Before and During College: Get Answers to These Questions Before Borrowing Private Student Loans (Part 1)

Private credit providers want to increase their share of the student loan market. So if you’ll be in college — including graduate or professional school — during 2018-19, you may be targeted by private student loan marketing campaigns. If you are, remember that old saying, “Let the buyer beware!”

Private lenders want to convince you to borrow loans that’ll maximize their profits. You want to borrow loans that are as inexpensive as possible and, since you can’t predict the future, that give you flexible repayment terms. To do this, you’ll need answers to questions about your private and Federal Direct Loan Program (FDLP) borrowing options.

Here are some questions to ask:

Interest

  • What’s the initial interest rate?
  • Is the interest rate ever subject to change? If so, when and on what basis? If the changed interest rate was place today, what would it be?
  • Am I responsible for interest that accrues (builds up) during all phases of the loan’s life? What happens to this interest when I’m not required to pay it?

Many private college loans offer “introductory” interest rates that are lower than FDLP interest rates. But these rates generally rise later. Conversely, every FDLP loan has a fixed interest rate that’ll never change:

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FDLP interest payments aren’t required while you’re enrolled at least half-time and for six months after you leave school. But interest accrues on all but FDLP Subsidized loans during these times and, if you don’t pay it, it’ll be capitalized (added to loan principal) when your grace period ends. Many private loans handle interest in a similar manner.

Credit Record

  • What creditworthiness standards must you meet to get the loan?

Applicants get rejected, or charged higher interest rates, if they don’t have lender-required credit scores. But Washington limits access only to FDLP Graduate and Parent PLUS loans for applicants with “adverse credit histories.”

Loan Fees

  • How much will I be charged to obtain my loan(s)?

Washington currently charges a 1.066% fee on FDLP Subsidized and Unsubsidized loans, and a 4.264% fee on FDLP Graduate and Parent PLUS loans. Private lenders may require larger or smaller fees. These fees are deducted from the loan money you receive.

Private loan marketing campaigns usually concentrate on a few positive highlights about what they advertise so, to get all the answers you need, you’ll have to dig through lender websites and maybe even make calls or send emails to lenders. In-depth information on FDLP loans is available in the government’s Federal Student Loans: Basics for Students booklet.

Next Wednesday
Look right here for even more questions to get answered before you
borrow private student loans.

Contact College Affordability Solutions at (512) 366-5354 or collegeafford@gmail.com for free consultations about how to compare your college borrowing options.

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After College: Look for Employers Offering Student Loan Repayment Assistance

You have or soon will complete your college commencement. Unless you’re about to begin graduate or professional study, you’re no doubt job hunting. If you have college debt, be sure to learn whether prospective employers offer student loan IMG_2287repayment assistance among their employee benefits.

Currently, only a few employers help employees pay down student loans. A recent survey found that just 4% of companies were doing this in 2017. But the number of companies offering this benefit is expected to grow in 2018, and some of America’s leading corporations — Aetna, Fidelity Investments, New York Life, Pricewaterhouse Coopers, Prudential, etc. — already provide it. So do some nonprofits and local governments such as the City of Memphis, Tennessee.

IMG_2288How does repayment assistance work on postsecondary debt? Your employer contributes a certain amount above and beyond the monthly payment you’re required to make. It’s contribution generally occurs on a monthly basis, although there may be annual and/or lifetime caps on its total contributions.

Employer-provided loan repayment assistance means your loans will be paid-in-full faster. Also, since the interest you pay is a product of how much you owe and for how long you owe it, it’ll also lower the amount of your lifetime earnings that you’ll devote to repaying your debt.

The Internal Revenue Service treats employer college debt payments as “taxable IMG_2289income” for the employees receiving this benefit, so put some money away to cover the increased federal income taxes you’ll pay on this amount. Nevertheless, any additional taxes you pay will be considerably less than what you’d spend if you paid 100% of your debt without employer assistance.

Why would an employer spend money to help repay its workers’ student loans? Think about it. Businesses in need of highly educated workforces gain a competitive advantage when recruiting the world’s most knowledgeable and skillful people — U.S. college graduates — 70% of whom borrowed while in school. Also, college educated employees are among the most mobile workers in today’s workforce but, being young and healthy, they often gain more from repayment assistance than medical, dental, or other types of benefits. So a company offering repayment assistance over a numbers of years also gives itself an advantage in retaining them.

You’ll likely earn less early in your career than at any other time. Employer-provided student loan repayment assistance can help resolve this while reducing your student debt, so carefully consider it as you evaluate prospective employers.

College Affordability Solutions brings 40 years of student loan experience to the table when consulting with ex-students about ways to manage their college debts. To arrange for a free consultation, email collegeafford@gmail.com.

Before and During College: Prepare for Rising Student Loan Interest Rates

The Federal Direct Loan Program (FDLP) provides 89% of all postsecondary educational loans. Unfortunately, FDLP loans will soon become more expensive to borrow.

FDLP interest rates are set every May for loans made from July 1 through June 30. The 2018-19 rates will be 0.6% higher than in 2017-18, making this the third year in aIMG_2154 row during which they have risen.

Note: FDLP loans are “made” from July 1 through June 30 if, during this period, any portion of their initial installments go directly to students or are applied applied to what they owe their institutions.

Higher rates increase borrowing costs. For example, what if the lower 2017-18 interest rates versus the higher 2018-19 interest rates were to remain in place for the next four years? Depending on the borrower’s choice of repayment plan, the total amount repaid to the FDLP under the higher rates would jump by up to:

  • $2,755 for undergraduates borrowing the maximum amount each year for four years;
  • $7,144 for parents borrowing the national average of $10,226 per year to help their undergraduates earn four-year degrees; and
  • $7,338 for two-year master’s degree students borrowing $25,000 per year.

Why are rates rising? Federal law ties the interest charged on each FDLP loan to the rate at which the government auctions off 10-year Treasury notes every May. The rates at which such Treasury notes are auctioned rises as the economy improves, which it’s been doing since late 2015, so FDLP interest rates have been rising, too.

And assuming there’s no economic recession for the next few years, future FDLP interest rates will climb even higher.

Good news? Federal law fixes FDLP interest rate until loans are totally repaid, so their interest rates never rise. This helps make FDLP loans better than the “variable rate” educational loans offered by many private lending institutions.

Still, rising FDLP rates make college less affordable unless borrowing is reduced. Fortunately, there are ways to do this and still get a quality education, including, but not limited to:

So make plans now, because it’s going to be more important than ever to minimize college debt for 2018-19!

College Affordability Solutions brings 40 years of personal college finance and student loan experience to it’s no-cost consultations with customers. Contact it at (512) 366-5354 or collegeafford@gmail.com for such a consultation.

Before College: 5+2+9 = A Great Way to Invest for College!

IMG_2130How to best save money for your child’s college education? We asked this of Kevin Wood, who recently retired after many years as a professional investment advisor. His answer was simple and enthusiastic — start a 529 plan!

These plans are specifically designed to help Americans in all income ranges save for college. Kevin affirmed that they’re simple, safe, and they grow tax free.

Kevin also offered three ground rules to have your 529 plan generate as much as possible for your child:

  1. Open it as early as you can. The longer it’s open, the longer your plan earns money and the more college costs it’ll pay. So start contributing to a 529 plan as soon as possible after your child’s birth.IMG_2132
  2. Authorize automatic monthly withdrawals from your bank account into your 529 plan. This way you’ll never forget to contribute to your plan.
  3. Grow your contributions as your income grows. Most parents earn the least they’ll ever earn while their children are young. But if you can only contribute a few dollars at this point, do so. Then, grow your contributions as your career progresses and your income grows.

Got relatives who want to help out with college costs? Have them make monetary gifts to the 529 plan you open for your child. Student aid rules don’t count payments from parent-owned 529 plans as student income, but they do count payments from other 529 plans this way.

You can find 529 plans that accept initial contributions of $50 or even less and subsequent contributions that are just as small. So you don’t have to be wealthy to use a 529. If you can only afford to make small contributions for starters, do it! Then raise your contributions as you begin to earn more. This will go a long way toward generating the money your child needs to go to college.

Risk for 529 plans involves suffering losses without having sufficient time to recover IMG_2135those losses as 529 investments bounce back. So Kevin recommends you go with 529 plans that employ age-based approaches to investing. As your child gets to closer college, these offer more protection from market fluctuations.

You’ll pay fees to your 529 plan’s manager, but don’t let this deter you. Kevin stresses that a good manager who meticulously watches and adjusts your 529 investments is well worth the money.

You can get information about 529 plans from most licensed investment brokers, or from the College Savings Plans Network website.

So open a 529 plan soon, one that uses an age-based investment strategy. Contribute regularly, and increase your contribution whenever you can. Your student will thank you for his 529 plan at commencement, if not before!

Need some advice from an experienced investment professional? Call Kevin Wood at (512) 900-0688.

For information on other strategies to keep college costs manageable, contact College Affordability Solutions at (512) 366-5354 or collegeafford@gmail.com for free consultations.

Before College: Get Ready for What It’ll Cost . . . Now!

Parents and students are often shocked by college costs, especially late in high school, when there’s little time to generate significant amounts to help cover these costs.

It’s well known that postsecondary institutions charge tuition, and that there’ll be expenses for books and class supplies and room and board while students attend college. There are other charges, too. But it’s the total cost that seems to catch families by surprise.

So let’s look at the most recent data about the average cost of college attendance for an academic year (fall through spring). And for a sense of how these costs grow, look at what they were 10 years ago:

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Yes, over the last decade the average cost of a year at college rose 25% at public 2-year institutions, 38% at public 4-year universities, and 36% at private 4-year universities.

At this rate, if today’s 8-year old begins college in 10 years, her freshman year will cost approximately $22,000 at a public 2-year, $35,000 at a public 4-year, and $69,000 at a private 4-year institution.

She may be able to reduce expenses by, for example, living at home while taking classes. But she’ll still encounter 5-figure costs:

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Sallie Mae’s most recent How America Pays for College report indicates that nearly 90% of 2016-17 families know their children are college-bound in preschool. But in 2016-17 only 13% of college parents had 529 plans to help cover postsecondary expenses and just 8% could devote parental savings to these costs.

The result? Sallie Mae’s report indicates that, in 2016-17 alone, 33% of undergraduates borrowed an average of $8,835 in federal loans and almost one out of 10 of college parents took out Federal Direct Parent PLUS Loans, at an average of $10,226 per loan, to help pay postsecondary expenses.

Many of today’s postsecondary parents lost their jobs, income, and savings during the 2007-09 Great Recession. This really limited what they could save for college.

But in general, Americans are now better off. Unemployment in March was 4.1% — less than half the March 2010 rate of 9.9%. And U.S. Median Household Income has risen steadily to be almost 20% higher than in 2010.

If you’re enjoying job security and prosperity, now is the time to start saving all you can for college — even if it’s only a small amount.

Ah, you may ask, but won’t my savings reduce my child’s eligibility for federal student aid? Yes. But the reality is that 62% of that aid comes in the form of loans.

So every dollar you save today can help your student — and you — reduce college debt in the future!

Next Wednesday: Why 529 plans are the best way to save for college.
Until then, contact College Affordability Solutions at (512) 417-7660 or collegeafford@gmail.com for free consultations about issues related to financing your child’s college costs.