<p>My S will be attending Cornell University in the fall. His financial aid package includes 3500 in Stafford Unsubsidized loans and 4000 in Cornell University loans.</p>
<p>The Cornell loans do not accrue interest while in school, but the rate is 8%. It has no loan fee.</p>
<p>The Stafford unsub loans do accrue interest while in school, but the rate is 6.8%. There is also a 0.05% "loan fee" which I assume is an origination fee. (Can anyone explain the loan fee precisely?)</p>
<p>I assume, if he wanted to, he could take the full 5500 in Stafford loans and take less in Cornell loans. I'm trying to figure out the trade-offs between the extra interest accruing while he is in school, versus the lower interest rate. Obviously this will depend on how long he is in school (if he continues to grad school) and quickly he pays off the loans. The goal is to be aggressive about paying them off, but of course no can know in advance what challenges life might present to make that more difficult than expected. </p>
<p>Are there other factors we should be considering here? I can make a spreadsheet to run a few scenarios, but I'm wondering if I'm missing any considerations.</p>
<p>Are they offering all unsub for the Staffords? If so, you would want to take as much sub Stafford as possible (3.4%); the max for a freshman is $3500 sub. If the offer is $4000 Cornell sub & $5500 Stafford unsub, I’d opt for $3500 Stafford sub, $500 Cornell sub, and $2000 Stafford unsub. If you need all $9500 in loans, though, you are better off with $4000 Cornell sub and $5500 Stafford unsub. If you take the $3500/500/2000 you would only be able to borrow $6000 instead of $9500 due to the $5500/year cap for Staffords for freshmen.</p>
<p>Does he have the option of Stafford sub if they weren’t offered to him? He needs 7500 in loans. If he does have the option of Stafford sub why couldn’t he take 3500 Stafford sub, $2000 Cornell sub, $2000 Stafford unsub or $3500 Stafford sub + 4000 Cornell Sub? I’m not sure why you’re capping the Cornell sub loan at 500 if he takes the Stafford sub (if available to him). Wouldn’t the 4K offered in Cornell sub loans be independent of whatever Stafford sub loans he is allowed to take?</p>
<p>What are the criteria for eligibility for Stafford subsidized loans? I assumed if they weren’t on his offer he wasn’t eligible. Our FAFSA EFC is higher than our Cornell-Profile-computed family contribution, fwiw.</p>
<p>I am assuming that if the school offered $4000 Cornell sub and no Stafford sub, there may not be enough “need” for any of the Stafford to be subsidized.</p>
<p>The formula to determine eligibility for a sub Stafford is COA-EFC-grants/scholarships-work study-any school based subsidized loans=Need for sub Stafford. Subsidized Stafford can then be awarded in an amount up to Need or $3500, whichever is less. Unsub Stafford can be awarded in the amount of $5500-sub Stafford (if any). Total aid, including unsub Stafford, cannot exceed COA.</p>
<p>Yes, a student “could” borrow the $4000 Cornell sub, $3500 Stafford sub, and $2000 Stafford unsub as long as there is Need. Ask the school.</p>
<p>Do the math as to what you would pay over the life of the loan, unsub vs. sub. Look at the actual numbers, not the “rate”. Also, consider how you or your son plan to handle the unsubs if you took them – would you be making interest-only payments along the way? Or taking a no-payment with interest accruing option… thus ending up 4 years down the line paying 6.8% interest on 4 years of accumulated interest as well as the initial principal?</p>
<p>It’s a fairly easy math problem & very easy to find calculators that will print out a full schedule showing breakdown of payment vs. interest.</p>
<p>Hmmm … the fact that your Cornell EFC is higher than your FAFSA EFC may be the reason for the Cornell loans. You may not have any eligibility for sub Stafford at all … this is because the FAFSA EFC has to be used in awarding Stafford sub. The Cornell sub can be offered using the Cornell EFC.</p>
<p>You should still be eligible for Stafford unsub. It just may not be offered in the award package, but it can be used to replace the EFC.</p>
<p>Our Cornell EFC is LOWER than our FAFSA EFC. So yes, since it’s the FAFSA EFC that applies here he probably doesn’t have any Stafford Sub eligibility. </p>
<p>he has 4K Cornell sub and 3500 Stafford Unsub in his package. I know he can borrow 2K more Stafford unsub but we’re hoping he doesn’t need it.</p>
<p>Calmom, I will do the scenarios, including the scenario that includes paying interest-only while in school. I was just wondering if there were any other gotchas that I might be missing when setting up the scenarios, but it sounds like not.</p>
<p>The one gotcha is loan origination fees. That’s generally between 2-4% of the amount borrowed, but it is one other number that needs to be tossed into the equation.</p>
<p>The chart at [Federal</a> and University Loans | Financial Aid](<a href=“http://www.finaid.cornell.edu/types-aid/loans/federal-and-university-loans]Federal”>Need-Based and Non-Need-Based Loans | Financial Aid) has the loan fee for the Staffords listed as .05% but that almost sounds like they may be off by an order of magnitude – perhaps .5% (half a percent versus a twentieth of a percent). Half a percent on a $3500 loan is $17.50 whereas .05% is $1.75 and seems hardly worth bothering with And if it’s really 5%, that’s into “ouch” territory.</p>
<p>Thanks swimcatsmom. .5% is not bad at all. I was starting to worry that it was 5% (since you would multiply by .05 to get 5%) which would be substantial.</p>
<p>For the subsidized loans, when exactly does the interest start accruing if it says payments start 6 months after leaving school – does the interest start when the payments start, or immediately upon leaving school? Thanks again!</p>
<p>I would estimate the probable cash outlays, by month, or if I’m lazy in semi-annual aggregates, in either scenario, and in each case discount them back to today using a discount rate representing the likely after-tax alternative earnings rate on retained funds (personally I prefer this to the alternative cost of capital in my case). Then take the one that represented the lowest all-in present value cost.</p>
<p>But I’m not doing it for you, I’m too lazy and that’s work. Sorry.</p>
<p>I made a quick, quick monthly payment calc just to see if I could. I didn’t get very specific about dates (assumed 48 months interest free (subsidized) and a 120 month payoff). I also grossed-up the initial loan by .5% for the unsubsidized loans and did 3 scenarios (current payments over 168 months; I/O and no I/O over 120 months). Looks to me like ‘subsidized’ means less cash out in the long run due to the 48 month interest holiday ($105, $205 or $364 per $1,000).</p>
<p>This simplistic approach may be completely wrong … but, this is how I would have approached it.</p>
<p>Also, please re-check before you rely on it!</p>
<p>A little technical here, but generally the loan fees come out of the principal rather than add to them. That is, if the student borrows $1000 with a 0.5% fee ($5), then the student’s loan principal would be $1000, but only $995 of loan proceeds would go to to the college. </p>
<p>So the loan fees do impact overall costs, but they don’t actually increase the loan principal. </p>
<p>But I do think that unless there is a huge differential in interest rate, no matter how you do the math you will see significant savings for a loan that doesn’t accrue interest for 4 years compared to one where interest is running. That’s why I think it is valuable to get away from looking at percentage rates and just look at dollars.</p>
<p>I’d add that I personally borrowed a healthy chunk of money in PLUS loans while my d. was in college, then paid them all off in the year after she graduated. I haven’t done the math yet to figure out what my “real” interest rate was with a shortened payoff, but the point is that no matter what the rate I signed on for, I ended up paying a lot less. I wasn’t sure in the beginning that I would be able to pay those loans off quite as fast, but I always did intend to accelerate payments as soon as my d. graduated.</p>
<p>Rather than amortizing all the loans for the same amount of time, I assumed a constant payment, so in some scenarios he gets out of debt sooner. I used $20/month (per $1000 in loans) after graduation. I treated the loan fee as a “closing cost” that was not rolled into the loan, and added it to the total money paid. I also assumed 4 years of interest-free for the subsidized, or of interest accruing or being paid I/O “during school”. The months until paid off starts counting after those 4 years. </p>
<p>subsidized 8%:
would be paid in full after 62 months (61 plus one small payment)
total payments: 1220.45</p>
<p>unsub 6.8% with I/O payments during school:
would be paid in full after 59 months
total payments: 5 fee + 272 I/O pmts + 1179.03 = 1456.03</p>
<p>unsub 6.8% without I/O payments during school:
would be paid in full after 83 months (82 plus one small payment)
total payments: 5 fee + 1644.42 = 1649.42</p>
<p>This assumes one can pay extra toward principal on any of these types of loans if he wants to pay it off faster than the standard amortization – true? (I guess we would have to check with Cornell directly about their loan, but for the Staffords?)</p>
<p>Yes, you can always pay additional toward principal. </p>
<p>Here’s another way of looking at – and one more reason to go with the higher interest, subsidized loans as compared to making I/O payments on the unsub loan – he can borrow less overall with the subsidized loan.</p>
<p>That is, let’s suppose he borrows $4000 of unsub loans. By your math, he is paying $272 per year in interest payments. That’s a small amount – but the point is that borrowing $4000 in unsub, with the payments, is really the equivalent of borrowing $3000 in subsidized loans, when you weigh in the 4 years of payments. And of course 8% interest on $3000 is less than 6.8% interest on $4000.</p>
And if it’s really 5%, that’s into “ouch” territory.</p>