Many people view student loans as a necessary evil. Very few of us have the financial ability to save enough money to cover the entire cost of college for our children. The majority need to borrow money and take out loans. But where do we borrow from?
The answer to that should be simple, right? “Wherever we can get the most favorable interest rate!”
It’s important to look beyond the interest rate and consider these questions:
- Whose name should be on the loan? Mine, my spouse, or my student?
- How long realistically will it take me or my child to pay it back?
- What will my kids earn after graduation? Can they afford the payment?
- Should I borrow against my house in this higher interest rate environment?
- Are there “special deals” that can make this debt go away sooner, or create smaller payments?
- How will this loan impact my retirement?
Few people will give their borrowing choice nearly this much thought. Thankfully, the media has brought the subject of student loans to the forefront.
- Starting on October 1, 2023, payments on federal student loans are set to resume after a three-year period of postponement set forth during the COVID-19 crisis.
- The Supreme Court struck down the possibility of up to $20,000 of federal student loans being forgiven, previously announced by the Biden administration.
- The Department of Education is working on income driven repayment plans for federal student loans that improve upon an already very generous system.
You may notice that this is not only an interest rate-based decision. It requires a lot of forethought and planning, even impacting how you might file your future tax returns. It could mean choosing a product that might not be the cheapest alternative right now, but the long-term outlook could offer you more flexibility.
Meet Bill and Mary
Here’s an example. Bill and Mary, both age 45, have three college bound children. Based on the current cost of college, it’s estimated that they’ll need to borrow $200,000 over the course of the next eight years — all in their name. Using a private loan at a 6% interest rate, they’re facing a staggering monthly bill of $2500 for 10 years starting when their last child graduates.
Bill currently works in sales earning a yearly salary of $125,000. Mary is a teacher and earns $75,000 a year. With the guidance of their financial professional, they choose a federal loan option that has income driven monthly payment choices. Furthermore, the plan is for the loans to be taken out in Mary’s name and they’ll now file their tax returns separately. What this sets up is after the last child graduates, and the loans are properly consolidated, despite their interest rate of 8%, Bill and Mary’s monthly payment will be close to $325! And since Mary is a public-school teacher, she will qualify for federal public service loan forgiveness, and her loan balance could be forgiven after 10 years.
Bottom line? When it comes to student loans, always look beyond the interest rate.