I have twin daughters going to college in the fall. The annual tab
(for both girls) after scholarships will be $58,000 in loans per year
for four years. We have saved $47,000 for the first year and
anticipate being able to save about $12,000 per year to apply towards
payments over the three remaining years. This leaves us looking for
loans to the tune of $145,000. Is there a particular strategy or any
combination of specific loans you recommend to minimize interest
accrued. Any other recommendations would also be sincerely appreciated!
— Patrick P.
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While your willingness to sacrifice for your daughters' college
education is commendable, the amount of debt you are considering is
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excessive. More than 95% of all undergraduate students will graduate
with less education debt.
You should seriously consider sending your daughters to a less
expensive college, where cumulative education debt at graduation will
be at most $45,000 per daughter (and preferably a lot less). There are
many good colleges where a motivated student can get an excellent
education without mortgaging her future.
As a general rule of thumb, a student should never borrow more than
her expected starting salary for her entire college education. If she
borrows more than that, she will be at high risk of defaulting on her
loans, and will have no choice but to use an alternate repayment plan
like extended repayment or income-based repayment to repay the
debt. This means she will be in debt for the majority of her working
life and will still be repaying her own student loans when her
own children enroll in college.
If you insist on investing in more college than you can afford, here
are a few tips for reducing your borrowing costs:
1. Prefer subsidized loans over unsubsidized loans, since the federal
government pays the interest on subsidized loans during the in-school
and grace periods. The interest on unsubsidized loans is the
2. Pay at least the interest on unsubsidized loans while the student
is in school. The interest on unsubsidized loans may be deferred by
capitalizing it. But capitalizing interest increases the size of the
loan by adding the interest to the loan balance. For example,
capitalizing the interest will add more than $20,000 to your debt by
the time your daughters graduate. Paying the interest along the way
will mean a lower loan balance at graduation, so you won't be paying
interest on interest. A lower loan balance will allow you to pay off
the debt sooner.
3. Prefer lower cost loans. This means loans with lower interest
rates, not loans with lower monthly payments. Lenders can manipulate
the monthly payment by increasing the term of the loan. For example, a
$20,000 federal Stafford loan with a 6.8% interest rate and a 10-year
repayment term has a $230 monthly payment, while a $20,000 private
student loan with a 10% and a 20-year repayment term has a $193
monthly payment. The private student loan might seem to be more
affordable because of the lower monthly payment, but the total
payments on the private student loan will be $46,323 compared with
$27,619 on the federal Stafford loan. When comparing loan payments on
different loans, always use identical loan terms to get an
The Stafford and Perkins loans have lower interest rates than the
Parent PLUS loans, so a student should exhaust her eligibility for
federal student loans before her parents borrow from the Parent PLUS
loan program. This will save her family thousands of dollars in
interest. (The unsubsidized Stafford loan and the Parent PLUS loan are
available without regard to financial need, so you don't need to be
poor to qualify for these loans.) Other types of debt, such as home
equity loans and private student loans will generally be more
expensive over the life of the loan. We are currently in an unusually
low interest rate environment. The variable rates on non-federal
loans might be lower than the fixed rates on federal education loans
if you have excellent credit, but these variable rates are likely to
increase significantly over the next few years.
Don't forget to claim the Hope Scholarship tax credit, which will save
you a little money at tax time on your college costs.
My parents are in a financial bind and can't get a loan for my
school. They also can't co-sign for a loan. I can't get anybody else
to co-sign either. What are my options? I need another $12,000 to
$15,000 after my aid award.
— Eric C.
Federal education loans do not require cosigners, so you must be
talking about private student loans. Students should always borrow
federal first before turning to private student loans. Needing to
borrow private student loans is often a sign of overborrowing, as is
borrowing more than $10,000 to $12,500 a year total, including both
federal and private student loans.
These days more than four-fifths of all students will need a cosigner
to obtain a private student loan. Even students with good credit will
need a cosigner. Only students who have excellent credit will be able
to obtain a private student loan without a creditworthy cosigner.
If your parents have been denied a Parent PLUS loan because of an
adverse credit history (or there are other unusual circumstances that
preclude them from borrowing a PLUS loan), the college can grant you
the higher unsubsidized Stafford loan limits available to independent
students. These limits, however, are only $4,000 higher during the
freshman and sophomore years in college and $5,000 higher during the
junior and senior years. You could try working part-time during the
school year and full-time during the summer to earn the rest, but you
may be better off switching to a less expensive college.