In case you didn’t know it – college is expensive. Excruciatingly expensive. The average cost for an in-state public college is nearly $30,000 a year. Since most students no longer graduate in four years, but closer to six years in a public school, your overall price tag could range from $120,000 - $180,000.
If your child attends an out-of-state public college, the annual cost averages about $45,000 a year. Depending on whether they are lucky enough to graduate in four years or closer to the norm of six years, you’re looking at an overall price tag somewhere between $180,000 - $270,000. Ouch!
If your child wants to attend a private college, the average annual cost is around $58,000. However, there is a better chance your child will end up graduating in four years compared to the public-school options. But still, your overall price tag is likely to be around $232,000. These high costs mean that many families will have to consider loans to help pay for college, whether you like it or not. But it's not easy to decide which loans to use because there is no such thing as a "best" loan. You will need to judge your loan options on both costs (interest rates and origination fees) as well as the features (such as loan forgiveness or extensions for repayments). When it comes to researching your loan options, I break them down into two categories, which then gets broken down by a specific order. My approach looks like this: 1) Traditional loan options
With this framework in mind, let's dig in a little deeper. Federal loans (Direct loans and Parent Plus loans) Direct Loans (subsidized and unsubsidized) Direct loans will be offered to the student if they complete the FAFSA application every school year. It does not matter how much income, assets, or debt the family has. These are issued directly from the U.S. Department of Education to the student. So this will be a debt in the student’s name. But it requires no credit check and typically will be the lowest interest rate loan for which they can qualify. I like to describe the Direct Loans in terms of tiers because there are two different ceiling limits. Your FAFSA calculated NEED will dictate whether the Direct loan is subsidized or unsubsidized. Refer to the chart below: 
With the Subsidized Direct Loan, the Federal government subsidizes the loan by paying your interest while you’re enrolled in college at least half-time. And you don’t have to start making payments until six months after graduation or fall below half-time enrollment. Whereas the Unsubsidized Direct Loan’s interest is accumulating while you’re enrolled in college. Ideally you should make the monthly interest payments as they accrue. You do have an option to defer the interest payments until you graduate; however, the deferred interest will be capitalized, leaving you to pay the extra debt of interest on top of interest. Since these loans must be re-applied to every year, the interest rate on the Direct Loans (subsidized or unsubsidized) is reset every year by the Federal government. But whatever you borrowed in a particular year, that particular rate will remain the same throughout the life of the loan. The interest rate is set at 2.05 percentage points above the 10-year Treasury yield; however the maximum rate is capped at 8.25%. For the 2024-2025 academic year, the interest rate is 6.53%. The origination fee is 1.057%. Pros to the Direct loans + Subsidized: the Federal government pays your interest while you’re enrolled at least half time and up to six months after you graduate + Unsubsidized: like the subsidized version, repayment of principal begins six months after you graduate + No credit check on the student + Interest rates are typically lower than other loan options available to a student + repayment window is 10 years, but you might be able to extend it if your financial circumstances warrant it + loan forgives plans are in place for teachers, government employees, work for a nonprofit, work as a medical professional, become disabled, income-based repayment plans after 20/25 years of on time payments, death of the borrower + easy to set up loan consolidation Cons to the Direct loans - - Unsubsidized: interest accrues while enrolled in college - - Relatively low borrowing limits Parent Loans for Undergraduate Students (PLUS) Somewhat similar to the Direct loans offered to a student after completing a FAFSA, parents will be offered a Parent PLUS loan by the U.S. Department of Education. Parents will be allowed to borrow enough to cover the overall estimated cost of attendance (including incidentals built into the school’s budget, but not an actual charge from the school) minus any financial aid awards and loans taken by the student. PLUS Loan approvals aren’t based on a standard credit check. The biggest difference is they don't evaluate your debt-to-income ratio - so parents can qualify by simply having marginal credit. If you placed a freeze on your credit file, you’ll need to lift the freeze at each credit bureau before you apply. If you have poor credit, you might still qualify if you meet additional requirements. Most parents do. Things that make it harder to qualify for a PLUS loan are 1) accounts with a total outstanding balance greater than $2,085 more than 90 days delinquent, 2) a default within five years, 3) a bankruptcy within five years, 3) foreclosure within five years, 4) wage garnishment within five years, or 5) a tax lien within five years. Parent PLUS Loan interest rates are always 2.55% higher than the rates for student Direct Loans. However the maximum rate is capped at 10.5%. For the 2024-25 school year, the parent PLUS Loan rate is 9.08%. The loan origination fee is 4.228% PLUS loans work similarly to the Unsubsidized Direct loans for students. Interest rates will be updated every year, but whatever you borrowed in a particular year, that particular rate will remain the same throughout the life of the loan. Parent PLUS loans begin their repayment 60 days after final disbursement for the academic year. However, you can request a deferment up to six months after the student graduates (or falls below half-time enrollment). If you do opt to defer, I still recommend paying the interest payments while the student is enrolled. Otherwise, you are capitalizing the debt. Pros to the PLUS loans + parents only need marginally good credit + parents can borrow up to the total cost of attendance minus other financial aid + parents can defer payments while the student is enrolled up to six months after graduation + repayment window is 10 years, but might be able to extend it if your financial circumstances warrant it + loan forgives plans are in place for income-based repayment plans after 25 years of on time payments, death of the student or borrower, full and permanent disability of the borrower, Cons to the PLUS loans - - parents are borrowing the money in their name, therefore they are responsible for paying it back - - interest is accruing while the student is enrolled - - interest on the PLUS loan will always be 2.55% higher than Direct loans - - high origination charge - - arguably too easy to be approved; without the debt-to-income criteria, it's way too easy to get in over your head and end up with an unpayable amount of debt - - many schools list PLUS loans as a form of financial aid on their offer letters which makes it deceiving State-based Non-Profit Organization Loans In addition to grants and merit-scholarships, some States administer student loan programs (23 of them in fact). Many families don't realize there are state-based loan programs provided by a state agency, a state authority, or a not-for-profit organization that is authorized, established, or chartered under state law or otherwise approved by a state. Government-backed loans usually make the most sense for college students because the terms and conditions tend to be more manageable than loans issued by banks, credit unions and other private lenders. In many cases, terms and qualifying conditions are similar to Federal Direct Loans. State resources are not quite as deep as those at the Dept. of Education, so interest rates and program charges might not be as favorable. Therefore I generally advise my students to take out their Federal Direct loans first and then we'll compare the State loan options against other loan types to help fund the leftover cost. Programs vary in scope and size, so consult your State’s Department of Post Secondary Education for details about state-specific aid that is available for you. Looking to find who offers the lowest interest rate should be a no-brainer. However, you should compare features of the loans as well. For example, Louisiana’s LelaCHOICE loan never capitalizes unpaid interest and the Missouri Family Education Loan Program doesn’t charge interest at all. When you compare loan options, look at all the terms in addition to the cost of the loan. Even if your State does not offer a student loan program, there are a handful of state programs that are willing to lend nationally:
Non-Profit Org loans Admittedly I didn't realize there were so many non-profit organizations who offer loans to students and/or parents to help pay for college. In addition to the previously mentioned state-based non-profits, there are some non-profits with no ties to a state government. These non-profit organizations are usually family funded or supported by donations. Some have religious qualifications, others may have geographical qualifications, and some may require you to have a low Federal SAI. Either way, I generally find these loans to be very competitive in cost. They probably won't have as many flexible repayment features as a Federal loan, but they also typically don't have any small-print "gotcha" clauses either. Eligibility and loan ceilings will vary amongst all the programs. Generally speaking these loans have lower ceiling limits though. Processing time from application to approval to disbursement may take a little longer than for-profit private lenders as well. I suggest doing your research early. Here are some examples of non-profit organization providers of loans for college:
University/Institutional Loans Not all colleges and universities offer institutional loans, but I am seeing it more often nowadays than I did 20 years ago. I definitely recommend doing your research when you see a school offer an institutional loan. Some of these institutional loans are really just regular loans from the private sector, but rebranded for the school. Other institutional loans may be funded by a third-party foundation. In some cases the institutional loan may be funded by a special endowment held by the university and actually managed by the university. Just because an institutional loan comes from the university doesn't automatically mean it's a better loan. I've seen some institutional loans have relatively low ceiling caps and I've seen others that let you borrow up to the cost of attendance. If the institutional loan is from an endowment or third-party foundation, I find their interest rates are often very competitive. Regardless, I recommend finding out if the loan is being serviced by an outside party. If so, do your due diligence about that company. Obviously you should always compare the specific interest rates, fees, and repayment terms to other loan options. I haven't seen any institutional loans that offer income-based repayment, but sometimes I do see they offer favorable terms such as deferment, forbearance, forgiveness, or even discharge. Private Loans Back when I went to college, many banks and credit unions offered loans to families to help pay for college. Nowadays, there aren't many left. Most banks have sold their student loans to other private companies such as Navient or Sallie Mae (both of whom used to function as the same legal entity). If you do an internet search for "best private loans for college", the results you'll mostly likely see will be venture-funded companies or tech companies. Typically private loans for college will be made in the student’s name; however, they are credit-based. Therefore, parents/grandparents/whoever usually are needed to co-sign these loans in order to be approved. Therefore the loan’s terms will be based on the co-borrower’s ability to repay the loan. The final terms of a loan will range from decent to awful, so be careful. Some lenders may even let the parents/grandparents/whoever fall off as a co-borrower after a certain number of payments are made by the student. However, that feature may cost more in terms of the interest rate. Generally every university will provide a list of preferred lenders that they work with. In exchange, those lenders tend to provide pretty favorable terms. However, if the borrower (or co-borrower) has really good credit, they may be able to find something better outside of the university’s list. Again, a quick internet search will provide you many companies to consider. Pros to Private loans + like a PLUS loan, you could be approved to borrow up to the total cost of attendance minus other financial aid + if you have really good credit, you may get a better rate than the PLUS loan Cons to Private loans - - if a parent/grandparent/whoever co-signs as a borrower, they are still on the hook to repay the loan if the student is unable - - if your credit isn’t good, the interest rate may be higher than other loan options - - not eligible for student loan forgiveness - - might not be discharged in the event of a student’s death - - READ THE FINE PRINT! Generally these types of loans offer the least amount of protection to the consumer. Home Equity Loans/Mortgage Loans If you own a home and have equity, a home equity loan or mortgage refinance could provide additional funds for college at a lower interest rate than you might get from a Parent PLUS Loan or other private loans. The repayment period tends to be longer, which could mean lower monthly payments, which could be easier on your cash flow. However, if you take a home equity loan or refinance your mortgage, you are putting your home at risk in the event you’re unable to pay. Pros to Home Equity Loans/Mortgage Loans + if you have good credit, you potentially could get a better interest rate than a private loan or a PLUS loan + longer repayment periods generally mean a smaller monthly payment Cons to Home Equity Loans/Mortgage Loans - - you risk losing your home if you’re unable to pay off the loan or refinanced mortgage - - if your credit isn’t good, the interest rate may be higher than a PLUS loan Life Insurance Loans If you set up a cash-value life insurance policy, such as a whole life or Indexed Universal life, a portion of your premium goes towards the death benefit and another portion is put into a cash-value account. If you have built up the cash value in your life insurance (similar to how you build up the cash value of your 401(k) or other retirement plan), you can take out a policy loan against the cash value. Depending on the terms of your policy, the interest rate may be fixed or variable. Often times, the loans can be set up as net neutral -meaning the interest rate on the loan will match the interest rate on your growth. The end result essentially is an interest free loan. Life insurance loans have numerous advantages to the other loans listed. For one, you don’t have to pay back the loan at any given time. You get to choose when and how much you want to pay back, if any at all. When you die, any unpaid loan amount plus accumulated interest will be paid by your death benefit before being dispersed to the beneficiary. Also, when you take a loan from your permanent life insurance policy, the amount is not reducing the potential investment growth. So if you have $200,000 in cash value and take a $40,000 policy loan, your cash value is not reduced to $160,000. Rather, it still grows at the $200,000 amount. This is because the loan is with the insurance company and your cash value is used as collateral. Another advantage is any money you take as a policy loan from your life insurance policy is not taxed, nor does it impact the financial aid calculations. Pros to Life Insurance Loans + flexible use – loans can be used for any purpose, not just limited to college + flexible repayment – loans can be repaid at whatever pace and amount you choose. Upon death, any unpaid loan amount will be paid by your death benefit. Cons to Life Insurance Loans - - requires you to plan early because the fees of life insurance are front loaded, it can take about 10 years for the cash value accumulation to be competitive to other options Retirement Plan Loans Many retirement plans allow you to borrow up to 50% of your retirement account balance up to a limit of $50,000. Typically these loans only offer a five-year repayment plan. Being the shortest repayment window means this type of loan probably the highest monthly payment. Worst of all, you are also losing any potential investment growth on the money you pulled out. Sometimes the interest you pay goes back to your plan provider, not your own account. So you are actually paying interest on your own money to someone else. Therefore, this option can end up being a triple whammy against you. Generally this option is never advised. Pros to Retirement Plan Loans + you may be able to borrow up to $50,000 towards college costs + if you’re a business owner, you may have additional creative opportunities because you’re in charge of the business’ retirement plan. Consult your financial advisor to learn more about your options. Cons to Retirement Plan Loans - - you lose the potential investment growth on any money you pulled out - - you are paying someone else interest to access your own money - - typically there is only a five-year repayment window What’s Next? Hopefully this overview has been helpful. Obviously I'm not providing you any specific advice as to which way to go. But as you can see, you have quite a few loan options when it comes to helping pay for college. I recommend you do your due diligence and research all your options so you make the most informed choice possible. If you haven’t yet put together a holistic plan on how to pay college, one that involves the options for saving ahead and how to maximize financial aid (free money), contact me today and let’s see how I can help. Comments are closed.
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