College Planning

Is College Debt The Way To Go?

Most colleges include student loans in their award packages. Some include what are called Parent Loan for Undergraduate Students (PLUS) loans. This is a loan parents can take out to cover the cost of the college, after any free money the student receives from the college. I am not advocating taking on debt. However, it may be the only way some families can cover the cost. If borrowing is something you are considering. you should be taking federal loans before private ones. Here are some of the advantages of federal loans:

  1. Fixed rates over the life of the loan
  2. Many different repayment options
  3. May defer payments during college without hurting credit scores
  4. The loan dies with the borrower
  5. Can consolidate loans without additional fees
  6. The government sets the rules
  7. Federal loans are generally less expensive than private loans

Because of a demonstrated financial need, many students receive a Direct Subsidized Loan and that’s great because while the student is in college they get the use of the money for practically nothing. No interest will be charged for four and half years. When the loan does go into repayment the interest rate for 2021-22 is 3.734%, which is fixed for the life of the loan.

There is a small origination fee of 1.062%, which translates into $37.17 on the first year subsidized amount of $3,500. No interest is being charged or accruing while the student is in school. When the loan is disbursed the college receives $3,463. You will have to make up the difference.

The new interest rate on PLUS loans is 6.284%, which is also fixed for the life of the loan but is not subsidized – meaning interest begins to accrue on the day you take the loan. The origination fee is approximately 4.228%. That is high, but compared to private loans may still be preferable. The fee is deducted from the amount the college receives, so it is recommended that you pay the fee immediately upon the disbursements so you avoid paying interest on the fee. When applying for the loan, tack on the amount that you will lose in the disbursement so the college gets the amount you intended. Parents can immediately defer payments during the four years their student is in college. However, interest will accrue and is compounded annually using simple interest.