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3. Loans

Loans are the last priority of money for education. Use loans wisely and pay them off quickly. Remember that our leaders have counseled that it is OK to go into debt for two reasons, a modest home and an education, but use the loans wisely. Even though loans are the last priority for financing education, I consider it better for your children to go into debt to get an education than to not get an education at all. In addition, is will likely be easier for your children to pay off their loans with their increased earnings that come from higher education.  I consider the cost of education an investment in my children’s future.

Loans are the last priority of money for education.  Loans are debt. Use loans wisely and pay them off quickly. There are five key questions you should ask about any loan:

  1. Who pays the interest on the loan during school? The borrower or the government?
  2. When do you have to start repaying the loan? Immediately or after graduation?
  3. Who takes out the loan? The student or the parents?
  4. Is the interest rate fixed or variable? If it is variable, what is the highest rate you would potentially pay over the life of the loan?
  5. What are the loan fees?  Are they negotiable or not?

There are four main types of loans.  The best type of loans is subsidized loans.  This is where someone else pays the interest while you are in school.  Generally, these loans also have lower interest rates as well.  The next best loan is unsubsidized loans, but where the interest rates are lower.  The third and fourth are private or alternative loans and credit cards.  These are the least recommended type of loans because of their higher cost.

Subsidized Loans

Subsidized loans are loans for which the interest payments are made by the sponsoring institution until the student graduates or leaves school.

Subsidized Federal Loans:  These are loans subsidized by the Federal Government for which the government pays the interest on the loans while the student is in college.

Federal Stafford Loans: A Stafford loan is a low-interest loan that you begin to repay six months after you graduate, drop below half-time enrollment and stay below for a full six months--regardless of whether or not you have graduated. Stafford loans may either be subsidized or unsubsidized. If you have a subsidized Stafford loan, the government pays the interest on the loan while you are in school and during the six month grace period which follows.  A Stafford loan is signed in the student’s name, and the student is responsible for repayment. Annual loan limits are based on class standing and range from $3,500-$5,500 for undergraduate students and $8,500 for graduate students in 2007.

Stafford loans since fall 2006 have a fixed annual percentage rate of 6.8 percent. If you are an independent student  (the definition of an independent student can be found at http://www.fafsa.com/independent.htm but includes things such as age, marital status, dependents, etc.)  you may be eligible for even more loan money. However, if you must use loans to help cover your educational expenses, I encourage you to borrow only the amount you need and not the amount that you may be eligible to receive.

Subsidized University Loans: The college or university you attend may have its own institutional short-term loan program. Loans available to BYU students include short-term loans, which are used to cover tuition. These loans must be repaid the same semester they are borrowed.  They are in the student’s name, charge no interest, but have a $20 processing fee.

Students who are enrolled in BYU’s law school can take out a Woolley Law loan, and graduate students in the Marriott School of Management can take out an MSM loan. These are university sponsored, long-term, subsidized loans are similar to the subsidized Stafford loans in that interest does not accrue on the loan until you begin to repay the loan six months after you graduate (MSM) or nine months after you graduate (Woolley). MSM and Woolley loans are in the student’s name and require a cosigner.

Unsubsidized Loans

Unsubsidized Loans: Unsubsidized loans are loans where borrowers are responsible for the paying the interest while they are in school.

Unsubsidized Federal Stafford Loans: A Stafford loan is a low-interest loan that students must begin to repay six months after they drop below half-time enrollment and stay below for a full six months--regardless of whether or not they have graduated. With unsubsidized Stafford loans, interest grows while students are in school. Borrowers may either choose to pay the interest while in school, or let it accumulate and be added to the original amount borrowed. An Unsubsidized Stafford loan is signed in the student's name, and the student is responsible for repayment. Annual loan limits are based on class standing and range up to $5,000 for undergraduate students and $12,000 for graduate students in 2007.

PLUS Loans (Parental Loans for Undergraduate Students): This loan is available to the parents of undergraduate students to help with school-related expenses. In this type of loan, the parent is the borrower, the parent receives the loan funds, and the parent is responsible for repayment. Interest rates on the PLUS loan is fixed at 8.5 percent. The parent can borrow the amount of the cost of attendance minus any financial aid the student is receiving. Repayment begins sixty days after the loan is fully disbursed.

Grad PLUS Loans:  The Grad PLUS loan is available to graduate students as a suupplement to the Stafford Loan. The Grad PLUS loan is disbursed based on credit worthiness and does not require a cosigner. This loan is especially helpful for expensive graduate programs, because students can borrow any amount up to the full cost of attendance less other financial aid received, and the 8.5% fixed interest rate makes it less expensive than private or alternative loans.

As a general rule, federal loans are generally less expensive than private, non-federal loans and a better choice, if, borrowing is necessary, as federal loans enjoy some tax-payer subsidy.

Consolidation of federal loans.  Students with older variable interest rate Stafford Loans and/or Direct Student Loans may consolidate them to create a new “consolidation loan.” However, before doing so they should carefully evaluate all the ramifications.  Consolidating loans with your spouse is not recommended. No benefits are gained and loan deferment or forgiveness may be lost.  Consolidation loan interest rates are the weighted average of the loans consolidated. Talk with your loan servicer if you have further questions. 

Federal grant and loan recipients must be: a citizen, permanent resident, or eligible non-citizen with a valid social security number; have a high school diploma, (GED), or have passed an approved "ability to benefit" test; be admitted as a regular student in an eligible degree or certificate-seeking program; register or have registered for Selective Service for males; complete the Free Application for Federal Student Aid (FAFSA); be making satisfactory academic progress (SAP); and not be in default on a federal student loan or grant.
Additional requirements for Pell and Stafford loans include:  for Pell Grant Eligibility to not already have a baccalaureate degree, and for Stafford Loan Eligibility, not already have a baccalaureate degree, unless you are pursuing prerequisites for admission to a graduate program, then undergraduate Stafford Loan amount may be awarded for up to one year.

Private Alternative Loans

Avoid private alternative loans (also referred to as alternative loans) if you can.  They are much more expensive than federal unsubsidized loans.  Currently, many of these loans have a 14.5% variable interest rate, which means the rate can rise. Private alternative loans have higher interest rates and may have up-front or back-end fees. Interest starts immediately, and accrues to the loan.  If you did not pay the 14.5% annual interest on the loan while you studies for five years, the loan amount you borrowed would double in size.  You do not have to begin repayment until you graduate, but the interest accrues while you are in school. These loans are based on credit worthiness and may require a cosigner. Read the fine print very carefully before signing the dotted line for this type of loan.

Credit Cards

Although you may be tempted to use credit card funds to finance your education, credit cards are the most expensive way to borrow money for your education and I strongly discourage you from using them to cover tuition or other school expenses. Credit cards give you the least flexibility and the highest interest rates (these rates are generally variable) and interest begins immediately. Credit cards charge late fees and over-limit fees, and interest rates increase if you are late making your payment or if you go over your credit limit. You are required to make monthly payments even while you are in school. This is the worst and most expensive way to finance schooling and is most often the result of poor planning!

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