A Federal Student Loan May Be Right For You
Jun 8th, 2009 @ 2:19 PM by Alden Smith
If you’re one of the many people who took a major hit during the stock market plunge and saw your children’s college account disappear along with most of your life savings, you’re not alone. The problem is, if you’re reaching retirement age, you don’t have the time to build it back up. Now is the time that many parents must put a contingency plan in to place.
If you have enough money left for the first year’s tuition, but not in the years after that, you might be thinking about pulling the cash out of what is left in worrying about further tuition down the road. Lynn O’Shaughnessy is an author of a book entitled “The College Solution”. In her book she warns against cashing out, and her reasoning is simple. You may be able to borrow a portion of that tuition, but judges are good that with today’s cost of schooling, you might find yourself in a position where you need to go to private lenders to finish paying for the remainder. If this happens, expect interest rates to be high.
O’Shaughnessy advises borrowing a portion of the money each year to cover tuition. Doing this insures that you still have some money in the account, and are giving the stock market the opportunity to rebound.
Federal loans are ideal and there are four different types available to almost everyone. A subsidized Stafford loan is low-cost, and guaranteed by the government. It is meant for students in need. Unsubsidized Stafford loans are available to all students. PLUS loans are also guaranteed, and available to parents.
Your fourth option is a private or signature loan. The loans you should avoid unless it is absolutely necessary. The longer not guaranteed by the government, and you can see interest rates as high as 20%.
That leaves us with the Stafford an PLUS loans.Subsidized Stafford loans are given to students in need. Typically they have a variable interest rate. According to The LA Times, for the school year 2009-10, they currently stand at 5.6% fixed rate. The rate should be 4.5% next year to two financial aid legislation that passed last year. In 2011, it is planned to drop from 3.4%.
Subsidized Stafford loans are very attractive for the student because the government pays the interest while the student is attending college this means that when the student graduates in 2013, the amount will be the same as it was in the freshman year. The amount owed of the Stafford subsidized loan depends on how close to graduating the student is. In other words, a senior could borrow more money from the Stafford loan than a freshman.
Each loan has its advantages and limitations. O’Shaughnessy says that she would consider a home-equity line of credit before considering a private loan, because at this time it is for a cheaper in terms of interest than even the PLUS loan. Because home-equity loans are usually verbal rate loans, you may see a change in your payments if interest rates rise. Remember, too, that your home would be on the line if you become unable to pay back the loan.