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The Right Way to Borrow

It’s important to understand lending basics when your clients need to shop for college loans.

More than 70 percent of college students borrow for college, with the average undergraduate leaving college with more than $37,000, loans are at a historic high. And those figures don’t include what parents borrow, something difficult to track. It’s important to understand lending basics when your clients need to shop for college loans.

Here are eight things you should know as your clients contemplate borrowing for college:

1. Don’t be so sure that your clients can cover the cost.

You shouldn’t assume that your clients won’t need to borrow. With the price of some fancy private universities exceeding $70,000 a year, taking out loans can be a necessity for high-income parents who are stretched thin.

Imagine that a client has two children who get into expensive universities like Northwestern and New York University, which give extremely few merit awards to affluent students. Using today’s prices, the cost for just two bachelor’s degrees would be more than $570,000.

Ego can get in the way of clients acknowledging that they need to borrow. In reality, the parents more likely to borrow large amounts through the federal loan program are affluent parents. So go ahead and broach the subject with parents who have teenagers, as well as your older clients who have teenage grandchildren.

2. Recommend the federal student loan.

The best loan to start with is the Federal Direct Loan for students. The Direct Loan is preferable because it offers the lowest interest rate, as well as federal safety features that are designed to keep borrowers from defaulting.

To qualify for the Direct Loan, a student must be at least a part-time college student. Completing the Free Application for Federal Student Aid is also a requirement. The FAFSA is available beginning on Oct. 1 every year.

3. Two Direct Loan versions exist.

The Direct Loan comes in two versions: subsidized and unsubsidized.

The subsidized version is best because the federal government covers the interest when the borrower is in school. The government also covers the interest during the six-month period after a person leaves college or graduates and also during deferments.

In contrast, a borrower with an unsubsidized Direct Loan is responsible for all the interest payments.

The financial aid formula will determine if a student is eligible for the subsidized version. The vast majority of students who receive subsidized loans have modest household incomes.

The Direct Loan’s current interest rate is 3.76 percent. The interest rate is tied to the 10-year Treasury and is adjusted annually. The rate for the 2017-2018 school year will take effect on July 1.

4. The federal loan for parents isn’t a crowd pleaser.

Parents can borrow through the federal PLUS Loan. The PLUS Loan was originally launched in 1980 to primarily help middle- and upper-middle-class families send their children to expensive private colleges.

The PLUS Loan currently charges 6.31 percent to parents, and it also assesses a 4.3 percent fee for all cash borrowed.

5. The parent PLUS Loan can be financially risky.

When the PLUS was originally rolled out, parents could borrow no more than $3,000. Parents can borrow far more than the earlier limits and that is one reason why parents need to be careful when turning to the PLUS Loan. The underwriting for the PLUS Loan is flimsy so parents can end up borrowing more than they need or can pay back.

The PLUS is designed to allow parents to borrow the costs that aren’t covered by the student’s aid package. The maximum amount a parent can borrow will depend on the college’s cost of attendance minus the aid a student received in grants and federal student loans.

6. Private loans are another option. 

The traditional private loan is designed for a student to use. Some parents mistakenly believe that their child can borrow the full cost of college on their own through private loans. In reality, nearly all lenders will require borrowers to have an adult cosigner. These cosigners will obviously be on the hook if their children fail to make payments.

Sources of these loans include: 

  • Credit unions.
  • Major banks.
  • Online lenders.

7. A new type of private college loans exists.

Parents can now borrow through a new type of private loan designed exclusively for them. For parents with very good to excellent credit history, these private loans can offer lower interest rates and fees than the PLUS Loan. 

An excellent resource to find lenders offering these loans is Private Student Loans Guru at www.privatestudentloans.guru.

8. Urge your clients not to overborrow.

In a Nerdwallet survey last fall, nearly half of student borrowers indicated that they had borrowed more than they needed to cover school costs; the grads borrowed an extra $11,597. In another survey by Student Loan Hero, 41 percent of borrowers said they spent some of their loan proceeds on such things as monthly bills, clothing and restaurants.  

College loans are a pricey way to borrow for expenses not related to obtaining a degree.

 

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