When it comes to a college student loan, you have two ways to go. You can go to the federal government or to private lenders. Just for the record, my preference is for you to graduate from college with no education debt, but sometimes that’s unavoidable.
The federal government offers loans that are relatively easy to get and don’t cost too much. Also, the fees associated with these loans are low. The financial aid forms are a pain, but you’ll survive.
For example, with a Stafford loan, students don’t need a credit history, collateral or even a co-signer. So far…so good.
You ask about the rate? They are fixed. Currently it’s at 6.8% and if you can prove financial hardship, you might be able to get a lower rate (4.5% as of this month).
With a private loan, you might pay even less than 4.5%, but the rates are variable.
That means you’ll probably pay much more interest over the years. (Sure rates are low now because the economy is floundering. But if it takes you 10 or more years to repay those loans, do you really want to bet on this low-rate environment continuing? I don’t.
Usually, private loans require a parent to co-sign. The better the credit history, the lower the rate. Conversely, the lower the credit score, the higher the rate. If your history is really troubled, your rate may be as high as 11 or 12%. Ouch.
So how do you decide which way to go?
Ask yourself two questions:
1. Do you really need a loan for college?
Maybe the first question is, do you really need to go to college now? For some people college is just a waste of time and money.
I read somewhere that only one in four college graduates are finding jobs right now. Hopefully things will improve by the time you graduate, but what if they don’t? Are you willing to end college deep in debt and possibly unemployed?
My feeling is if you want to work as a professional, go to college. But does it have to be Harvard?
If you’re in a situation where you’re going to an inexpensive school and still need to borrow the money to do it, I can support that. But if you can get that degree at a fraction of the cost by going to a different school, you must consider doing so.
If, on the other hand, you think you’d prefer to work in the trades, you may do better by skipping college at this time and getting into trade school now.
2. How long will you need the loan?
If you decide you’re going to borrow to finance your education and you’ve done everything you can to minimize those loans, try to determine how long you’ll need the loan for.
Estimate what you’ll earn when you graduate and what it’ll cost you to live. Then you’ll know how fast you can repay those loans. Hopefully, it will be fast.
As a rule of thumb, if you can repay those loans within three years of graduation, I’d go for the variable rate. If it will take you five years, I’d go with the fixed rate. If it’ll take you more than five years to repay the loans, it might be a sign that you‘re barking up the wrong tree and should reevaluate your decision.
The best advice is to use the Common App that will allow your child to apply to multiple schools. Then you have a better idea of how many colleges will accept the student and what financial aid package will be offered.
One should also fill out the FAFSA to determine what government financial aid is available.
I work in higher ed and have seen too many students take on expensive loans to earn degrees that will not further their earning potential (art history majors, etc.). If the student isn’t working towards a solid degree with career potential (business, engineering, computer science), a parent may have to intervene and determine that a degree is not a wise step at this point in the young adult’s life.
More importantly, there are always other options to a standard, 4 year degree such as taking classes at a community college to knock out those core course requirements. The student can live at home, retain a job, and pay a fraction of the cost.
The G.I. Bill remains a solid option. And just plain working and saving is never a bad choice.
There are too many young adult with massive student loan debt that will impact their life choices for decades to come. At some point the consumer needs to wise up and determine if there’s a return on investment for the college degree they would be capable of earning.
Everyday Tips says
My son is 16, so we are aggressively thinking about college these days. You are so right about picking a college that will not saddle you with tons of student loans. A friend of mine has 2 kids, one went to a great public university and the other went to an ‘elite’ private college. I asked if the private school was worth it and he said ‘I will let you know if she ever gets a job’.
One thing I have heard though is a lot of smaller schools will give more financial aid. (Not so much schools like Northwestern, but lesser known private schools.)
I did not know student loan rates were so high. Thanks for the info.
Yes, that’s true – I went to a private school for undergrad and they gave me a lot of scholarship. Out of about 40-50,000 dollars charged per year, I only ended up getting loans for 40,000 total – 10,000 per year. I’m currently doing my grad work at Indiana University – obviously a public school – and they gave me only 7,000 a year out of about 30,000 that I have to end up paying. College is expensive, but I definitely recommend the private schools. It’s a good learning environment, and the financial aid is way better!