‘Cheap Money’ Loans Can Help Finance College
Anyone who doesn’t have a six-figure trust fund and who is about to enroll in college is likely to engage in another great American pastime--borrowing.
Never before, nor never again, will your borrowing options be as attractive as when you are in school. Today, student loans are offered at rates ranging from 5% to about 10%. That, in industry parlance, is relatively “cheap money” considering the rates you’d pay for other types of personal loans.
The reasonable rates and the wide availability of funds make student loans a good option for anyone who needs help paying for college. In addition, those who have not yet established a credit history will find that student loans make this process easier too.
How so? In addition to the low rates, student loans usually provide the borrower with easy payment plans that often don’t start until six months after the student has finished college. If you are unable to find a job or if you plan to enroll in graduate school, those payments sometimes can be delayed even longer.
Of course, if you fail to pay back or reschedule these loans when due, you could face serious repercussions. The government can’t repossess your education, of course, but it can put a claim on your future earnings and assets. In addition, non-payment can mar your credit history and make it difficult for you to obtain loans in the future. Defaulting on a student loan can also make you ineligible for other economic aid.
The point is, there are few reasons to default. So don’t.
There are lots of student loan options. However, you may not be eligible for all of them if you and your parents are reasonably well-to-do.
To find out what you are able to apply for, you must fill out financial aid forms, which are also required to apply for federal and state scholarships and grants. Once your eligibility is determined, you generally must fill out student loan forms and promissory notes.
Those who are needy will have the most attractive options, starting with 5% federal loans. However, even those with less substantial needs can usually borrow under similar programs that offer slightly higher rates.
The most generous loan programs are the Perkins, Stafford, SLS and PLUS loans, which are all federally sponsored plans. However, a number of states and universities have their own loan programs, which you can find out about by talking to a college financial aid counselor or your state guarantee agency. (To find the guarantee agency in your state, you can call 1-800-4-FED-AID.)
Interest rates and limitations on these loans can vary a bit, but here’s the rundown for the current academic year.
Perkins loans provide up to $9,000 for needy undergraduates at 5% interest rates. Those who go on to graduate school can borrow an additional $9,000, assuming they meet all the requirements.
Students can borrow $17,250 under the Stafford program at an 8% interest rate. However, again, they must meet some eligibility requirements, including a determination of need.
Supplemental loans for students (SLS) and parents loans (PLUS) are available to those with less substantial needs. Students and their parents can borrow up to $20,000 under these programs. The interest rates are currently set at 9.34%.
It is important to note that the limitations on most loans are for the student’s entire undergraduate career. In other words, if you borrow $3,000 annually under the Perkins program, you’ll run out of Perkins’ loan capacity in three years. At that point you can borrow under another program or find some other sort of student aid. (There are separate limitations for graduate study.)
Additionally, the amount you can get will be limited by the cost of your education minus other financial aid you have received. You can’t get more than the amount you spend on college.
Many loan programs allow students to defer making any payments until they have completed their education. And then, the payments can be as low as $50 a month. However, some programs require the student (or parent) to pay while still in school. These are distinctions that the student should pay attention to when securing the loans.
States, colleges and universities also offer loans. It is impossible to go into the details of all these programs. However, it is worth noting that those who are interested in public service and teaching can often secure special loans designed just for them.
Union College in Schenectady, N.Y., for example, sponsors the Chester Arthur Undergraduate Support for Excellence Award, otherwise known as the CAUSE loan. These loans are made at higher-than-market rates, but the principal is forgiven at a rate of 20% per year if the student goes into public service, such as the Peace Corps or other nonprofit work on behalf of the environment or the disadvantaged. In other words, those who stay in public service for five years or more owe nothing.
