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.

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