Student Loans A Good Deal

Student Loans A Good Deal



Student loans: a​ good deal
America is​ awash in​ debt .​
The consumer-driven economy is​ driving consumers into bankruptcy,​ the​ average household owes more than $10,​000 in​ high-interest credit card debt spanning six or​ more credit cards,​ and the​ Goverment recently announced that our national savings rate was negative .​
(Not that the​ Government has room to​ talk; the​ Government is​ exceeding its income so much that the​ new exciting goal in​ Washington is​ just to​ cut the​ deficit in half by the​ end of​ the​ decade.)
Amidst this sea of​ splurge-spending that has seen consumers trade their home equity in​ to​ pay off credit cards only to​ max-out those same cards in​ the​ same calendar year,​ there is​ a​ curious reluctance on​ the​ part of​ the​ American populace to​ borrow money for higher education through the​ Stafford loan program .​
In fact,​ the​ same students who eagerly sign up for card after card just to​ get free tacky t-shirts they'll never wear complain about the​ amount of​ student loan debt that they'll have when they graduate.
If only all of​ America's financial troubles were linked to​ student loans! These loans aren't as​ bad as​ parents and students seem to​ believe .​
In fact,​ they're among the​ best deals available today .​
Here's why.
Attractive Rates
For the​ last decade,​ interest rates on​ Stafford loans have been exceptionally low,​ getting down to​ as​ little as​ 3% or​ less during some years .​
The Stafford loan rate has traditionally been variable,​ fluctuating based on​ the​ prime rate; by law,​ however,​ the​ rate has been capped at​ less than 9% .​
That means that even in​ a​ bad year,​ the​ gross interest rate paid on​ those funds is​ a​ lot better than the​ rate on​ most credit cards (which average around 17% and can go upwards of​ 25%).
Moreover,​ even those attractive rates only apply to​ the​ unsubsidized portion of​ Stafford loan debt while a​ student is​ in​ school (defined as​ enrolled half-time in​ a​ degree-seeking status) .​
Depending on​ a​ family's financial situation -- and the​ terms are pretty generous here,​ too -- a​ portion of​ the​ money for which students are eligible may be subsidized .​
The Government pays the​ interest for the​ subsidized portion of​ the​ loans while students are enrolled.
The amount that you​ can borrow is​ capped by school year (Fr.,​ So.,​ Jr.,​ Sr.,​ and Graduate) as​ well as​ a​ student's dependent status with regards to​ his or​ her parents,​ but for a​ quick example,​ let's assume that you​ are a​ graduate student who borrows the​ maximum annual amount of​ $18,​500 and qualify for the​ maximum subsidized amount of​ $8,​500 .​
Your interest rate is​ 8.5%,​ but while you're in​ school,​ you​ only pay that 8.5% on​ the​ $10,​000 in​ unsubsidized loans.
That means the​ effective interest rate for the​ entire $18,​500 is​ only about 4.6% while the​ borrower is​ in​ school.
Attractive Terms
In addition to​ being relatively cheap versus other forms of​ borrowing,​ Stafford loans offer extremely attractive terms .​
No payments at all are required while the​ borrower is​ in​ school,​ although students may choose to​ pay the​ unsubsidized portion of​ their interest to​ reduce payments later on​ .​
When he or​ she does leave school and repayment begins,​ there are several payment options,​ including a​ graduated pay scale that assumes a​ low initial income growing over time or​ an​ extended term that gives up to​ 30 years to​ pay off the​ debt.
And if​ the​ borrower decides to​ return to​ school? the​ loan can be deferred again as​ in-school status .​
Try telling a​ mortgage company that you​ won't be living in​ your house for a​ few months so you'd like to​ defer the​ mortgage!
Consolidation
At the​ moment,​ consolidating student loans remains a​ very powerful option for borrowers .​
When loans are consolidated,​ they shift from a​ variable interest rate to​ a​ fixed rate calculated as​ a​ weighted average .​
The average is​ based on​ the​ rates of​ each loan consolidated -- and someone who consolidated once could borrow more and then consolidate again .​
(Consolidation loans can also be deferred if​ the​ borrower returns to​ school.)
Consolidation was particularly valuable in​ the​ early part of​ the​ decade when interest rates bottomed out,​ giving students a​ chance to​ lock in​ a​ fixed rate of​ 3% or​ less for the​ life of​ the​ consolidated loan .​
These days,​ with interest rates edging up,​ the​ locked-in rate would probably be between 5% and 6%.
Tax Advantages
The last of​ the​ four key strengths of​ student loans is​ their tax treatment .​
Interest paid towards student loans is​ tax-deductible up to​ a​ certain cap .​
While it​ does phase out based on​ household income,​ the​ phase-out levels are fairly high and most likely don't affect many recent graduates (especially married couples) .​
What about grants?
In their eagerness to​ shun loans,​ Americans clamor about grant programs,​ particularly the​ Pell program .​
Grants are basically free money; the​ funds are given based on​ certain criteria but generally do not have to​ be repaid .​
Don't get me wrong,​ either: if​ someone offers you​ a​ grant,​ take it.
That being said,​ education is​ an​ investment in​ your own future .​
Sure,​ the​ nation has a​ vested interest in​ having an​ educated population,​ but that interest is​ only met if​ its citizens succeed in​ the​ courses that they take and actually get educated .​
Grants are fine as​ part of​ the​ mix,​ perhaps,​ but anyone who is​ planning to​ attend a​ college or​ university should go into it​ confident that he or​ she will make enough money when it's all over to​ be able to​ repay money borrowed to​ finance the​ costs of​ education .​
I​ understand that there are exceptions -- some of​ the​ arts,​ in​ particular,​ never pay well -- and these are areas where grants make sense (though even here,​ I​ favor merit-based scholarships) .​
Too often,​ people are going to​ college without the​ slightest idea of​ why they are there and failing to​ learn anything at​ all .​
If they do that with borrowed money,​ fine; if​ they do it​ with tax dollars given in​ the​ form of​ grants,​ perhaps not so fine .​
Either way,​ grant money rarely covers the​ entire cost of​ education .​
That takes us back to​ Stafford loans.
Changes are coming (but it's still a​ good deal)
One little-noticed aspect of​ the​ recently passed Deficit Reduction Act is​ a​ provision that changes Stafford loans from variable rates to​ a​ fixed rate of​ a​ little under 7% .​
The Government likes this change because it​ makes loan interest predictable .​
In the​ long term,​ students will like it​ as​ interest rates get higher.
In the​ short term,​ though,​ this shift is​ bad news for borrowers who have enjoyed exceptionally low rates .​
My advice to​ borrowers? Consolidate now and lock in​ a​ fixed rate that will still be a​ bit lower than the​ new rate .​
Once the​ changes take effect in​ July 2018,​ consolidation will just create one account number without impacting interest rates.
Yet even with these changes,​ the​ Stafford loan program remains an​ exceptionally good deal for Americans .​
Sure,​ there's a​ case to​ be made that debt is​ never a​ good thing,​ but in​ the​ United States,​ we all too willingly embrace debt .​
And as​ far as​ debts go,​ Stafford loans are among the​ best debts one could have: the​ rates are low,​ the​ interest is​ tax-deductible,​ and the​ terms are generous .​
If the​ choice comes down to​ a​ Stafford loan or​ a​ credit card,​ ditch the​ lousy t-shirt and borrow from the​ Government.
Long live the​ Stafford!




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