Borrowing for College – What You Need to Know
What You Must Know About Borrowing for College
The College fall semester is right around the corner and if plans haven’t been finalized on how you plan to pay for it, don’t delay. Especially if borrowing for college is necessary. College costs continue to increase and the average cost for just one semester at a public college is around $7,000.00 and around $13,000.00 at a private school. These amounts are after grants and scholarships.
To cover the cost remaining, many families use a combination of current income, savings, and loans. It’s highly recommended to borrow money only as a last resort. Some colleges allow you to pay some part of the balance in installments, so it’s a good idea to ask.
There are still many families that have no other choice but to borrow to cover some part of the cost. A survey done by Sallie Mae indicated that almost 42% borrowed some amount of money the past year.
If borrowing for college is necessary, there is still time to do it. But don’t wait, take care of it now. More often than not, the semester bill is larger than anticipated. There are basically three options for those who have to borrow. The first is a federal loan that a student borrows. The second is a federal loan that parents borrow. The third option is borrowing from a private lender.
Federal Loans for Students
This should be the first choice for several reasons. These loans have a low rate of interest with more flexible repayment terms. Plus, students are automatically eligible no matter if they have no credit history or income. For the 2017 – 2018 semesters, the rate of interest is fixed at 4.45% for all students.
Some of the low income students receive a benefit whereby their loans don’t begin to accrue interest until six months after they graduate. For all others, interest begins to accrue immediately. This type of borrowing for college does have some limitations however.
The maximum amount that can be borrowed is limited each year. The first year is $5,500.00, the second year is $6,550.00, and for all remaining years it is $7,500.00 each year. In addition to that limitation, the direct student loans have a 1.1% origination fee.
Students that choose to go that route must first complete the Free Application for Federal Student Aid form, better known as the FAFSA. Once that is completed, students need to login at studentloans.gov to accept the loan.
Parent PLUS Federal Loan
Quite often, the annual limitation of the Direct Student loan won’t cover the balance of tuition. In this situation, the parents will have to borrow the funds from a private lender or another federal program.
The Federal PLUS Loan Program offered to parents normally will cover the remaining cost for the child to attend college. However, when borrowing for college with this program, there is no automatic approval. Parents must pass the usual credit check and have a good credit history. That means they can’t be delinquent on any other loans. The process to apply varies from college to college, but in most schools the parent can apply for the loan at studentloans.gov.
The rate of interest for this school year is fixed at 7% for all borrowers. On these types of loans, the parent is supposed to begin repayment immediately. However, there are various types of repayment plans and parents can also request a deferment of repayment until the student graduates.
What happens if the parent doesn’t pass the credit check? This could be good news for the student because they automatically qualify to borrow $4,000.00 additional in their Direct Student loan.
Private Student Loans
Some parents who have excellent credit can sometimes find a private lender with a lower rate of interest. These private lenders include banks, credit unions, some states, and others such as Sallie Mae who are willing to work with parents and students to pay for college.
The terms and interest rates can vary substantially. Some of the lenders will lend to students and some to the parents. In the case of a student borrowing, the parent usually has to co-sign as well. So, when shopping around for a loan from a private lender, the interest rate should not be the primary concern.
Lenders usually advertise low rates of interest, but few parents will qualify for that low rate. There are five items to consider when shopping for a private loan.
- What is the current rate of interest and is it variable or fixed?
- Are there fees charged for the loan? (The federal loans have an origination fee)
- When does repayment of the loan begin?
- In the event of financial difficulty, are there some flexible plans to repay offered?
- If the primary borrower becomes disabled or dies, is the loan discharged?
Oftentimes, private loans take longer to get approved and funded, so if borrowing for college with a private loan, be sure to allow enough time. It’s a good idea to contact the college financial aid office at least a couple of weeks before their deadline to be certain that all is in order. If not, the student might not be able to register for any of the classes, or even move into the dorm.