Unsubsidized Fixed Rate Stafford Loans - a good deal?

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markcoop
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Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by markcoop »

I'm weighing various options to pay for my children's college educations. I do have a good chunk put away in 529 plans, but it may (probably) not cover the total cost. I'd be curious to hear opinions about whether unsubsidized Stafford loans are a good deal. The details:

1) Fixed rate loan, new loan rates determined July 1 of every year and based on the federal 10-year Treasury rate plus a margin (capped at 8.25%).

2) Current rate is 3.86% plus a 1.051% up front fee.

3) Maximum that can be borrowed for an undergrad is $31K ($5.5k/yr1, $6.5k/yr2, $7.5k yr3, $7.5k yr 4).

4) If the borrower (student) earns less than $75k, they can deduct up to $2,500 of student loan interest payments.

5) Interest accrues while in college and payments begin after college.

I think if one needs the money to attend college (no other options), it's a pretty good deal. Of course, no debt is better (unless you knew you could invest the difference at a higher rate). I'm just trying to get a feel if this loan is a no-brainer to use. Comparing it to a secured fixed rate home equity loan, I see rates starting at 4.75% at my credit union. This Stafford loan seems better than a secured home equity loan.

Opinions?
Mark
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rpike
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by rpike »

I wanted my kids to have skin in the game paying for college. My son is freshman now and I told him an unsubsidized Stafford loan and whatever is in his college savings accounts (ESA and UGMA) are his share. Now just need to figure out where the other 2/3 will come from.

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livesoft
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by livesoft »

I'd look into a 401(k) loan.
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MathWizard
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by MathWizard »

Op,

I don't consider unsubsidized student loans to be a good deal. Unlike subsidized stafford loans, there is not a real
advantage to them, and yet like any other student loan, they cannot be wiped out in bankruptcy.

You did fill out the FAFSA, correct?

In the experience with my kids, the student can get subsidized loans up to the TCA - EFC as long as that
does not exceed the max for Subsidized loans for the year the student is in.
TCA = Total Cost of Attendance
EFC = Expected Family Contribution from the FAFSA.

Thus, I told my kids to take out subsidized loans if they needed them, but not unsubsidized loans.

I figured the student's portion of EFC, and subtracted it from the total EFC to get the parent's portion.
I took it as my responsibility to pay the portion of the EFC that came from the Parent's section.
After all, if he had parents who did not make very much, then he would have gotten more aid
via Pell Grants and subsidized loans.
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markcoop
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by markcoop »

Thanks for the replies.

I like the idea of my kid having "skin in the game" as well. But assuming I don't need the Stafford loan, I can just have my kid take out a loan with me as the bank. Although I do like the idea of them knowing they owe to an external entity (not family). May seem more real to them. If only I can know how much money all my kids would need for college up front, then I can adequately borrow.

A 401K loan is always an option. So I guess the question becomes is a 401K loan better than an unsubsidized Stafford loan. Is a HELOC better than a Stafford loan? These are the types of questions I'm thinking about.

I'm also thinking about how to use my 529 plan money in relation to these loans. I have always viewed my 529 plans as one big pot of money. If I use a disproportionate amount of that money on child 1 of 3, then I can always get a loan when I need it down the road with another child. A benefit of this strategy is if child 2 or child 3 get a nice scholarship, then at least I used as much of the 529 plan as I could. The negative of this strategy is if I do use all my 529 plan money and then need extra money, I probably would have preferred to have used loans like the unsubsidized Stafford loan spread equally among the children. Although I can always use bank of dad for the first child and then see it how it goes with the other couple of children. What makes it difficult is not knowing how much each child is going to need and wanting to do the optimal thing.
Mark
Midwest Dave
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by Midwest Dave »

Before ruling out Stafford, check the repayment and forgiveness provisions. Depending on your student's intended occupation, this could be very beneficial.
There is also lots of noise regarding broader forgiveness of student loans. If that occurs, it would be unlikely to apply to any borrowing other than Federal Student loans.
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markcoop
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by markcoop »

MathWizard wrote:You did fill out the FAFSA, correct?
I did fill it out. My EFC is greater than the TCA, so we only qualify for unsubsidized Stafford loans. A large part of the reason the EFC is that high is I put a decent amount of money into the 529 plans. I don't regret that decision as I think the savings I got from the 529 plans probably exceed the benefits I would have received from potentially more good loans (although I haven't really analyzed it).
Mark
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by Dad »

Unsubsidized Stafford loans do offer better repayment options for the student than a traditional secured fixed loan, despite the yearly variable nature of the loan. Your student can consolidate his/her loans afterward for a longer payback period to lower the payment in his/her early working years and then payoff faster once on better financial footing. But I agree with MathWizard, please make sure you have exhausted your student's ability to take out SUBSIDIZED Stafford loans first. That is of course the better option.
MathWizard
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by MathWizard »

markcoop wrote:
MathWizard wrote:You did fill out the FAFSA, correct?
I did fill it out. My EFC is greater than the TCA, so we only qualify for unsubsidized Stafford loans. A large part of the reason the EFC is that high is I put a decent amount of money into the 529 plans. I don't regret that decision as I think the savings I got from the 529 plans probably exceed the benefits I would have received from potentially more good loans (although I haven't really analyzed it).

Make sure you check out the education tax credits docs from the IRS.
You may be able to get up to $2500/year back via the AOC for the first 4 years if you pay
the tuition from your bank account rather than from a 529.
The first $2000 you pay you get a $2000 tax credit, then it is 25% for the next $2000.
My reading was that the 529 has already had special tax treatment, so you can't "double dip"

I took this into account for when to use the 529 money.
Note that you generally have 5 tax years involved in 4 college years.
I didn't have much in a 529, so I used it in the 5th year (spring semester)
when I had exhausted the AOC in the first 4 years.
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market timer
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by market timer »

What you've described is a pretty fair deal for someone who intends to repay. Not a great deal that can be easily arbitraged, like the subsidized loans, but not bad either. For someone who has a significant chance of receiving forgiveness, either due to a career in public service or with low pay, they are a fantastic deal.
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markcoop
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by markcoop »

Dad wrote:...despite the yearly variable nature of the loan.
What does this mean? Are you referring to the fact that every year you're taking out a loan and the rate may be different every year? If so, that would be true of any loan unless I took out the whole amount I wished to borrow at one shot.
market timer wrote:For someone who has a significant chance of receiving forgiveness, either due to a career in public service or with low pay, they are a fantastic deal.
If you have a career in public service or have a low paying job, then you may not have to pay back the loan? Can you explain further.
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market timer
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by market timer »

markcoop wrote:
market timer wrote:For someone who has a significant chance of receiving forgiveness, either due to a career in public service or with low pay, they are a fantastic deal.
If you have a career in public service or have a low paying job, then you may not have to pay back the loan? Can you explain further.
A couple programs created a few years ago:
Income Based Repayment: http://studentaid.ed.gov/repay-loans/un ... come-based
Public Service Loan Forgiveness: http://studentaid.ed.gov/repay-loans/fo ... ic-service

The amount of debt likely to be forgiven by these programs is astronomical, on the order of a hundred billion dollars just from what is outstanding today.
Last edited by market timer on Wed Apr 09, 2014 9:57 am, edited 1 time in total.
Topic Author
markcoop
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by markcoop »

MathWizard wrote: Make sure you check out the education tax credits docs from the IRS.
You may be able to get up to $2500/year back via the AOC for the first 4 years if you pay
the tuition from your bank account rather than from a 529.
I am aware of this credit and will be eligible for it. That does bring up an interesting point. Assuming the tuition is $40K for the year, I could pay $36K from the 529 plan and then use the Unsubsidized Stafford loan for $4K. I can then use the credit on that $4k paid via the loan money and get back $2.5K via the credit. Of course, I could use the credit even if I pay that $4K out of pocket.
Mark
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markcoop
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by markcoop »

market timer wrote:Income Based Repayment: http://studentaid.ed.gov/repay-loans/un ... come-based
Public Service Loan Forgiveness: http://studentaid.ed.gov/repay-loans/fo ... ic-service
Thanks for the links. I did not know about either program. I guess that tilts the decision slightly toward taking out the loans. Even though I don't think she'd be eligible for either plan, you never know. I view any option that potentially makes the loan a great deal as a benefit.
Mark
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by Jack FFR1846 »

I just received the financial aid package for my son who is starting this fall. Besides his merit scholarship, he is offered a Stafford for $2750 per semester. I could pay full boat and have saved to do so, but my son will be taking the full amount in Staffords. I'm actually quite happy to see the loan rate (I assumed for some reason that it was 7.8%). My agreement with him is that if he finds and is awarded scholarships, I will pay off loans dollar for dollar to the amount of scholarships that he finds.

So not only does he have skin in the game, but he has the incentive to go search out and apply for scholarships himself.
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markcoop
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by markcoop »

Jack FFR1846 wrote:I just received the financial aid package for my son who is starting this fall. Besides his merit scholarship, he is offered a Stafford for $2750 per semester. I could pay full boat and have saved to do so, but my son will be taking the full amount in Staffords. I'm actually quite happy to see the loan rate (I assumed for some reason that it was 7.8%). My agreement with him is that if he finds and is awarded scholarships, I will pay off loans dollar for dollar to the amount of scholarships that he finds.

So not only does he have skin in the game, but he has the incentive to go search out and apply for scholarships himself.
I made a similar deal with my daughter! Every dollar she finds in scholarship money , I would give back to her. I like that you give it back in the form of a loan repayment for them.

I assume your loan was unsubsidized?? It sounds like you made a decision about a similar question. Did you consider giving your son a loan from the money you saved? That way he still has skin in the game, but you don't have to take out the loan (unless you feel the loan is such a good deal).
Mark
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by Jay69 »

Jack FFR1846 wrote:I just received the financial aid package for my son who is starting this fall. Besides his merit scholarship, he is offered a Stafford for $2750 per semester. I could pay full boat and have saved to do so, but my son will be taking the full amount in Staffords. I'm actually quite happy to see the loan rate (I assumed for some reason that it was 7.8%). My agreement with him is that if he finds and is awarded scholarships, I will pay off loans dollar for dollar to the amount of scholarships that he finds.

So not only does he have skin in the game, but he has the incentive to go search out and apply for scholarships himself.
I like this thinking.
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Dad
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by Dad »


Dad wrote:
...despite the yearly variable nature of the loan.

markcoop wrote:
What does this mean? Are you referring to the fact that every year you're taking out a loan and the rate may be different every year? If so, that would be true of any loan unless I took out the whole amount I wished to borrow at one shot.
You are right. I was thinking the loan rate adjusted each year.
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by Rubiosa »

"I think if one needs the money to attend college (no other options), [Stafford loans are] a pretty good deal."

There are always other options. And plenty of them. The loans just seem easier. Of the 2 1/2 million students who will be taking BA and MA degrees this year, only about 35% will have incurred student loan debt. And most of these will have come from average middle class, middle income families. Other options have been discussed here for at least the last three years. I mean no disrespect, but your "no other options" 'solution' must be called lest others similarly rationalize, and to their kids' detriment.
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by Bob's not my name »

markcoop wrote:If the borrower (student) earns less than $75k, they can deduct up to $2,500 of student loan interest payments.
Not exactly. The deduction is limited for AGI, not gross or earned income, above and at $80,000, not $75,000. If the student marries the phaseout starts at $160,000 AGI. In addition the couple is limited to the same $2,500 deduction. At a 3.86% interest rate that means the couple maxes out the deduction with $65,000 of debt. If the student is in the 15% bracket the deduction cuts the effective interest rate to 3.3%. If the parent is in the 25% bracket a deductible 4.75% loan is about 3.6%, so similar.

By the way, the AOTC is available only through 2017 under current law.
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by dickenjb »

Bob's not my name wrote:
By the way, the AOTC is available only through 2017 under current law.
Did not know that. Thank you for that info.
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markcoop
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by markcoop »

Rubiosa wrote:"I think if one needs the money to attend college (no other options), [Stafford loans are] a pretty good deal."

There are always other options. And plenty of them. The loans just seem easier. Of the 2 1/2 million students who will be taking BA and MA degrees this year, only about 35% will have incurred student loan debt. And most of these will have come from average middle class, middle income families. Other options have been discussed here for at least the last three years. I mean no disrespect, but your "no other options" 'solution' must be called lest others similarly rationalize, and to their kids' detriment.
I don't think you understood what I meant. If you wouldn't be able to attend college without borrowing, then the Stafford loan seems like a good deal. Sorry if I mislead by the "no other options".
Bob's not my name wrote:Not exactly. The deduction is limited for AGI, not gross or earned income, above and at $80,000, not $75,000. If the student marries the phaseout starts at $160,000 AGI. In addition the couple is limited to the same $2,500 deduction. At a 3.86% interest rate that means the couple maxes out the deduction with $65,000 of debt. If the student is in the 15% bracket the deduction cuts the effective interest rate to 3.3%. If the parent is in the 25% bracket a deductible 4.75% loan is about 3.6%, so similar.
Similar, but the Stafford still comes out ahead. In addition, you're not putting your home up as collateral.

Anyone have any feel if the AOTC will be extended?
Mark
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Re: Unsubsidized Fixed Rate Stafford Loans - a good deal?

Post by Bob's not my name »

markcoop wrote:Anyone have any feel if the AOTC will be extended?
On the one hand, tax breaks are often extended, because it's easy to give and hard to take away. On the other, this wouldn't be taking away, since it's set to expire. In addition, the AOTC was introduced by the current administration, which expires about when the AOTC does. Finally, it's a terribly constructed tax rule. It phases out right where financial aid phases out at the most expensive schools, so the family is hit with the AOTC phaseout, the financial aid phaseout, the 28% bracket, and the AMT all at about the same income level -- in fact, it used to also overlap with the Making Work Pay phaseout, the Roth IRA phaseout, and the spousal TIRA phaseout. The phaseout is not inflation-adjusted. The phaseout is particularly cruel for multi-student and single parent families -- a single mother of three college kids can have a 100% federal marginal rate thanks to the AOTC. It's also ridiculously complicated, requiring an extra form and two different entry points on the 1040. It has the same flaw as other education credits in that the student gets screwed out of it in his graduation year if he makes the mistake of paying his last tuition bill before January 1 (and most schools conspire with the government to trick the hapless student, because they make December 27 the due date). This last point applies only if the AOTC's four-year limit has not been exhausted, e.g., if the parents were never eligible due to the non-inflation-adjusted phaseout.
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