What are the pros & cons of accepting the $5500 loan offer for students that may not need to use the loan. Are there good reasons to take the loan & stash the funds for future use?
I am not an advocate for taking loans you don’t need.
Depends on what you mean by “may not need to use the loan”. If you’ve got a mixture of 529 funds, regular savings, and a solid income from one or more bread winners; your family contribution is reasonable given your financial situation, and you’ve gone through the expenses carefully and have accounted for travel costs, health insurance, etc. and you’re just trying to be prudent-- probably not worth taking the loan. If you are skating on the edge of affordability and one missed paycheck from a parent would mean having to withdraw, or you can’t bridge the gap between your aid and the expected expenses if you have to make an emergency trip home- than yes, probably fine to take the loan as your cushion.
Without knowing more it’s hard to give advice. But grandparents die during college (not to be morbid), parents get sick and have to go on disability with a reduced paycheck, the super duper cheap airline you’ve been counting on to get home in June goes bankrupt or eliminates service from your home airport… depends on how secure you are in your ability to weather this type of circumstance.
Great question, looking forward to learning more from the responses! I have told my D21 that should it turn out she doesn’t “need” it to pay tuition/room/board than she could still take it and save the money to fund a study abroad program in the event she can’t work enough to earn savings on top of spending money (for instance if she is doing unpaid research, etc). I’ve also wondered if she should take them in the event she needs an extra semester or year to complete her degree (merit awards seem limited to 8 semesters) or if she fell below the required GPA to maintain a merit award.
We had our kids take the Direct Loans. This improved our parent cash flow while they were in college. IOW, for freshman year, we had $5500 additional dollars, just in case.
That way, if we had any unforeseen expenses, we had that extra $5500 that we hadn’t paid to some college.
We gave both of our kids the gift of Direct loan repayment for undergrad as their college graduation gift…because we could.
There are situations when it makes to take out a Direct Student loan even if you do not need the money. However, understand that this is not something to do lightly, anymore than taking out loans anywhere just because you can. You do have to pay back the money and in many cases interest on it. The temptation to use funds sitting right there so available can be irresistible.
A reason to take out the loan is if you have a very good chance of needing more than the future years’ loan allotment amounts. I’ve seen community and other 2 year college kids do this, and have recommended this course of action at times. Kids who are commuting to a local school and will be transferring to get their degree can get hit with increased costs including room and board if they have to go away to a university to achieve that goal. Its possible that such students were able to cover those first year costs without borrowing but the last half of schooling necessitated more money than Direct loans would cover. In such cases, it would be a good idea to borrow the $5500 from freshman year, and the $6000 in sophomore year and keep it stashed for use junior and senior years when more than the Direct loan maximums for those years
are needed.
Another reason to take the loan is when a college senior with little or no prospects of getting enough money to launch a career but has not taken a Direct loan for school purposes might avail self of the money to tide self over.
Those eligible for interest free loans because of need component unmet by other sources may take the loan as free use of money during that time period though low interest rates hardly make that a lucrative move. There are always risks in taking the mone because it’s not free money. You have to pay it back and even the interest free loans start wracking up interest once you are out of schools.
As a young adult with little credit, without a strong earnings/job history, these loans are often the only source for borrowing for certain people. So, for good reasons, they can be enormously helpful. To use them for nonessential purposes, especially when prospects to pay them back are not yet formed can be a huge financial misstep
I go back and forth on this one. It would be nice to have the buffer in case of a 5th year, loss of aid in subsequent years, or no job prospects right out of college, but I’m also very anti-debt and worry that the money might burn a hole in a teen/young adult’s account. There’s always the risk it could be more harmful than helpful. Now with the ability to pay off up to 10K of loans with 529 funds I’m more tempted.
My daughter did take the loans in years 2-4. For sophomore and junior year, she mostly used the money throughout the year (she only took the subsidized portion) but did carry over some. Senior year she took the loans and ended up with almost all of it still in her account and used it to buy a car and to relocate to her first job. It really was a cushion. She’s very frugal.
Interest rates on a student loan will be set in July. It should be VERY low this year.
Thanks for all the responses.
Just confirming: a student that borrows the federal unsubsidized $5,500 loan does not need to make payments until graduation but interest begins to accrue immediately. Current rates are +/- 4.5%?
Yes, interest accrues right away.
The loan payments begin 6 months after a student leaves college for any reason…dropping out, leave of absence, graduation.
Don’t forget the loan origination fee, that is another 1% taken out of the disbursement.
[QUOTE=""]
Current rates are +/- 4.5%?<<<<
[/QUOTE]
The rate is 5.05%.
Unless you need the money, I am a fan of taking out only the subsidized loans and paying them back 6 months after graduation so you don’t pay any interest. Of course, if you are receiving a subsidized loan, there’s a good chance you need it. We took out the subsidized loan with the goal to have more cash on hand in case needed during those years. I did dip into that money as needed but was able to pay it all off (total was less than $10K in my case) without interest for my first child. The interest rates, although better than other loans, are not so amazing.
We had our oldest take the loan. There are three kids in a five year window, so two others were in a private high school at the time and money was tight. When the others start clearing out of the tuition pipeline we’ll come back around and help her pay it down, but it really helped with liquidity for a few years there.
We could have paid for college for our DD without her taking the loans but we had her take the loan each year. We were looking for her to have some skin in the game.
We then bought her a car, helped pay some of her moving expenses that her company didn’t reimburse, paid her security deposit and first month’s rent on her apartment, etc after she graduated. Things that we may not have had all the money to do if she hadn’t taken those loans.
She got a good job after graduating and combined with some money my sister gifted her (not a huge amount but it helped) , she had those loans paid off within about 18 months of graduating.