25 May 2009

Undergraduate student loan options

Which are your best options (or order of lower rates and better terms):

(1) Private interest free organizations (i.e., Hebrew Free Loan Association) - though they're rare, you should investigate before moving on. This is like investigating for scholarships and grants - it comes first. The organization paying the interest for you is essentially giving you a scholarship for the interest, and that can be a lot over time.

(2) Federal Perkins Loans - currently 5% (great rate!) but limited to those who demonstrate extreme financial need and only so much funding is available for each school in a given year.(3) Federal Direct loans for students (i.e., Stafford loans)____
  • Subsidized (the government pays the interest for you while you're in school)
  • Unsubsidized (interest starts accumulating immediately)
Direct Stafford loans offer low interest rates relative to private or PLUS loans, but you're limited in how much you can take. It depends on:
________
  • your year in school (i.e., freshman, junior, graduate student, etc),
  • your school's offer (which may be less than the maximum - it's based on your need derived from your FAFSA).
  • whether you're dependent or independent (which can increase unsub'd amount available)
(4) Parent PLUS (or Graduate PLUS) direct loans - fixed interest rate, relatively favorable policies/terms/fees compared with most private loans. However, higher interest rate relative to Stafford and Perkins loans.

(5) Private loans (a.k.a. Alternative laons) - Citiassist,
Sallie Mae Education Trust, Wells Fargo, Chase, Ed America, U.S. Bank, etc.
  • Shorter repayment term (standard 20 years)
  • Higher, variable interest rates (LIBOR or Prime + X%)
  • Less favorable terms for borrowers often (i.e., prepayment penalties, origination fees, etc)
  • Not available for everyone (depends on credit of borrower and possibly a co-signer)
Assuming you need more money than is offered by the Stafford Direct loans, you have to decide whether to take a Parent (or Graduate) Plus or Private / Alternative loan. The general consensus is to take the Plus loan.
Finaid.org's advice:
Of course, borrowers who are eligible for federal education loans should exhaust their federal loan eligibility before resorting to private student loans, as the federal loans are generally less expensive. (There are a few exceptions where private student loans offered by nonprofit state loan agencies are less expensive, but private student loans offered by commercial lenders are generally much more expensive than federal loans. For example, the average interest rate on private student loans in 2007 was about 2% higher than the Federal PLUS loan interest rate and about 4% higher than the Federal Stafford loan interest rate.
I was uncertain whether Parent Plus loans would always be a better option than private loans. My private law school loans offered very low interest rates, but these are not available to undergrads. The differences are in the interest rate and loan terms/policies/fees.

The differences between Plus loans and private loans come down to interest rates and loan fees/terms.
  • Plus loans are fixed: this year they are 8%.
  • Private loans are mostly variable: LIBOR (the rate banks charge to lend each other money) plus 3-15% depending on the lender and depending on your credit, whether you have a cosigner, and other factors. They may also be based on the Prime rate (benchmark in setting home equity lines of credit and credit card rates) minus 0.50 to plus 5%.
To decide if a private loan would be better than a Plus loan, you need to know:
(1) What the interest rate is likely to be over the life of the private loan (i.e., a prediction for the average LIBOR rate):
So it seems that over the past 10 years LIBOR has varied between 0.38% and almost 7% (which is added to your loan interest amount, i.e., LIBOR + 6% = 6.5% today, but it was 13% in 2000). LIBOR can be even higher, see the 1989 - 2009 chart where it went over 9%.

So the average LIBOR rate is over 3% in the past 10 or 20 years. You'd be repaying your variable loan over 10-30 years depending on the terms, so odds are that LIBOR will average around 3%, so your rate will be 3% + [your lender's additional amount].

If your lender is offering a rate below 4% then a variable loan has reasonable odds of beating a Plus loan, though certainly no guarantee. But if it's LIBOR + 5% or higher, then the private loan is probably going to cost you more than the Plus loan.

(2) Beyond simply the interest rate, other fees and terms in a loan can impact the total cost substantially.
  • Plus loans have very standardized deferment policies, repayment terms, and are government regulated to afford you some protections.
  • Private loans are much more varied - you might get better terms, you probably won't. There might be origination fees, pre-payment fees, hefty late fees, and others which the Plus loans do not have.
Comparisons:
Take Sallie Mae for example: their "Sallie Mae Smart Option Student Loan" offers rates of LIBOR plus 5.75% to 12.5%. Today's historically low LIBOR would mean you'd get an optimal rate of 6.25%, but on average that would be 8.75-15.5% ... substantially worse than the Plus loan.

Chase offers LIBOR + 3.65% to 12.25%. If you got their best rate, LIBOR + 3.65%, you might consider accepting their private loan over a Plus loan. However, the terms are much less favorable for you as a borrower:
Maximum 20 year repayment period (vs. Plus offering 30 years)
You may be required to pay origination or repayment fees depending on your creditworthiness.

CitiAssist offers Prime -0.50 to +4.5% ... an analysis of various lenders offering Prime -0.5 to +4.5% may give different results;

But for now I'd recommend accepting a Plus loan over a private (or alternative) loan unless you can get a rate lower than 4% ... even if you can get <4%,>

Winner: PLUS loans

*if your parents are denied a PLUS loan, you become eligible for additional Stafford (subsidized and unsubsidized) loans, so don't immediately seek out a private loan, go to your fin aid department.

** if your in a different position from when you filed your FAFSA, file a changed circumstances petition with your Fin Aid department ASAP, you may be eligible for Perkins loans, more Stafford loans, or a changed budget increasing your maximum loan eligibility.

3 comments:

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pay student loans said...

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Anonymous said...

Thanks...best info I've found yet about comparing the different types of loans