how do student loans work?

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Topic Author
vanbucky
Posts: 41
Joined: Thu Apr 21, 2011 2:28 am

how do student loans work?

Post by vanbucky »

I was fortunate never having needed to consider student loans. But given the tuition increases that even public universities are having, I'm thinking that my 1-year old may need to get a student loan in the future. I'm trying to learn about student loans so that I can decide how much to invest into 529/ESA.

If student loans are an incredible bargain (compared to other types of loans), then I may invest less and have my kid take a loan. However, if student loan rates are high, then I may invest more into 529/ESA, and essentially loan to him myself at a reduced rate (e.g. halfway between student loan rate and mortgage rate).

What have student loan rates been historically? Do they roughly follow an index? Something like twice the 10-yr treasury?

Do federal student loans have cheaper rates than private? If so, why would anyone get a private student loan?

Are federal loans fixed rate or variable or either? If fixed rate, can you re-fi it with federal again?

Is it true that student loans do not (or are extremely difficult) to be forgiven even with bankruptcy?
MathWizard
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Re: how do student loans work?

Post by MathWizard »

vanbucky wrote:I was fortunate never having needed to consider student loans. But given the tuition increases that even public universities are having, I'm thinking that my 1-year old may need to get a student loan in the future. I'm trying to learn about student loans so that I can decide how much to invest into 529/ESA.

If student loans are an incredible bargain (compared to other types of loans), then I may invest less and have my kid take a loan. However, if student loan rates are high, then I may invest more into 529/ESA, and essentially loan to him myself at a reduced rate (e.g. halfway between student loan rate and mortgage rate).

Not a real bargain. The advantages are that you can get a loan (because the govt. guaranteed it, and because
the loans cannot be forgoven in bankruptcy), and that for subsidized loans, you don't pay interest while you are in school.
When I got them, there was a 5% origination fee (take out a $1000 loan, and you only got $950.)
Perkins loans are 5%, Subsidized Stafford are 6.8%, private loans are usually floating.
I don't think provate loans are subsidized, so interest accrues from day one.

What have student loan rates been historically? Do they roughly follow an index? Something like twice the 10-yr treasury?

In the early 80's Stafford's were 9% , later 7%, then 6.8% No real rational reason I know of.

Do federal student loans have cheaper rates than private? If so, why would anyone get a private student loan?

You only get so much for subsidized loans. You can get more money by using private loans. Very expensive though.
Are federal loans fixed rate or variable or either? If fixed rate, can you re-fi it with federal again?

They have been both. Depends on what Congress wants to do.
Is it true that student loans do not (or are extremely difficult) to be forgiven even with bankruptcy?

Yes. Otherwise students could take out loans and declare bankruptcy upon graduation.
NorCalDad
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Re: how do student loans work?

Post by NorCalDad »

Not too long ago, Congress set the interest rate for federal student loans. But last year, Congress and the president enacted legislation tying some rates to the 10-year treasury. I do not know the exact formula. But the rates get determined each June and are currently 3.86% for undergrad loans: http://studentaid.ed.gov/about/announce ... erest-rate

Obviously, this could change in 20 years by another act of Congress, but this is what we know now. There was a variable rate system in place when I was an undergrad, and most of us consolidated down to a fixed 3% when we had the opportunity.

Congress then fixed the rate at 6.8% in the middle of the last decade for new borrowers. To those of us who have perfect credit scores and assets, that rate seemed ridiculously high. But keep in mind the federal loan program lends money to students regardless of family credit history or income, so it was a better rate than many students/families would have gotten elsewhere.

If your child qualifies in college based on need, he or she can get a subsidized student loan in which it's essentially a 0% interest rate while your child is in college. But I'm guessing most of our children will not qualify for that.

Student loans are notoriously difficult to discharge through bankruptcy, and it's one reason there has been a growing aversion to accruing too much student debt.

I'm with you - thinking that my children may need some loans to get through school, depending on where they attend. Before you start investing heavily in a 529, make sure your own retirement needs are taken care of.
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TomatoTomahto
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Re: how do student loans work?

Post by TomatoTomahto »

I don't have a crystal ball, but I think it's a safe bet that by the time your 1 year old is in the market for a student loan, things will have changed.

Save for an emergency, save for retirement, save for education if the first two are taken care of. Above all, save.
I get the FI part but not the RE part of FIRE.
catspaw
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Re: how do student loans work?

Post by catspaw »

I totally agree with the previous posters. Save for your own retirement first. I would even earmark a moderate amount in a taxable account before starting a 529 plan. Taxable accounts have a lot more flexibility. If you are in a position to fully pay for your child's education (and would not qualify for financial aid, in any case), then 529 plans make a lot of sense. But if it is a tradeoff in funding your retirement and the 529 plan, fully fund your retirement plan.

The one saving grace of federal student loans is they may either be partially or fully forgiven. For example, if a new teacher agrees to teach in a very poor area for X years, their federal loans may be forgiven. Other programs are based on paying a certain amount of you income per year. After many years of paying the income based rate any outstanding balance is forgiven. You could even make the student loan payments for your child, if you are in a position to do so after they graduate.

Lastly, college education may be much cheaper in 10-15 years. There is at least a chance that your child will be able attend college online for a very reasonable cost.
technovelist
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Re: how do student loans work?

Post by technovelist »

With the current legal treatment of student loans, I would not take them out under any circumstances.
In theory, theory and practice are identical. In practice, they often differ.
Topic Author
vanbucky
Posts: 41
Joined: Thu Apr 21, 2011 2:28 am

Re: how do student loans work?

Post by vanbucky »

thanks all for your helpful responses!
Topic Author
vanbucky
Posts: 41
Joined: Thu Apr 21, 2011 2:28 am

Re: how do student loans work?

Post by vanbucky »

can you re-fi it with federal again?
Found out the answer is no!

"Unlike almost every other type of loan, federal student loans are set in stone even if rates change for the better. (There are private refinancing options but they have strict requirements and limited scope.)"

http://www.cnn.com/2014/03/25/opinion/j ... index.html
z3r0c00l
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Re: how do student loans work?

Post by z3r0c00l »

catspaw wrote: Lastly, college education may be much cheaper in 10-15 years. There is at least a chance that your child will be able attend college online for a very reasonable cost.
It already is, if your student attends a state or city school, they can pay a fraction of what private schools charge. That may not be attractive in your area, but here in NY we have a good SUNY system that currently costs perhaps $20,000 a year for in state students and that is with housing, food, and all expenses included for the best SUNY school. Tuition alone is only $6000 a year.
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RobInCT
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Re: how do student loans work?

Post by RobInCT »

Eleven years elapsed between when I started college and when I finished my professional degree. During that time period alone, there were no fewer than three substantial revisions to the federal student loan program that affected whether student loans were a "good deal" or not. I finished all school 5 years ago, and there have been at least two more substantial revisions since then. Upon completion of my professional degree, I had federal student loans with interest rates that ranged from .85% to 8.5%. I had private loans that ranged from 1.25% to 10.25%. It depended on the era during which they were acquired.

Do not make plans for your 1 year-old based on whether student loans are a good deal now. Whatever the rules are now, they won't be in 17 years.
can you re-fi it with federal again?
You can't now, but you could before, not very long ago. And then you couldn't before the last time they let you, but you could again before that. And this is all just within the last 15 years.

The federal student loan program is a huge cash cow, previously to the banks and now to the federal government. The federal government makes a ton of money off of these loans. People can and do have varying opinions about whether that's a problem. But it means there is a constant tension between groups who think that raising revenue this way is unfair to students and groups who don't want to give up the revenue. Generally, one group manages to shout louder than the other for some period of time, and the policy is whatever it is for a few years until a different group shouts louder and then it's something else.

Seriously, there's no point in trying to figure out what the "rules" are in order to determine how they might affect you unless you're going to school in the next 3-4 years. Waste of time.
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