My son will be going away to college next year and I am trying to determine when is the right time to take out loans. We can afford to pay for the first two years including room and board without loans but if we go that route we will have to get parental loans in addition to Stafford loans for the last two years. Our other option is too get Stafford loans each year spread out over the four years, but then interest will start accruing right away which will result in significantly more interest over time. Finally because we have a college account for my son we do not qualify for assistance which may change if we use up all of the funds in the account before submitting the FAFSA
Any suggestions?
I personally don’t think folks should take out loans for college in excess of the Direct Loans the students can take. Even with that, I would suggest taking the loans when you need the loans, not before.
What happens if you take the Direct Loan for freshman year, and junior year your kid decides to take a year off for some reason or another? I suppose you could just take the money you have in the bank and payback the loans…adding the interest.
Are you saying that the college account when added to your income makes the net cost for your son’s first year of college? And that this, along with your income make your family contribution more than the cost of attendance at all of his colleges?
Are there some less costly schools on his application list?
Using the 4caster our EFC exceeds the cost of attendance.
A friend who has been battling cancer for 2-3 years posted on her facebook page 3 milestones: That she had her last chemo a year ago, that she got her first haircut in a year… and… at age 66, she finally paid off one of her kids’ parent plus loans. She has another loan she is still paying off. She is a successful professional, but stuff happens. Please, be careful.
It’s an interesting math problem with lots of things to consider.
- You don't have to let interest accrue on the loans if you choose to pay the relatively small amount of interest from the start--yes, the total interest would be more than if you waited 2 more years to take out the first loan and 1 more year to take out the second, but the principal balance wouldn't be increasing this way so it would be a middle of the road solution.
- Does your son's school guarantee to meet 100% of the demonstrated need based off of the FAFSA EFC? A lot of schools don't, which would take that factor out of the equation.
- What are the fees and interest rates of the Stafford vs. parental loans? I honestly don't know because we haven't taken out any loans yet, but depending on those numbers, the interest on the Stafford loans ($5,500 for 2 years early and $5,500 for 1 year early) might still make more sense.
- Another number to plug into the equation is the 2% or so interest that you could get if you put the loan proceeds in a high yield savings account or CD until you needed the money.
- Not part of the math, but important nonetheless, is your philosophical views on student loans vs parent loans and how you feel about making your kid have some skin in the game when making their college choices. We made the decision a long time ago that we would do our best to pay for our kids' schooling but if they choose to go to a school where our cost would be more than about $100k that they would have to take out the max Stafford loan each year and that we would not be taking out any parent loans unless it was absolutely necessary.
Mostly because of your salary…I would guess…since assets are only tapped at 5.6% of their value for FAFSA EFC purposes.
Have you run the net price calculators for the colleges? Those will give you a better estimate of net costs than the FAFSA EFC gives. If you aren’t divorced, don’t own a business, don’t own real estate in addition to your primary residence…the net price calculators will be a good estimate if your net costs. Run them at each school your student is applying to.
Is your kid applying to schools that use the CSS Profile? Do the colleges guarantee to meet full need for all accepted students?
Any strong chances for merit aid anywhere he applied? That would not consider your income or assets.
I highly recommend talking to an independent financial adviser to confirm that you can safely afford the college you are talking about and what the best road for your situation would be. It depends on so many factors and especially what other debt you may carry. That was the best money we spent during the college planning and admissions process.
In general, sticking to schools that can be covered by federal loans and savings/cash flow is a good idea. Any loans taken by parents should be paid by parents comfortably in the very short term. We personally carry no debt at all (mortgage paid in full), so as our 2nd gets into college we may take out some short term loans to spread out payments. Special care is needed for parents approaching retirement age.
I will also say this very much limited my kid’s college options who had reasonably good stats and a unique EC profile to apply to any school. It’s not uncommon to not be able to afford your EFC.
Current rates for direct loan to the student is 4.53%, for PLUS loans is 7.08%.
Origination fees are 1.069% and 4.23%. There is ‘talk’ of eliminating the origination fees.
I think you are always going to be better off taking the direct loan early and paying or accruing interest for those 2 years than paying the higher PLUS rate in jr/sr years. The interest is simple interest so is not compounding. Many people pay off the interest as they go along and then only compound interest once on conversion. My daughter was given the option of paying the interest from her loans after graduation before she started repaying her loans. You may be able to get a lower interest rate (than the PLUS loan) private loan with no origination fees from a private lender, but most likely that would have a compounding interest rate, not a simple rate.
You can run the numbers. If you don’t need the money for freshman or sophomore years, bank it. Put it in a CD for 1-2 years.
My opinion is to pay cash for the first year and additional semesters when you can. You never know if the student will change schools, major direction, get a merit award in future semesters, or if some other “life happens” situation will come up.
Pay upfront and save the loans for the end
Thank you for all the responses. I did not realize that assets play such a small role in the EFC. I think it makes the most sense for my son to get Stafford loans and us just paying the difference over the course of the four years.