Student Loans: Fixed vs. Variable and Private vs. Federal

MarkD

Level 2 Member
I'm checking out student loan rates on the Discover Student Loan site for my kids and I see private loan variable rates based upon the 3-month LIBOR (currently .25%) + at least 3.24% for a total of 3.49% versus fixed rates of 5.99%.

The government based Federal Direct Parent PLUS loans offered by the schools are a fixed 7.21%.

Being that the 3-month LIBOR has been below 1% since 2009, it seems like the private variable rate starting at 3.49% is the way to go.

With a good credit score, a little research and initiative you can cut the interest rate in half over what the schools offer you.

Is it that simple or am I missing something? I realize that it is variable and may change in the future, but...
 

VDebs

Level 2 Member
The but is the question really. As a grad student I can tell you that those points make a huge difference when you go into pay down mode. There's always the threat of a catastrophic shift in interest rates, but given the 20+ years of ZIRP I don't see how that happens without much larger problems coming with it.

Basically, if rates move from ZIRP then your increased loan bill is probably the least of your worries.
 

Matt

Administrator
Staff member
You should certainly factor interest rates raising by a point or two over the next 4 years as a minimum, just for projection purposes. However, as you say that will still make the private loan more attractive (providing you qualify for the best rate).

I was looking through the various rules and regs and the biggest issue that I could spot was:

If a parent claims a student as a dependent but the student is legally obligated to pay the interest on the loan, then neither the student nor the parent may deduct the student loan interest.
So you should factor that in when you consider how you structure the loan in terms of guarantor.

I'll do some more digging, it does seem like a better choice. May some US students could weigh in with their experiences of going for loans too?
 

VDebs

Level 2 Member
I had fixed and variables and the variables were usually cheaper. Rates didn't rise much and they were a lot easier to pay off as a result. We had a similar problem with loan interest deduction. If you structure the loan primarily in the student's name than the student can deduct and only them. You may want to take out loans in your name for the student. Dunno if that's still possible though, it's some years since undergrad for me.

I would also wait to see what FAFSA says about your financial situation. You may qualify for subsidized loans, which are preferable to anything else, since the interest only accrues once the student is 6 months out of school. If you pay it off before 4.5 years, you'll have accrued no interest.
 

pillow25

Level 2 Member
I would also wait to see what FAFSA says about your financial situation. You may qualify for subsidized loans, which are preferable to anything else, since the interest only accrues once the student is 6 months out of school. If you pay it off before 4.5 years, you'll have accrued no interest.
THIS. If you're a US citizen / perm resident going for undergrad, definitely fill the FAFSA / CSS forms fill them out early in the year. The order of financial aid for undergrad goes:
  1. School grants + scholarships
  2. Outside grants and scholarships
  3. Subsidized loans
  4. Unsubsidized loans
Also, Discover has a deal where they forgive part of the loan if the GPA is good, it's usually a good deal.

Federal subsidized loans and grants are usually capped per semester and lifetime.

Also keep in mind that many "elite" and "good" private schools (the Harvard, Yale, Princeton, Rice, etc) have no loan guarantees / fixed loan amount guarantees depending on what the parent's income is. My advice is that as parents, you should send your kids to the best undergrad that you and the kids can afford. The reason is that having "Graduated from Good University" on your resume opens doors either through networking or sheer name recognition.
 

VDebs

Level 2 Member
Also keep in mind that many "elite" and "good" private schools (the Harvard, Yale, Princeton, Rice, etc) have no loan guarantees / fixed loan amount guarantees depending on what the parent's income is. My advice is that as parents, you should send your kids to the best undergrad that you and the kids can afford. The reason is that having "Graduated from Good University" on your resume opens doors either through networking or sheer name recognition.
I would caution against this actually. A strong state school with no debt is preferable to a better private school and debt. Outside of the Ivys you're not getting any job guarantees out of the Uni name. Even with the Ivys you're typically stuck going into finance or tech since you need a big payday to work of the giant loans you took out. Finance means you're working some 80-90 hour week analyst position and high paying tech jobs are rarer than we think.

Honestly I think a move to less "elite schools" is better for everyone. All that debt forces you to narrowly focus on a career, which means you really don't do much learning and growing. Especially when compared to if you were free to pursue a more liberal arts path before specializing. Plus debt slavery sucks.
 
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pillow25

Level 2 Member
I would caution against this actually. A strong state school with no debt is preferable to a better private school and debt.
I agree, but you'll find that because of the loan guarantees, oftentimes strong private school is just as cheap (out-of-pocket and loan costs) as strong state school. But if both schools are equal academically, I'd take the one where I'd graduate with less debt.

Outside of the Ivys you're not getting any job guarantees out of the Uni name.
I didn't say a job guarantee; I said that it opens doors. By that, I mean interviews, networking, and better opportunities. We'll have to agree to disagree here. I firmly believe that I got job offers out of undergrad because of the school I went to. Of course I was a good candidate, but I think where I graduated tipped the scales in my favor.
 

VDebs

Level 2 Member
I didn't say a job guarantee; I said that it opens doors. By that, I mean interviews, networking, and better opportunities. We'll have to agree to disagree here. I firmly believe that I got job offers out of undergrad because of the school I went to. Of course I was a good candidate, but I think where I graduated tipped the scales in my favor.
Fair play. I think it depends on the industry really and how hiring works. I went to a school that likely would have netted a strong job in politics if I wanted it. Sadly, living and working and learning in DC wises you up quickly to working for the political/non-profit class. Instead I ended up on a circuitous route to academia in the humanities where my school's name wasn't of much help.
 

Cytraveler

Level 2 Member
Resurrecting an older thread here...

We are trying to self-pay for as much college as possible, and use our home equity loan to fill in gaps. Yes, in theory it puts our home at risk, but student loans have their own risk. I'm paying a very low interest rate, and it looks to stay that way for awhile. I can deduct the interest without a problem. And we can borrow just as much as we need when we need it, then pay it off as fast as possible.

We require our kids to work in college, but not to take loans. I want to impress on them the idea of not being in debt, so we hammer that in every year, but they have to work for their own expenses including books.

As to the type of school, my oldest is graduating from Yale and my second is at Northeastern. The very top schools are less expensive than state schools if your income is less than around $200k or so - you get financial aid up to an income of $250 or even $300k if you have more than one in college. It's completely free - no tuition, room or board - they even give you money for expenses - if income is $60k or less. And they don't have loans as part of the financial package. For our son's last year in college, we had to pay $0 for tuition, and even didn't pay all of room and board. Our daughter at Northeastern got a $25k merit scholarship, which makes it about equivalent to a state school in PA. So when applying, don't rule out private colleges - it might be as affordable or even more so than state colleges.

As to the value of the schools, I think it totally depends on what the student thinks they might want to do. In PA, often for law or accounting - as one example - you're better off at Penn State to make business connections. The Ivy's are good for Wall Street business connections. In my son's case, Yale has given him great opportunities in his major in physics - internships at CERN and Fermi Labs that he may not have gotten somewhere else. But I think it is of great importance to choose a school that student and parents can afford without large loans - and NEVER at the expense of saving for retirement. I've never known a bank to give a loan to finance retirement.
 
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