student life

The best ways to borrow for college education

Written by Nigel Simpkins

Paying for a college education is seldom an easy task for most people and it is not uncommon to see them use several means to make ends meet. While some parents have some savings set aside for tuition fees, some don’t have enough money to take their children through college. The tuition costs have risen over the years and it has led to high student debt among young graduates. Considering this factor, you probably need to find the best way to fund the college education.

When you hear about aging parents who can barely pay for school since they are still saddled with student debts, it is easy to see why you need to be cautious. While this scenario has happened in the past, it can still happen to anyone now. But a college education is a good investment for your children and if you want the best for them, you want them to go to college. As such, your best option is to be wise when borrowing and only use sources that offer you great rates.  

Make the federal loans a priority

Federal loans are characterized by a low-interest rate and flexible payment terms. Besides, all students are eligible since it doesn’t consider credit reports and income history. Usually, the students pay similar interest rates but if you are a low-income student, the loan will not accrue any interest immediately, but you will be given a six-month grace period after graduation. These loans also offer a reasonable level of debtor protection if a catastrophe strikes. For instance, if the borrower becomes disabled or suffers death, the loan is canceled.  

Unlike the direct federal loans, the Perkins loans are still federal loans, but you get the money through colleges and it is based on financial needs. While they have a fixed interest rate of about 5%, the government will settle all the accrued interest when you are schooling. After you graduate, you are given nine months before you start paying the debt and you have ten years to clear everything. 

If you are not regarded as a needy student, you can qualify for direct unsubsidized loans which are issued to undergraduates. Unlike the option above, the government will not pay the interest rates when you are still studying. 

Parent plus loans

While other federal loans are designed for students, the parent plus loan is given to parents. If you choose to take this loan, you can get an amount that is sufficient to cover all the costs of attending college except the amount you receive from sources providing your child with financial aid. Before jumping on this option, first, consider if you can afford to pay fees in the selected school. In most cases, if you have to borrow more than standard federal loans offer you, it is likely your choice of school is wrong. 

The loan comes with fixed interest and you can still be approved even when your scores are not stellar. Nevertheless, you could miss the opportunity if your credit history is characterized by foreclosures and bankruptcy in the last five years. At the same time, having a debt that has been delinquent for more than three months can lead to disqualification. If a parent is denied the PLUS loan due to bad credit history, the student depending on they can get an additional amount of unsubsidized student loans.

Consider alternative loans

There is no doubt that federal loans offer favorable loans for student loans. Nevertheless, some alternative sources may be appropriate in some circumstances. 

Almost all the states provide their students with loans. While some are issued by state agencies with a backing of state bonds, others are from private providers, but the state dictates the terms. Most of the times, residents are eligible but you may also benefit when you are a nonresident enrolled in a college in the state. Some of these loans from come with better rates and repayment terms that you can get from commercial financiers, but you should weigh the benefits to make a decision. 

HELOCs are known to have low-interest rates which make it a better option for student loan than borrowing from some expensive private sources. To make things better, interest on HELOCs is tax deductible up to $100,000 of the borrowed amount. However, it is important to weigh your financial situation carefully before taking this option. A HELOC can give you an excellent amount to deal with an emergency and if you have already taken the loan, you have nothing to fall back on. Besides, you must ensure the payments will be on time, lest you lose your home.  

Choose a sensible payment plan

If you fail to clear your student loan, it’s likely to haunt you for many years. Usually, defaults lead to higher interest rates, additional fees and costs that increase the principal you owe. Also, it will be recorded in your credit score and you will have a difficult time when trying to get a loan for a house or vehicle. In extreme circumstances, the government may choose to garnish your wages, withhold tax refunds or social security benefits. 

The good thing is that you don’t have to go through all this because the loans offer favorable payment terms or pause the payments temporarily. But if you have worked for the government for about ten years, your loan can be forgiven. 

You can’t be penalized for making early payments and instead, you save on interests. When you set up an automatic payment, you may qualify for lower interest rates. While you are obligated to clear your debts, it can be quite challenging to repay the loan when you are not earning a good income. However, you should speak up before the situation becomes hectic. Applying for deferment allows you to push the payments forward by three years and if you have a Perkins loan, the government pays the interest for the entire period. For any other federal loan, the interest will still be piling. 

On the standard repayment plan, you will be required to pay about $50 every month for ten years. But it depends on your earnings. You can also choose the extended repayment plan that runs for 25 years if you have a high debt to income ratio. On the other hand, an income-based plan allows you to pay 15% of your income for 25 years. After this period, any pending balance is forgiven. 

Attending college gives you better job opportunities and your income will also be higher. However, financing the education can be daunting especially when you don’t have enough savings in your account. To most parents, borrowing is a good option but it can quickly turn sour after graduation. But if you can choose wisely when considering the borrowing options, your life will be better.