Our oldest daughter will be a freshman this year and we currently have enough money saved to pay her first year or so of college. We have 2 other daughters that will be starting college in the next 6 years and we have enough saved for their first years as well. Our plan is to be able to pay for most of the college costs for each of them but who knows what the future brings. I am self-employed and doing well with plenty of work currently but we have 10 years of tuition payments in front of us, as well as saving for retirement and the other living expenses.
So my question is should we take out the unsubsidized Stafford loan even though we don’t need it this year? The interest rates should be very good this year since the 10-year treasury is currently lower than last year and the rate was 4.66% last year.
I also like the fact that my daughter will have some “skin in the game” for college if we get the loan.
My wife thinks we shouldn’t pay any extra interest until we have to. I agree, but there is a piece of mind knowing we have more money in the account to pay for future years of college.
What have other people done in similar situations?
If your D and you have the discipline not to touch the money, it makes good financial sense to take out the loan, have it put into an account in your daughter’s name and leave it there. It can accrue some interest maybe (not much) and because it is fin aid, it does not get counted as an asset against your daughter when she applies for financial aid.
I suggest you do this because the year might come when, your family needs that money due to some financial aid change or jack up in expenses, your other kids going to college or needing something. The unsubsidized amount costs you just the interest And if you don’t take it when you can, you don’t get to take it later. It’s an offer only good during that freshman year. You get another offer each subsequent year, but it depends on fin status of that time.
Thanks for asking this question. It is mine, too. I hate paying interest before I need the money, but we will probably need the money from the loans offered freshman and sophomore years to pay for junior year. The subsidized loans make total sense to take now.
Why would you take out a loan that is NOT subsidized???You will make no interest on it in a bank account, and be paying a daily interest on it. Regardless of whether you use it or not, it still will accrue interest as soon as it is dispersed. Lets say you take out the $5500 limit, and do not use it this year. You will be paying the fee for it, plus the interest. Lets say it is 5%, that is 275$, so with the fees, its probs about $300. For $ you don’t need? Seems like its a waste of $.NOW, if you think you will need that $ next year, plus another loan on top of it, ok, I guess it would be ok, but why pay for what you do not need. Listen to your wife.
If you do plan to take the unsubsidized to save for future use, please wait until the end of the school year to do so - in order to minimize the amount of accrued interest.
I would not pay almost 5% for money to just sit there. If you need it for future children, take THEiR loans when you need the money. You’d have to do the math, but I doubt it is cheaper to pay 5% Per year for two ‘dead’ years than to pay about 8% for a PLUS loan when you need the money. IF you need the money.
Some people have poor credit and the rates on the student loan look mighty good. Also they may be in unstable financial situations and the per year limits are not going to cut it. It all depends on the situation.
I opened a home equity line of credit a few years before my older daughter started college. I thought it might be handy. It has been. We didn’t use it during DD1’s college years but did use it to pay off her loans shortly after graduation. It was my desire for her to not have loan payments and the HELOC interest rate is lower than the student loans’ rates.
Thanks for all the great comments. They are very helpful.
One point of clarification. My understanding is once you accept a loan is the money given directly to the school and the money doesn’t go to the student. Is this how it happens?
What I like about the loan at 4.66%, or potentially lower if rates stay where they are, is its fixed. A HELOC is usually a variable rate and could go up as interest rates rise. Currently HELOC rates are generally lower than 4.66% but who knows is 6 years when my youngest starts college. I may have to pay a much higher rate at that time. Although we would be paying interest throughout that time on the 4.66%.
What happens is… if you borrow more in loans than the balance remaining to be paid to the college, the college will send you a check or a prepaid card containing the overage that you can then deposit in your own checking account and use in any way you see fit.
So let’s say the school charges you directly $5000 a semester; if you pay that amount in full in cash and then borrow the $5,500 Stafford loan, the credits for your payment and the loan will be applied to your tuition bill. Since you’re already paid up, they’ll give you back the loan amount as a refund.
In addition to the interest your daughter will also pay an administration fee for taking the loan out that goes to the university. The current loan fee is 1.073%
We took both the subsidized and unsubsidized loans for our daughter her freshman year. She got $2000 unsubsidized and 3500 subsidized.
On our taxes we got back the $2500 American Opportunity Credit and used that money to pay her $2,000 unsubsidized loan off(about 6 mos after it was issued). I had my daughter make monthly interest payments to that loan, just to get her used to the idea of it. I can’t remember the amount of interest she ended up paying, but no more than $50; probably less.
I figure we’ll let our money sit and continue to grow and use it to pay back the stafford loans after graduation.
I don’t know why you don’t take 1/4 of whatever you have saved and take out loans for the rest of this year’s COA rather than trying to pay all with saving the first year and all with loans the later years.