the school he will be attending.
@overbearingmom I guess your son will be attending a school that has a no loans policy?
If that is the case, then the only other options I can think of are private loans or equity loans (if you have home equity). I am not a fan of attaching my home to a student loan as collateral, but many others don’t seem to mind doing so.
Parent Plus loans are the worst loans you could commit yourself to. If you don’t make car payments, you lose your car. If you don’t make mortgage payments, they seize your house. Fail to make high interest student loan payments, the bank can simply take you to court and force you to pay by seizing your house, car, and other possessions as they see fit. In effect, the bank has been given the same power as the IRS.
Instead of complaining how corrupt and unfair the system is. Do yourself a favor and make sure the college you go to is affordable.
@lastone03 Whatever loan we have at this point would be a cash flow thing and not something we would get ourselves into a mountain of debt (retirement be damned beyond the maximum IRA we take out). We lived on one income when my kids were little and we can be frugal again, and we do have a home equity line and live in CA so we are cash poor but can tap into the equity. Because my son has special needs, we aren’t 100% sure how easy it would be for him to get a job and pay off loans, but he is going to the right school that gives him the best chance to do it. And that will give me comfort when friends are off on “empty nester vacations” and we are home by the fire.
@overbearingmom — whether your son was offered loans as part of his package or not, he is eligible to take federal direct loans up to specified amounts. If your son has a financial aid package that meets his full need as determined by FAFSA, then the loans would be unsubsidized. If there is a gap between FAFSA EFC and the college’s determination of need, then he would be eligible for subsidized loans as needed to fill in the gap (up to the maximum allowed). If FAFSA EFC is fully met then your son would still be eligible for federal direct loans, but they wouldn’t be subsidized.
And the advantage of PLUS loans over other forms of borrowing is that there are some protections built in — including that the debt is forgiven if the student dies, and can also be forgiven if the parent borrower becomes permanently disabled; additionally there are a variety of different options for reducing the monthly payment amount if the parents run into financial payments down the line. That may not be a factor for you as you are planning only short-term borrowing as a way to ease the financial strain of paying for college – but that is why many parents would be hesitant to use HELOC financing. Apparently, @coolguy40 thinks it is better to be both jobless and homeless at the same time, rather than to have to go the trouble of doing the paperwork to consolidate a parent PLUS loan and signing up for an income-contingent repayment plan if something happens to the primary wage earner in the family… but some of us would rather pay a little more in interest because of the flexibility down the line … especially as we parents are getting older and the prospect of disability or loss of work becomes more important to plan for.
@calmom I think @overbearingmom said previously that they weren’t offered federal loans as part of their aid packet. That is why I asked if her son was going to a “no loan” policy school.
@overbearingmom I understand the need for a little breathing room, and I understand you won’t be taking out much money. If you have ample equity in your home, then a small HELOC might be worth it if you are sure there is no way to get a loan from the Federal Government through the college, and you are 100% certain you can easily repay it without jeopardizing your home.