Best way to handle student loans and repayment?

[disneysteve]

Our daughter is a junior in college. We were able to fully pay for years 1 and 2 from savings (along with a generous scholarship). For year 3, our daughter took a Stafford loan and my wife and I took a PLUS loan.

So in August, we borrowed 15K.
In September, October, and November, I paid back $1,000/month.
In December I didn't make a payment (none required and needed cash for something else).
In January I paid $500.

I'm wondering how best to proceed at this point. My original plan was to pay $1,000/month. However, in August we will need to take a second loan to cover her senior year.

Is it better to keep making large payments on the current loan and take out the new loan as needed? Or is it better to make smaller payments on the existing loan and stash away more in savings so that we don't need to borrow as much for next year? Or will it end up about the same?

The interest rate on the loan is considerably higher than the interest we would earn on the savings so I'm thinking that mathematically, it makes more sense to keep paying down the current loan.

[Jluke]

Are you going to borrow 15k again in August for the senior year?

I am guessing that the balance on the current loan is now around 12k.

I think I would prefer to borrow less money on a new loan, but still put something towards the current loan - $500 to loan, $500 to cash???

so by August you might end up with:

Current loan - 6-7k balance if you do 1k/month
New Loan - 15k

current loan - 9k balance if you do $500/month
new loan - 12k

so in those examples you're at 21k, but the second option might actually lead to less interest??


that's my attempt to advise the site's most respected member

[disneysteve]

so in those examples you're at 21k, but the second option might actually lead to less interest??

Right. It looks like the total owed would be about the same either way. But paying $1,000/month instead of $500/month for the next 6 months will save me more interest between now and then. Of course, the next loan will be larger that way so there will be more interest on that one.

I haven't actually plugged it in to any kind of loan calculator but my impression is that in the grand scheme of things, it won't make a huge difference either way.

[bigdaddybus]

Is getting a new loan each year the norm for college financing?

I kinda assumed it would be more like a line of credit, say for $50,000 and you could use 12K in yr 1, 15K in yr 2, .....etc.

I have 2 in high school still and I ask as I just don't know. I have told my kids I will fund 50K to each of them. The rest needs loaned.

[disneysteve]

Is getting a new loan each year the norm for college financing?

I kinda assumed it would be more like a line of credit, say for $50,000 and you could use 12K in yr 1, 15K in yr 2, .....etc.

I have 2 in high school still and I ask as I just don't know. I have told my kids I will fund 50K to each of them. The rest needs loaned.

If you open a line of credit, like a HELOC, then yes, it would work that way.
We are using traditional student loans. Stafford loans for DD and PLUS loans for us.

[LivingAlmostLarge]

Is this your responsibility or will your daughter assume the loan after graduating?

[creditcardfree]

PLUS loans are in the parent's names and legally parental responsibility. Stafford loans are in the student's name and legal the student responsibility. Obviously, a parent and student could make agreements differently, but legally that is how it would work if the government needed to go after for non payment.

[disneysteve]

Is this your responsibility or will your daughter assume the loan after graduating?

Legally, it's ours. I have spoken to DD about assisting with the payments once she is gainfully employed and pays off her own loans. We haven't worked out any details because we need to wait and see where she ends up employment-wise. I just wanted to plant that idea in her head so that when I bring the topic up again in the future, it's not a surprise.

All of that said, if we continue to pay $1,000/month, it's going to be pretty much paid off by the time she would be able to help out.

[Like2Plan]

Our daughter is a junior in college. We were able to fully pay for years 1 and 2 from savings (along with a generous scholarship). For year 3, our daughter took a Stafford loan and my wife and I took a PLUS loan.

So in August, we borrowed 15K.
In September, October, and November, I paid back $1,000/month.
In December I didn't make a payment (none required and needed cash for something else).
In January I paid $500.

I'm wondering how best to proceed at this point. My original plan was to pay $1,000/month. However, in August we will need to take a second loan to cover her senior year.

Is it better to keep making large payments on the current loan and take out the new loan as needed? Or is it better to make smaller payments on the existing loan and stash away more in savings so that we don't need to borrow as much for next year? Or will it end up about the same?

The interest rate on the loan is considerably higher than the interest we would earn on the savings so I'm thinking that mathematically, it makes more sense to keep paying down the current loan.

I just saw this, so I have a couple of questions.

Would you take a loan for 15K in Aug? But, if you were paying cash --would you pay 7.5K in Aug and 7.5K in Dec?

The question I had in another thread was about the loan origination fee for the new loan (which you would have to pay whether you paid off the loan early or not).

I'm assuming that this is just a short term cash flow problem. To me it seems a shame to be paying any interest for a loan term that will last 12-24 months at most (I'm assuming).

What would it look like if you got a 0% for 24 month credit card--then put all your normal household expenses on new 0% CC and put all your cash towards the tuition--with priority towards paying cash for the last year and then remaining loan?

[bjl584]

I'd continue paying as much as possible now.
The less debt that exists upon graduation the better, especially since the math is telling you to pay the loan versus invest the money.

[disneysteve]

If we stash money in savings (earning 1%) to pay tuition in August, we could avoid borrowing $7,500 which would save us the $320 origination fee on that loan. But in the process, we'd be paying 6.31% interest on the $11,500 we already owe. I think that works out to just about the same amount so it's pretty much a wash.

I think because of the short time frame involved, it really won't matter which way we do it. The difference over the life of the loan would be minimal one way or the other.

[Jluke]

I'd sell taxable investments to cover her senior year. avoid that $320 fee.

assuming you pay one semester at a time, you could probably time your sell so one is for tax year 2017 and the other for tax year 2018.

just a thought; and obviously ignoring that you can make more in taxable investments...

2 loans out of 8 semesters is a great accomplishment.

[disneysteve]

2 loans out of 8 semesters is a great accomplishment.

Yep. We were able to cover 100% of years 1 and 2 from the 529. We covered a bit of year 3 from that as well but needed a loan for the difference. And will need something for year 4 partly due to cash flow. No matter what, the loans should be paid off within a year of graduation.

DD also took out a $7,500 Stafford loan this year and will again for next year. She already pays $400/month toward those so at graduation, she'll only owe about $7,000 which will be gone in 18 months or less assuming she finds herself a job.

[Ruthdavis]

Weigh your options

Does the loan charge for high interest rates? If you can make smaller payments and save for the next year, it will benefit you from not borrowing anymore. However, if the loan is charging you so much with high interests, I suggest to prioritize paying it while save a little on your savings for the meantime if only that is possible.