Borrowing for College

Financial Planning For College in US All About College Financial Planning
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Transcript

This is logical draw again with lesson number 16. Borrowing for college. Recall that in the previous lesson we said that the gap and EFC amount the amount to be paid by the family in order to cover college expenses is generally funded from college 529 family savings or loans. If private savings and 509 funds are not available, the entire amount to be paid by the family can be sourced through loans. There are so many types of loans each with different terms that it is best to prioritize borrowing using the layer strategy. That is you exhaust all loan amounts available at a level before Moving up one layer.

The first layer is the subsidized Stafford Loan. Here the government pays the interest while you're in school during grace periods and during any deferment periods. Clearly, you must maximize your subsidized loan because it amounts to free money. Assuming you qualify based on income, you could get $23,000 in subsidized loans over six years, which is typically the length of time that college graduates take to graduate from college. The interest rate is a fixed 4.45%. Next, you would stack a Federal Direct unsubsidized loan on top.

These loans are such that you are responsible for interest payments, when in school, you could get additional $8,000 of unsubsidized loans for carrier maximum of 31,000. The interest rate is still 4.45%. Next up, you would stack a Perkins Loan if you can qualify. This is based on need. But the catch here is that the government does not define what need is. It is the college that you're attending which defines it.

If your borrowing needs are not still met a Perkins loan is a great choice, the interest rate is 5%, and the maximum carrier cap is $37,500. Next, stack a plus load taken by parents if they don't have bad credit histories. A major issue is that the loan fees are steep, almost 4.3%. The interest rate of course is fixed for the life of the loan. If a parents PLUS loan is denied, this is not always Bad news, the student can then apply for a direct unsubsidized loan where the limits are relaxed to 57,500. This is a big benefit because the interest rates on an unsubsidized loan are just 4.45%.

Significantly lower than the 7% for a PLUS loan. Also, there are no loan fees. So you may want to hope that your parents PLUS loan is denied. When you're done with all of these different federal loans, then and only then should you think about private bank loans. private bank loans generally have higher interest rates and the loan terms are not quite as friendly as the federal laws. An important thing to remember is that there are a lot of finance Eight myths and don't fall for any of them.

You must spend a little bit of time to watch these four videos which summarize the federal student aid program. They're excellent sources of information. So the key takeaways from this lesson are that if you must borrow, a loan layering strategy will help lower borrowing costs. Remember, the lower your cost of education, the higher is your return on investment. If you have any questions, please let us know. Thank you.

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