So my son’s college asked my son to borrow some serious money, $5,500 in “Federal Direct Unsubsidized Stafford Loan” and $19,150 in “Federal Direct Parent Plus Loan”, or $24,650 in total.
We have to be careful here, else by the time he finishes college, he will carry a student loan balance of over $100,000, qualifying him as another debt kid.
Now the liberal art college he is going to does not really prepare him for any specific profession. Most liberal art colleges in this country do not. They offer kids a good college experience, make them better (hopefully) people, but do not really prepare them for any particular job. Most kids attending liberal art colleges move on to professional schools after graduation, which mean adding to the student loans.
I am all for kids to have a good time when they are young. But facing a student loan balance of over $100,000 immediately after that? God Bless American Young Students.
So what is “Federal Direct Unsubsidized Stafford Loan”? Search the exact term brought me to this federal website that answers most of my questions.
Put it simple, an Unsubsidized Stafford Loan is a federally guaranteed student loan that is NOT based on financial need.
For unsubsidized student loans, unlike subsidized student loans, interest accrues from the time the loan is disbursed to the school.
These are some quick facts for Unsubsidized Student Loan:
- Interest rate of 6.8% for the 2012-2013 year
- Borrow up to $12,000 per year, depending on grade level
- Lifetime limit of $34,500 for undergraduate students
- No payments required while enrolled in school
- 1% origination fee
Congress has not yet finalized interest rates for the 2013-2014 academic year. If they do nothing, the rate will remain at 6.8%. Doing nothing is the new norm for our congress these days. In the past they lowered the rate for the subsidized loans to 3.4% for a short period of time, but the rates for unsubsidized kind has also been at an elavated level.
I am a bit disappointed at this stage, for 6.8% is rather high. Very few people can make 6.8% from their investments. My personal record is between 13-14% for the past ten years, but there is no assurance that I will be able to as well in the next 10 year, or even better than 6.8%
And what about “Federal Direct Parent Plus Loan”. This is an overview from the same government site:
- The U.S. Department of Education is the lender.
- The borrower must not have an adverse credit history.
- Loans have a fixed interest rate of 7.9%.
- The maximum loan amount is the student’s cost of attendance (determined by the school) minus any other financial aid received.
In an era when residential mortgage rate is 3.5%, typical 1-year CD rate is less than 1%, I will be crazy if I entertain the student loans offered at 7.9%. Are you serious?
I consider at this time any loan with interest higher than 5% is a rip-off. Perhaps the default rate is too high for the student loans, else I would imagine the competition would have driven the interest for student loans to a much lower rate than it is now. The way to prevent one from becoming a “debt kid” is to not assume high interest loans. The kind of interest rates these federal government loans carry serves to create more debt kids.
I will look into alternative student loans a bit more tomorrow. For now, government sponsored programs, either Stafford Loan or Direct Parent loan are not good ideas.