Home Student Loans

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    According to a CNNMoney article, a woman recently died, leaving behind over $200,000 in private student loans for her parents to pay off.  How can you avoid this situation?

     

    Prevention is better than cure…

    The first thing you can do is understand the difference between Federal Loans and Private Loans.  The first one is created by the government, and the second one is created by the private sector.  Federal loans are always better – they are easier to get, and in this situation they would have been written off.  Also, Federal Loans usually have income-based-arrangements which Private Loans do not have.

    But if you had not choice but to borrow private loans, there’s something else you can do.

    …But cures still exist.

    If you graduated from college with lots of private loans, you’ll want adequate life insurance to pay it off if you die unexpectedly.  I know, you might be young and think that the chances of dying are slim – but right now that’s not the problem.  The problem is that IF you die, private loans don’t get written off – someone will have to pay them out of your estate.  If you have a co-signer, it automatically becomes that person’s problem.  Personally I believe private loan borrowers should have life insurance with the cosigner as a named beneficiary (up to the amount of the loan).  If the co-signers are your parents, then this is even more important.

    Additionally, after a few years of paying your debts on time, you should be able to refinance your private loans without a co-signer.  This way if anything happens to you and your estate has no assets, you’ll be okay.  Don’t forget though, that you will need to have disability insurance because while chances of dying are slim, chances of being hurt or sick for more than a few days are quite significant.  Be prepared!

    Student loan borrowers do not have to go through this.  You can prepare and avoid these traps.  If the borrower cannot pay for the insurance, then the co-signer should pay for it him/herself.  It’s a small price to pay.

      0 377

      Since student loans are the new mortgage, what can you do to stay ahead of the pack?

      There are a few things you can do.  You can use student loans to get the most marketable education possible.  You can also use your salary to gain access to top-tier investment opportunities.  Most importantly, you should seek professional help to build and preserve wealth.

      Get The Most Marketable Education Possible

      Student loan horror stories in the media typically show people doing the wrong things with student loans.  It’s not just that they major low-paying areas, it’s that they go to schools without a major reputation.

      In my study of the student loan conversation over the years, I’ve noticed an interesting pattern.  People who are connected to a local community send their children to nearby state schools.  They use their connections to get jobs and internships for the students, so that they can succeed.  On the other hand, people without connections send their children to schools that can connect them.  Once I decided to get a graduate degree out of state, the University of Texas-Austin was an obvious choice.  It is ranked consistently in the top 2 for my field – a Ph.D in Accounting from there was ranked higher than Harvard and Yale even.  I had already paid a $250 deposit for Ohio State University which was a great school too – but I had to get the most for my money.

      People have a tendency to be cheap with other peoples money, and lavish with their own money.  It should be the other way around.  If you’ll be making principal and interest payments on something, it should be the best you can get.  An expensive education without market recognition is like paying $100,000 for a Hyundai Equus.  It’s a great car, but nobody’s ever heard of it so no VIP treatment for you.

      Use Your Income To Gain Access To Investment Opportunities

      This one is for people whose careers will inevitably lead them to six-figure incomes, especially the medical professionals whose household incomes will go beyond $300K.  There are many investment opportunities out there that are reserved for high-income people.  The reason?  It is assumed that you are more informed and have more money to lose.  However, with that assumption you can get access to huge opportunities like buying Facebook before the IPO.  For the most part, the people with the most student loan debt will be the highest earning, but if they become too conservative they can miss out.

      Whatever you do, don’t go it alone

      Wherever big money is moving, there is an opportunity to strategically build wealth.  It’s easy to be fooled if the big number is negative (debt).  But with professional help, you’ll know the difference between Facebook and MySpace.  There are professionals who can help you get into the most reputable schools in your field.  And as a CPA I help my clients make investment decisions all the time.  The worst mistake you can make is expect to figure your finances out all by yourself.  Don’t think of student loans like the flu, think of them like a common, curable cancer:  medicines that work are by prescription only.

       

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        Right! Children Borrowing For Their Education

        When the government created the student loan system, they assumed each student would take personal responsibility for his/her loans.

        From my understanding of the student loan system, the government expects that families do not support adult children.  It expects that the 18 year old is responsible for paying for his or her college.  The only exception is for children of two types of parents:  the ones who can pay for their child’s college tuition from current (yearly) income, and the ones who can raise the money without significantly affecting their wealth (or retirement).  I am a successful borrower today because I worked with those assumptions, not against them.  In this article I want to explain the logic of the government (as far as I can tell), so that you understand what to do and what not to do.  Here are a few questions:

        Who should borrow for college tuition?  The student.  Most students are young, with thirty to fifty years of productive life remaining.  As a group, they are likely to pay off their loans to the government, even though individuals may default from time to time.  Think of it like insurance; it’s cheap for young people.  That’s why the very best loan terms on the planet are available to students and not their parents.

        When should parents borrow for the child’s tuition?  Never.  Well, almost never.  Only if the parent can afford to pay the tuition.  For example, if a parent has $1 million dollars in stock that is down, he or she may not want to sell.  It may be appropriate to borrow for the tuition and pay over time. But the interest rates for parents are very high, so that parent better be holding a stock like Facebook during August 2012.

        What if Federal Loans are not enough?  Then the child can get private loans.  Non-wealthy parents can co-sign private loans for their child.  Co-signing still leaves the child with the primary responsibility for the loans.  It’s best to get loans that have cosigner release after a few years.  The student can also refinance on their own credit later on (I did).

        Even though the student loans are expected to be the child’s problem, the government understand that parents can help.  Parents can give up to $14,000 per year to their child without incurring gift taxes.  Ultimately, the child has many more options as a borrower (than the parent), and also gets lower interest rates on FEDERAL loans.  These facts have nothing to do with where money comes from to pay the debt.

        The way I see it, my loans are my problem.  But I’m not turning down any financial help to pay it down!

         

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          parents borrow for edu

          WRONG! Parents Borrowing For Their Child’s College

          Lately I have noticed parents borrowing money to pay their children’s college tuition. There is a right way to do this, and a wrong way to do this.  The wrong way is not consistent with the assumptions that the federal government made when it created the student loan finance system.  For that reason, it is the most expensive and causes the most stress.

          Many parents feel it is their responsibility to put their children through college.  If they don’t have the money, some will get loans in their own name for the tuition. Unfortunately loans from the government to parents (“Parent PLUS Loans”) have higher interest than the loans to the student (1-2%+ more).  Forgiveness for public service is available for federal loans, but unless the parent wants to commit to it they will have to convince their child.  In my experience with clients so far the loan is in the parents name and they don’t involve the child much in managing it.  If they do, I can’t tell.

          Many parents feel it is their responsibility to put their children through college.  If they don’t have the money, some will get loans in their own name for the tuition. Unfortunately loans from the government to parents (“Parent PLUS Loans”) have higher interest than the loans to the student (1-2%+ more).  Forgiveness for public service is available for federal loans, but unless the parent wants to commit to it they will have to convince their child.  In my experience with clients so far the loan is in the parents name and they don’t involve the child much in managing it.  If they do, I can’t tell.

          There are many potential problems here.  Probably the most important is about responsibility.  An adult child that doesn’t have to grapple with the cost of his/her college has the option of being irresponsible.  In my case, because I know the total cost of my college education, I work really hard to get that money back (and them some).  But those that don’t, often feel no responsibility to take risks that might make them more money.  By keeping the debt as “their problem”, the parents might be keeping their children away from the real world.  So far I have yet to meet a parent that said something like “contact my child”; they all think it’s their problem.

          Remember:  If a parent has to borrow money for the child’s tuition or even co-sign a private loan, then the school is top-tier, out-of-state, or private.  My debt helped me realize the value of my education because it is such a big number.  If nobody ever let me see how much it cost, I may not have become as successful today.  Of course some parents may not want their children to worry unnecessarily, but I think as adults they should learn.

          By the  time the loans are inked in the parents name, this is it.  But if the parents could go back to the first meeting with the financial aid office, what should they have done?  Get the loans in the child’s name, of course.

           

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            imsis527-019

            College causes debt; just like buying a house.  Are you still in denial about it?

            Recently someone sent me an article from Forbes about how hard it is to be a low-income student in an ivy-league university.  I started to feel bad for the many people who feel bad about the debt they get into during college.

            When you graduate college with a lot of student loans or other debt, people judge you.  I know because I have been there.  They ask you what you were thinking.  They ask you why you didn’t do this, or do that [to save money].  Most people don’t want to accept that college is a very expensive process – for someone to do it and do it well on his/her own requires debt.  For a while you might beat yourself up (even without external judgment) and question what were legitimate decisions you made in school.

            As the Forbes article pointed out, after you have tuition paid, then you have to deal with LIFE.  Some people have their parents or relatives to buy them clothes, gifts, and the like – but others do not.  Some people even get to inherit an old vehicle – others do not.  If you want to get the full value of a college education, you will get involved in extracurricular activities which will simultaneously boost your resume and destroy your net worth.  I know that my ability to graduate cum laude and win awards for campus involvement was due to me not working, and my willingness to get into more debt.  Good schools have many student organizations and although some are free, their activities typically involve using financial resources.

            I’m not writing this article to be a downer.  I want to make two points.

            First, it is normal to get into debt for college.  We all accept that we will use a mortgage to buy our homes, but folks still have a hard time accepting the debt related to time spent in college.  Secondly, college requires financial planning.  Students and their parents need to project how much it will truly cost to go to college – including costs outside of tuition – and proactively seek help on ways to finance it.  After college, students need to proactively seek financial help to dig them out of their financial ditch.

            What I propose in this article are cultural changes, but the sooner people adopt them the better off they will be.

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              No Collateral

              Student loans rock because there is no collateral.  That wouldn’t be possible if it wasn’t financing an intangible asset.

              To determine why student loans rock, all we have to do is compare it to other types of debt.  For some readers, articles in this series will serve as a crash course on debt terms.

              The closest thing in awesomeness to student loans are mortgages.  Both are backed by the federal government.  Unfortunately, mortgages come with the risk of becoming homeless.  If you skip mortgage payments, you will be evicted.  However if you skip student loan payments, you will not lose your home, your car, or any of your property.  Heck, you will not lose the education that you purchased with the loan!

              This is a big deal, because Maslow’s Hierarchy of Needs shows us that shelter is very important.  There is a huge difference between a loan that damages your credit, and a loan that damages your credit but also kicks you out of your place of residence.  All the people who complain that student loans cannot be discharged in bankruptcy completely neglect this fact.

              I personally like the if the worst case scenario happens (financially), I can continue to live my life exactly as I see it.  If you ask me, the only people who have to worry about student loans are the ones who feel guilty about having them – or the ones who want to impress the world by becoming debt free.  If you are one of them, even the best debt in the world will make you miserable.

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                You Get A Head Start

                Student loans rock because of the grace period, deferment, and forbearance.

                To determine why student loans rock, all we have to do is compare it to other types of debt.  For some readers, articles in this series will serve as a crash course on debt terms.

                When you get a car loan or a mortgage, they tell you that you can start paying your first payment in 30 or 60 days.  Big deal.  I didn’t start paying my student loans until 6 months after I graduated.  Six months is a very long time.  In six months you can learn a skill or get a part-time job.  You can make enough money to pay a $300-500 monthly just from this!  This is what they call a “Grace Period”.

                Random note:  With private loans, they might not figure out that you have graduated until you tell them.  I voluntarily told them because I didn’t want to tack on further interest (private loans are never subsidized).

                A grace period is a big head start which, I fear, most people don’t use.  Anybody can make a substantial amount of money or save a substantial amount within six months.  When I graduated, I planned my spending as if I had the loans, and within six months I was spending appropriately…any mistakes I made along the way were absorbed by the cushion created by the student loan bill I didn’t actually pay.

                If you find another loan that gives this benefit, please put it in the comments.  Don’t be greedy and keep it to yourself.

                 

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                  Interest Rates Are Low or Fixed

                  Student loans rock because the interest rates are low and/or fixed.

                  To determine why student loans rock, all we have to do is compare it to other types of debt.  For some readers, articles in this series will serve as a crash course on debt terms.

                  When you borrow money, you prefer a low interest rate to a higher rate. Credit cards typically charge more than student loans, so they are not a better source for paying your college tuition.  But what if they were the same rate?  Unless the rates were fixed, it’s still better to get money from the federal government.

                  Right now I have half my student loans at 6.5% or so (Federal Loans) and the other half at 5.88% (Private Loans).  The lower rate sounds good, but it is variable based on the prime rate.  This means that once the economy cranks back up and interest rates go up, so will my cost of borrowing. For many people who live on fixed incomes this is just not good.  For example, 5.88% of $50,000 is $2,940, but 6.88% is $3,440 (17% increase).  Those numbers assume an interest-only payment (for simplicity), but the issue is whether the person can afford an increase in their loan rate.  I believe that the risk is often not worth it.  I advise folks to get fixed  rate loans whenever they are possible – sometimes they pay more, but it makes spending plans easier easier and reduces risk.

                  Not only are federal loan interest rates fixed, some of them are subsidized while you are in school (i.e. the government pays your interest).  There’s talk of making federal loans variable, but if that would happen they’d be much lower than private loans or credit cards because they will be based on the federal government’s borrowing rate (which is close to zero), and they still wouldn’t factor in the borrower’s credit (or lack thereof).

                  One more thing:  Student Loan interest is deductible (up to $2,500) for most taxpayers, so your interest just got cheaper.  The other source of tax-deductible debt is a mortgage, but payment terms are better with student loans (you’ll find out soon).

                  Next time someone tells you they’re paying too much in student loan interest, ask them for the alternative. What other loan could they have used to pay for college and get a better deal?  Don’t hold your breath while they try to answer.

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                    Did you know that student loans rock?

                    To determine why student loans rock, all we have to do is compare it to other types of debt.  For some readers, articles in this series will serve as a crash course on debt terms.

                    Qualifying is easy

                    To qualify for federal student loans all you have to do is enroll in an academic institution full time.  That’s it.  You don’t have to have good credit. Paying your loans on time after you graduate will do many good things for your credit score, and that’s just a bonus.

                    What other loan on the planet do you get without credit qualification?  I can’t think of any – if you do, please put it in the comments.  I’m confident there won’t be many.  The federal government doesn’t even restrict your borrowing capacity according to major.

                    These are common criticisms of student loans, but they present incredible opportunity for the borrowers.  Imagine that you are the next Oprah Winfrey.  Nobody can tell you not to borrow $60K for a masters degree.  You don’t have to know now that you are the next Oprah; you just have to pursue opportunities in front of you until you reach your peak.  Also keep in mind that many college students will change their major at least once.

                    When I read articles about student loans online, one of the things people say is that liberal arts majors should not be able to borrow $120,000 for college.  The problem with this idea though, is that a number of liberal arts majors do very well (not necessarily in liberal arts careers).  In fact, the Accounting profession has a surprising number of highly successful liberal arts or music graduates – and the liberal-arts/accounting combo helps develop better accountants.

                    So, next time someone tells you something bad about student loans.  Ask them to tell you another way that an 18 year old with no credit history, and majoring in “undeclared” can borrow an unsecured loan of $30,000 per year.  Enjoy the silence that follows.

                     

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