So how do student loans really work?

[TexasHusker]

We will have our first kiddo in college in 2 years. We can fund the thing out of our budget I feel pretty sure, but I am curious if student loans might be a better way to go.

I really don't need a lecture on this re: debt versus no debt - I am just curious as to how the typical student loan works.

- Terms
- Interest rate
- When you start paying it back
- Etc.


Thank you!

[disneysteve]

Since we are right in the midst of this now, let me start off the conversation.

There are 3 main loan types:
1. federal Stafford student loans
2. federal parent PLUS loans
3. private loans

Type 1 is broken down further into subsidized and unsubsidized. The former means that interest doesn't accrue until repayment begins. The latter starts accruing interest right away. You can pay it as you go or else it gets added to the principal when repayment begins, a process called capitalization.

Whether you get subsidized or unsubsidized loans is based on financial need as determined by filing the FAFSA form. You must file a FAFSA in order to be eligible for any federal loans.

The amount you can borrow on Stafford loans is limited. It varies based on year in college and whether it is subsidized or not. The range is between $3,500/year and $7,500/year. The interest rate is 4.29% I think.

The federal parent PLUS loans are not subsidized but are based on your credit. You can borrow up to the full amount needed not covered by other sources. The interest rate is currently 6.84%.

Repayment on all of the above can start immediately or can be deferred for up to 6 months after graduation. As noted, though, the loans may accrue interest during that time.

Loans can also be put into forbearance for various reasons (student unemployed after graduation, etc.).

Finally, the private loans are issued by lender of your choice. Rates vary. Terms vary. These are not subsidized and are also not eligible for any type of income based repayment the way student loans are. They also can't be consolidated through any federal consolidation program.

What are we doing? Years 1 and 2 we paid 100% ourselves without loans. For year 3, our daughter just signed up for her first unsubsidized Stafford loan for the max $7,500 she could borrow. My wife and I (well just me technically) took out a $15,000 parent PLUS loan.

My daughter will start repaying her loan right away as she has a steady income from an annuity and can probably send $450/month to the loan which will knock it down to about $2,100 by next year when it's time to take a loan for senior year.

We will also start repayment immediately. I'm hoping to pay $1,000/month so that most of the 15K will be repaid by next year when we need to borrow again for senior year.

The hope is that by the time she graduates, she should only owe about 5K on her loans and we will only owe about 6 or 7K on ours and within a year or so after graduation, everything will be repaid.

We do have savings we could dip into but I'm fine paying a modest amount of interest and cash flowing the repayment over a relatively short time span.

[JustBill]

PLUS loans also carry a not insignificant upfront fee of 4.272% from monies borrowed. A good website for further information on SLs is studentaid.ed.gov/sa

[disneysteve]

PLUS loans also carry a not insignificant upfront fee of 4.272% from monies borrowed. A good website for further information on SLs is studentaid.ed.gov/sa

There's a fee on the Stafford loans, too.

[TexasHusker]

Wow, sounds like the options are limited unless you're good with 6% +/- interest rate.

If I end up not cash flowing all of it, I'll look at a home equity loan.

Other than the school fees - room, board, tuition, and books, what do you budget per month for extra living expenses?

We are looking at a private school that's about $35K per year. However it appears he will get a partial athletic scholarship and some academic scholarship help that should bring it down to $20K a year.

Is that good?

[disneysteve]

Wow, sounds like the options are limited unless you're good with 6% +/- interest rate.

If I end up not cash flowing all of it, I'll look at a home equity loan.

A HEL is probably the cheapest option. I thought about that and in the end decided to just go with the PLUS loan since I anticipate being able to pay it back pretty quickly so the difference in interest won't be all that significant.

Other than the school fees - room, board, tuition, and books, what do you budget per month for extra living expenses?

Very little, actually. With her living on campus, she doesn't spend a whole lot of money and she covers most of the little stuff herself. Her meal plan includes unlimited use of the dining hall and also includes a couple hundred dollars of campus currency that is good at the pay as you go snack bar. We have covered some costs related to her fraternity membership (it's a co-ed fraternity) but that's like $75/year and an event here and there.

We are looking at a private school that's about $35K per year. However it appears he will get a partial athletic scholarship and some academic scholarship help that should bring it down to $20K a year.

Is that good?

"Good" is a very subjective term. It all depends on your own situation and what's appropriate for your son.

[LivingAlmostLarge]

Is the private school what he wants? Or is it just money? I think you know what works for your kid.

[TexasHusker]

Is the private school what he wants? Or is it just money? I think you know what works for your kid.

He wants to play college golf, so that's the primary determiner. Since he's only going to be a junior that could change, but the recruitment process is well underway.

We are big believers in intercollegiate athletics if you've got a child that is capable - so much so that we are bribing both of our kids with brand new cars at high school graduation if they play a sport in college. It's not the scholarship - we just feel that kids these days are sorely lacking in motivation, goal-setting, and hard work. Having a coach ride their a**es for four years we hope will instill some of that.

So that's the method to our particular madness.

[Joan.of.the.Arch]

A car for HS graduation if they play a college sport? That's a new one to me. Do you mean if they get a sports scholarship you'll give them a car? What if they just are on a team without a sports scholarship. It isn't the case that all college athletes have scholarships, is it?

I hope your kids will be self motivated when they are in college.

Anyway, I just wanted to tell you that some NPR and APR stations had an interesting feature on student loans this morning. You can listen to it at https://www.revealnews.org/episodes/...-student-debt/
You will probably find it more of a cautionary tale than anything else.

[Outdoorsygal]

Instead of buying them a car, if you have time, learn how to apply for the college scholarships. They add up and can exceed the cost of actually attending College. Our company offers $2000 (ok not much but worth the time to submit) scholarships to our children. My son got one. Once you've written one up, it only needs to be re-vised.

He didn't exceed the cost of his schooling but if I had to do it over again, I would've ignored the pain, took more vicodin during that time which helps my eyes to stop spasming, and applied everywhere we could for him.

He just got moved up with Apple so his education was a bit useless anyhow not going into the field he got his BS degree from. He has 3 AA degrees to. He's always loved school.

.

[TexasHusker]

A car for HS graduation if they play a college sport? That's a new one to me. Do you mean if they get a sports scholarship you'll give them a car? What if they just are on a team without a sports scholarship. It isn't the case that all college athletes have scholarships, is it?

I hope your kids will be self motivated when they are in college.

Anyway, I just wanted to tell you that some NPR and APR stations had an interesting feature on student loans this morning. You can listen to it at https://www.revealnews.org/episodes/...-student-debt/
You will probably find it more of a cautionary tale than anything else.

We aren't really concerned about whether or not they are getting an athletic scholarship, academic, or combination thereof - the concept is the same. We want them participating in intercollegiate athletics because of the opportunities it will afford. Not the end of the world if either/both of them do not, but we are greasing the skids.

[TexasHusker]

Instead of buying them a car, if you have time, learn how to apply for the college scholarships. They add up and can exceed the cost of actually attending College. Our company offers $2000 (ok not much but worth the time to submit) scholarships to our children. My son got one. Once you've written one up, it only needs to be re-vised.

He didn't exceed the cost of his schooling but if I had to do it over again, I would've ignored the pain, took more vicodin during that time which helps my eyes to stop spasming, and applied everywhere we could for him.

He just got moved up with Apple so his education was a bit useless anyhow not going into the field he got his BS degree from. He has 3 AA degrees to. He's always loved school.

.

We will definitely be digging for scholarships, making good grades, and taking/re-taking ACTs and SATs!

[Outdoorsygal]

We will definitely be digging for scholarships, making good grades, and taking/re-taking ACTs and SATs!

Sounds like a great plan
My cousin works for a large university in Alaska and knows a few students who don't pay a dime. Just apply for a ton of scholarships and it is more than covered.
He called it easy money in which so many kids don't bother with

[moneybags]

Wow, sounds like the options are limited unless you're good with 6% +/- interest rate.

If I end up not cash flowing all of it, I'll look at a home equity loan.

Other than the school fees - room, board, tuition, and books, what do you budget per month for extra living expenses?

We are looking at a private school that's about $35K per year. However it appears he will get a partial athletic scholarship and some academic scholarship help that should bring it down to $20K a year.

Is that good?

That sounds pretty typical. If you have options, opt for the academic scholarships that can be renewed each year. Athletics are a bit riskier due to injury, ability, and need to stay on the team.

My son plays a D3 sport, so no athletic scholarships. He loves it, and since it is D3, the time commit does not interfere with his academics or social life.

[TexasHusker]

That sounds pretty typical. If you have options, opt for the academic scholarships that can be renewed each year. Athletics are a bit riskier due to injury, ability, and need to stay on the team.

My son plays a D3 sport, so no athletic scholarships. He loves it, and since it is D3, the time commit does not interfere with his academics or social life.

We are seriously considering Divisuon 3, due to the benefit you describe. It allows the student to have a life outside of the sport, including concentrating on studies. Division 1 has become quasi-professional sports. That would be fine if your goal was to go on and play professionally after graduation, but that isn't the situation for 99.9 percent of college athletes.

Division 2 might be a fit, but we are finding that many of the really good private colleges are in Division 3.