All education financing is not created equal; there is a generally-accepted hierarchy that goes roughly like this: 1. First, the freebies: scholarships and grants. Obviously. 2. Next, your own cash savings - including Education IRAs and 529 plans. 3. Federal student loans - stafford loans - are your next best bet. These loans have fairly low interest rates (now fixed at 6.8%), you won't need to make payments while in school, the interest is tax-deductible, and there are very flexible repayment options once you've completed your education. With subsidized loans, the gov't pays the interest for you while you're in school. The interest on unsubsidized loans accumulates while during this period, and can greatly increase your prinicpal by the time you are ready to start repaying. (Hint: if at all possible, at least make a monthly interest payment while you're in school.) Maximum per year: $18,500. (Of which $8,500 can be subsidized. Subsidy is determined by need.) 4. Grad PLUS Loans. These are additional federal loans - PLUS used to mean Parent Loan for Undergraduate Students, but recent changes mean that grad students can use Grad PLUS loans to fund their own education. These loans have fixed rates, at about 8.5%. You can borrow as much of these as you want, up to the total annual cost amount (tuition, fees, and cost of living) determined by the school, less any other aid received. Unlike stafford loans, eligibility for these loans is not just based on your FAFSA - lenders will also consider your credit history. Your payments are derred as long as you are enrolled at least half-time. However, interest will be accruing. Nice repayment options. 4. Private student loans - these loans offer some of the benefits of federal loans, but not all. The interest will not be subsidized (again, do try to make payments to avoid capitalized interest), but you should not be required to make payments as long as you are enrolled at least half-time. Rates can be variable or fixed, and will vary a great deal. Maximum loan amounts will also vary. Your credit history will certainly be used to determine eligibility. Repayment options will vary. 5. Non-student loans: home equity, personal loans, credit cards. Yikes! Use wisely! No special repayment options, and payments due within 1 or 2 months after disbursement. Generally speaking, you should always shop around for federal student loans. While the government sets the rates and many other features, different loan companies offer different kinds of borrower benefits, including rate reductions. Since new laws went into effect last summer, the word on the street is DEALS DEALS DEALS, so look for the lender that can offer you the best package. And care for your soul - lenders make money off your loans; think about who you want to have your money. While schools may have preferred lenders, you can borrow from ANYONE, no matter what line they school feeds you. At my credit union, we've been referring people to https://www.MyRichUncle.com for private loans. Private loans especially deserve lots of scrutiny as they can vary so much from one lender to a next.

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refurb

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19 May 2009, 11:46

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dayman

What about hedging and applying for a mix of loans (GradPlus and private)? I thought about this, but haven't spent any time researching the implications yet. Are the private loans limited to the COA generally or is it just based on your credit inquiry?

I was thinking about doing the hedge thing too. The idea would be to borrow say 25% of your total loans privately, then if rates went through the roof, you could pay those off first. Or, you could do most of your private borrowing in your second year, lowering your overall exposure.

The thing is, when you start to do that, you reduce the total benefit you'll get from using private loans. At some point, its not going to be worth all the effort to save $2000 if you're also taking on the risk of rising interest rates.

I'm pretty sure you can't borrow above the COA on any loans, at least not without withholding info from the lender.

I also agree with jb32 that the risk of rapidly rising interest rates is probably higher now than any time in the last twenty years. I'm going to stick with Stafford and GradPlus and try and pay off the higher interest rate loans ASAP after graduation. In the end, the added cost will be worth the lower risk.

RF

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19 May 2009, 12:00

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Let's play who wants to create a model!! Not it.

refurb

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19 May 2009, 13:38

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dayman

Let's play who wants to create a model!! Not it.

I'll start, here's a model from a guy whose never done any financial models.

I assumed you make one payment at the end of each year, paying off the interest for the entire year and 20% of the principle. This has the following implications:

- total interest paid is pretty low, no matter the type of loan, since you pay it off in only 5 years.
- the effect of a very rapid increase in interest rates is not reflected well because you are paying off the principle so quickly
- the total interest paid is actually higher than it would be, since a normal payment plan would have you making principle payments monthly

Five scenarios based on a $10K loan.
1. You get a private loan at prime (3.75) and it never goes up (v. unlikely)
2. You get a Grad Plus at a fixed 8.5% rate.
3. You get a private loan at prime (3.75) and it goes up 100 bps each year. This is reasonable since prime was 5.00 last year.
4. You get a private loan at prime (3.75) and it goes up 200 bps each year. Not unreasonable in the current economic climate.
5. You get a private loan at prime (3.75) and it goes up 300 bps each year. Probably a worst case scenario.

refurb

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19 May 2009, 13:41

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Actually, my assumptions about the prime rate might be too low! Only the last year of scenario 4 and the last two years of scenario 5 have the prime rate above 10.

If you look at this chart, the prime rate has been a lot closer to 10 even in the past few years!

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19 May 2009, 13:59

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Yeah, check the history out. It's only been recently that rates have generally been below 7.5 percent.

Attachment:

MPRIME_Max_630_378.png [ 15.06 KiB | Viewed 9543 times ]

refurb

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I found this over at the bw forums...

Quote:

I was originally having a hard deciding between the Grad PLUS and the alternative loan but after having giving a couple of lenders my credit score (766) I found out that the alternative loan isn't as attractive. I thought that I would be able to qualify for the better rates, i.e. Prime + 1%, however my score puts me in the Prime +5%. That by itself is already as much as the Grad plus rate and it would most likely go up. They told me that one would need a fico score of around 820 in order to get near the Prime +1% rate.

Also, I called my loan provider because I hadn't heard anything back after applying and she said they are waiting for my school to certify the loan. She said a lot of school are waiting until July because the gov't will be setting the new interest rates early that month.

Maybe we'll luck out and see the 8.5% Grad plus drop a bit?

RF

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Anybody know if you can cancel your loan and change to the lower interest rate in July if it does go down? I figure it won't be an issue, but maybe I am overlooking something.

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One other thing to note this week is the big change in the Eurodollar futures contracts, which is tied to LIBOR expectations. For instance, from Wednesday to today, Eurodollar contracts scheduled for December 2010 delivery fell 50 bps, which implies expectations for future LIBOR rose 50 bps in just 3 days. With movements like that it wouldn't take much for variable (i.e. private) student loan rates to rise higher than fixed rate student loans.

refurb

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05 Jun 2009, 13:21

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dayman

Anybody know if you can cancel your loan and change to the lower interest rate in July if it does go down? I figure it won't be an issue, but maybe I am overlooking something.

I don't see why not. I mean, the funds haven't been disbursed yet, so you could just opt to not disburse any funds, then apply for a new loan.

Then again, I've never tried it, so there might be a factor I'm overlooking.

RF

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Bump. With admittances rolling in, I'm interested to hear about what you guys are thinking in terms of loans. Especially considering Grad PLUS vs. private.

From a little bit of research so far it seems like a private loan at LIBOR +4% might be a better, although riskier, deal than Grad Plus at 7.9% plus 2.5% origination.

Thoughts? What are others planning?

Thanks,

fingercrosser

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03 Mar 2010, 07:23

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Another thing to consider is taking out loans against your 401k. I think you can typically borrow against half of your balance, so it may or may not cover all your tuition (but every little bit helps). Looking at mine, the rate was 3.25%, so it's definitely something to think about. The catch is that the payback period is shorter term (3-58 months). Anyway, just something to consider.

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03 Mar 2010, 22:25

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Borrowing against your 401k is probably not a good idea. Unlike student loans where you can defer repayment while you're in school, a 401k loan you start making payments right away.

fingercrosser

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04 Mar 2010, 06:47

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Good call, Jerz. Guess that wouldn't make much sense at all. I'll have to check and see if they offer the option to defer, even if it's at a higher rate.

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30 Mar 2010, 07:31

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This has become a terrifying endeavor...

altruistanand

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Hi All,

I presume these schemes are only applicable to US students. Are there any financing options available for non US citizens wishing to pursue a MBA program in the US?

jstauning

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Another small (slightly morbid) item to note in comparing federal vs. private loans is that the federal loan balances are forgiven if the borrower dies. Private loans would go against your estate and could create a financial liability for your survivors.

Hopefully an irrelevant point for all of us.

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There are two downsides to borrowing against your 401k

1) No grace period
2) Returns are limited since a good portion is tied up in your loan.

The benefits are good though:
1) Low fixed rate (4.25% at my company)
2) Flexible payment options (1-10 years usually)
3) The interest you pay goes to YOURSELF (or specifically your 401k)

Times2012

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13 May 2010, 21:24

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Does anyone have an idea what credit score it takes to qualify for the best rates from private lenders? I was surprised to find out that I "qualified" for the worst rate 7.75 + LIBOR from Discover Financial. My credit score is in the 80th percentile.

Jerz

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14 May 2010, 06:56

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That's not entirely surprising. First, it's an unsecured loan so banks are going to save the best rates for people with sterling credit scores (but of course they'll advertise the heck out of those rates). Second, the govt did away with subsidies for private education lenders, so of course banks will raise rates to compensate for the lost subsidies.

GoBruin

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14 May 2010, 13:40

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magus

I don't think you can borrow if you quit. At least for my company any loans on your 401K needs to be repaid immediately upon termination of employoment. Otherwise it will be considered a withdrawl and taxed/penalized accordingly.