Borrowing: Where to Start

I’ve probably said this before, but there are families staring down tuition payments for the first time right around now. Most families use a combination of savings, cash flow and borrowing to pay for college. The first two are reasonably straightforward; they’re yours, after all. Borrowing is more complicated, and chances are that if you have a high school student, you’re getting lots of mail about education loans that are available to you.

In almost every case, the best loan to take out is the Federal Direct Student Loan. There are numerous reasons why this is a good loan:

  • There’s a limit to how much you can borrow, starting at $5,500 for freshman year, so it can help you avoid getting in over your head
  • It has the lowest interest rate and fees of the broadly-available federal loans (4.45% interest rate and 1.068% loan fee for disbursements through Oct. 1, 2017) and the interest rate is fixed, not variable
  • A portion of it may be subsidized, meaning no interest accrues during the school years
  • Because it’s in the student’s name, the interest is more likely to be tax deductible. (The deduction phases out at income of $65,000/single or $130,000 married filing joint; the student’s/recent graduate’s income is more likely to fall in that range than the parents’.)
  • It has the broadest set of borrower protections of any available loans: deferment and forbearance, income-based payment options, forgiveness programs and more.
  • In the future, as the full debt balance becomes known and the income stream is more consistent, there may be refinance options– federal or private– that make sense. Private loans, on the other hand, cannot be refinanced through federal programs.

The downsides of the student loan are pretty straightforward:

  • There is a cap on the borrowing amount so if the loan is taken out with the intention of its being used to pay the parents’ portion of education, the student’s only option would be private loans
  • Again in the case of the loan being used to pay for the parents’ portion, the student is the named borrower and the parent is not required to cosign, so the student’s credit is at stake in the parents’ payments

And of course since it’s a federal program, the Direct Student Loan requires you to fill out the FAFSA.

Dept. of Ed. Freezes Loan Discharge Program

The federal Department of Education last week froze two Obama-era changes in student loan programs aimed to protect students against predatory for-profit schools. The first program allowed students to have their loan debt erased if the school acted fraudulently or otherwise cheated the student. The second program, known as the Gainful Employment Mandate, cut off federal loan funds for colleges whose graduates did not earn enough money to pay off their loans. The loan discharge rules were set to go into effect on July 1. Read more here.

Can You Use a Roth IRA for College? Should You?

Today’s post is written by a fellow fee-only advisor, Greg Phelps, CFP®, CLU®, AIF®, AAMS®, of Redrock Wealth Management

Saving for a child’s college education is perhaps one of the most noble things a parent will ever do. It’s also one of the toughest financial goals to tackle, because similar to healthcare costs, college expenses have risen across the board at 5% per year. Continue reading Can You Use a Roth IRA for College? Should You?

Student Debt for Women

The AAUW recently released a report titled, “Deeper in Debt: Women and Student Loans.” The report points to a side effect of women’s increased educational attainment in recent decades: College-educated women hold a disproportionate share of outstanding student loan debt. While the AAUW’s report focuses on women, it points out that most historically under-served college populations have seen their share of the debt pie rise at a higher rate than their share of diplomas.

While women receive 57% of bachelor’s degrees from American colleges and universities, they hold about 2/3 of outstanding student debt. The report cites several reasons for this:

  • Women take out larger loans on average than do men; the average accrued student debt upon attainment of a bachelor’s degree is $1,500 higher for women than for men.
  • Women with college degrees earn an average of 26% less than do college-educated men, leaving them with less income available to repay loans.
  • For-profit institutions– which tend to leave their graduates with the worst debt outcomes– enroll women and minorities at higher rates.

Anyone borrowing for college needs to keep their likely career and salary trajectory in mind when deciding how much to borrow. The report also includes some institutional and policy recommendations for helping maintain access to higher education without creating undue burdens on students and graduates. The full report is available here.

Student Loan Interest Rates for 2017-2018

The May Treasury Note auction is done; one of its results is an increase in student loan interest rates for the coming school year. Direct student loans (subsidized and unsubsidized) disbursed between July 1, 2017 and June 30, 2018, will carry an interest rate of 4.45%, up from 3.76% in the current year. PLUS loan interest rates went up as well: graduate student PLUS loans will be at 6% and Parent PLUS loans will be at 7%.

The interest rate increase means a student taking out the maximum direct loan for next year will pay about $3.50 per month in additional interest on a 10-year payment plan after graduation on that loan. (A number of factors might make that higher or lower, including whether a portion of the loan was subsidized and whether any payments were made during the school years.)

Parents might be wondering if they can wring a few more dollars out of the system at this year’s 6.31% rate. The answer is probably not– and the headaches of doing so would likely cost more than the interest savings. But you might inquire with your school’s financial aid office just in case.

Here is a list of all interest rates for the coming year, as well as a link to loan fees.


Colleges Still Have Openings for Fall ’17

Further confirming that college can be a buyer’s market, the National Association for College Admission Counseling’s annual College Openings Update: Options for Qualified Students (a list of schools still accepting applications after May 1) shows an increase in the number of schools still accepting applications compared with last year. In fact, the number has gone up every year since 2013; it increased by about 20% from 2016 to 2017. Continue reading Colleges Still Have Openings for Fall ’17

Some School Rankings

No, I’m not trying to excuse my recent absence from posting by suddenly buying into ratings hype!

The Princeton Review has some interesting rankings that might be a good second step on your winnowing-down-of-schools process. (The first step being of course identifying schools that you can likely afford.) In addition to their ranking of the “Best” 381 colleges, Continue reading Some School Rankings

Dear Tyler & Isabella, Let’s Pick a College

Today’s post is written by a fellow fee-only advisor, Richard Freight, CFP®, EA, of IAM Financial, who is a father of two who will hopefully be college-bound. 

tyler and isabella

Dear Tyler & Isabella,

These are some of the things I want you to consider when choosing what and where to study in college…..

When the time comes for my son Tyler, and my daughter Isabella, to go to college, I image us having this wise and thoughtful conversation around the pros and cons of this Continue reading Dear Tyler & Isabella, Let’s Pick a College