It is less than 3 weeks before my oldest daughter goes off to College and every day I get some type of letter offering us ways to pay for it.
The latest letter says “Figuring out how you”ll pay for college can be tough”. They go on to say they are here to provide “Peace of Mind” by finding the best way to “Cover up to 100% of college costs”.
While borrowing is a reality for many families paying for college, what struck me about these marketing letters is how they make borrowing(debt) sound so appealing and the best option. It is no wonder why the amount of Student Loan debt recently surpassed $1.5 TRILLION. The truth is paying for college can be emotional and stressful, but not being informed can have some serious consequences. While the majority of families will have some amount of student loan debt in how they fund the cost of college, graduates who have taken on too much debt may be forced to delay or may not be able save for a house or retirement.
While many parents know that getting a good education at a reputable university is an investment they want to make for their children the challenge is how to pay for it. With tuition costs rising at twice the rate of inflation and some elite university which have tuition costs of $75,000 or over $300,000 in after tax savings for ONE Child it really does require oneself to be an informed consumer. With many families unable to keep up with these costs it is vital to be a smart consumer of education.
While it may be tempting to act on these marketing letters to help fund the cost of college, there are other options you should consider first.
The Best Student Loan Options
Federal Loans First
The Federally guaranteed Stafford loans, which are offered as part of financial aid awards, are usually the most affordable loan option. Interest rates are set at lower-than-market levels. These loans can be either Subsidized by the Government which means interest won’t accrue until after the student graduates or Unsubsidized which means the loan starts accruing interest right away. To qualify for these you will need to file a FAFSA (Free Application for Federal Student Aid). At a minimum, you will be eligible for an unsubsidized Stafford loan from the U.S. Department of Education, but to qualify for a subsidized it will be based on need.
Parent PLUS Loans- Caution
A more expensive option is the Direct PLUS loans are also guaranteed by the federal government and are awarded based on what you file on the FAFSA. The difference is these loans are only for the parents of undergraduate students and for graduate students. Interest rates on these loans are much higher currently at 7.595% with an upfront origination cost of 4.248% as of July 1st, 2018. They have fewer repayment options than Stafford loans, and parents cannot qualify if they have an adverse credit history. I would caution use of these. While parents can borrow up to the total cost of attendance these loans are expensive and you will be on the hook for paying the debt probably while you are thinking of your own retirement. Understand your budget and be informed before you sign up for these.
Private Loans should be your last resort
Think about it. Are you really getting “Peace of Mind” by taking on these loans? These are a rapidly growing area of educational loans and which explains what I am getting in the mail. These type of loans should only be considered after maxing out all federal loans. Interest rates, loan fees, and repayment terms can vary. Most of the time a parent is required as cosigner.
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At University Financial Strategies our mission is to help families think beyond just saving for college, but helping leverage strategies that leverage your unique situation to help you save on college costs. We take into consideration topics like specialized college-planning strategies for business owners, planning for financial aid, school-specific scholarships, coordinating college planning with grandparents, cash-flow strategies and options for covering shortfalls, to name just a few.
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