Is the subsidized Stafford a better deal?

August 4, 2009 12:36 PM

Should my son accept a partial subsidized Stafford Loan at 5.6% then pay the balance with a variable rate private LOC, or should he skip the Stafford if the LOC's current interest rate is 4%?

You are not my financial advisor, but this is hopefully obvious to you while not at all obvious to us.

Financial Aid office offered a small portion of the upcoming semester's bill as a subsidized Stafford Loan, and another as an unsubsidized Stafford Loan. Total is about $2500 of a $11,000 bill. Our local credit union offers a variable rate line of credit for up to 100% of the cost. Currently it's at 4%. The credit union manager says that he is financing his own education with that product, and the highest it has been in the 5-6 years he has participated was 8%, when times were still pretty good. The terms of the loan are pretty similar to Stafford, with repayment deferred until six months after graduation as long as he carries at least 12 credits.

Each piece of the financial aid package must be accepted or declined separately. I originally thought my son should decline the whole thing and just deal with the LOC, but now I'm wondering if that's bad advice.

posted by Breav to education (6 comments total)

There are several things to consider:

1. What are the terms of the LOC's deferment? Fed loans can be deferred as long as you are enrolled in at least 6 credits (part time), and this enrollment status is updated automatically through a national clearinghouse for most schools. So, if your son plans to go to grad school, the Stafford would, most likely, be deferred (and subsidized) throughout that as well. See if the LOC does that too.

2. What are the max rates the two loans can reach? It may not be worth the risk of the LOC increasing dramatically.

3. Repayment options. Stafford loans can typically be repaid on a standard plan, an extended plan, or a graduated plan (increasing with income). They also have repayment/forgiveness programs, like Americorps if you work in certain areas of public interest. The LOC probably doesn't qualify for those.

4. Bankruptcy. Currently, federal student loans are not dischargeable in bankruptcy, unless there would be undue hardship. The LOC probably is.

5. Who's the borrower? If the student loan is in your son's name, but the LOC is in your name, you have to think about the impact on your credit (unless you plan to pay both back yourself anyway). If you plan to pay back the loan regardless, then you don't need to worry about him defaulting on the LOC, it would actually help your son's credit to have the a loan in his name (but you'd still have exposure to the risk if you cosign).
posted by melissasaurus at 1:01 PM on August 4

I am not sure about the choices you have offered, except to say that variable interest rates make me nervous.

Either way, you should check again with your son's school to ask them if they can negotiate or help you out. For instance, I thought limits for Stafford Loans are something like $2200 unsubsidized for freshman (and it goes up from there), so your son should be able to borrow more at a lower interest rate (Maybe this is income dependent, I'm not sure).

I do know several people who've gotten great results by just calling their schools and explaining their situations and asking for assistance - better interest rates, payment terms, loan terms, etc.
posted by lesli212 at 1:10 PM on August 4

There are currently student loan forgiveness programs in place for those who do not make a certain income; those would not apply to the line of credit.

However, if you are borrowing in your name that may be moot.
posted by miss tea at 1:10 PM on August 4

Subsidized Stafford loans eat the interest while your son is in school. When he starts repayment 6 months after graduation, the capital will be the same amount that was borrowed. This is actually a really good deal. Your son is getting the money on free float for the duration of his education.

UN-subsidized Stafford loans accumulate interest while your son is in school. When he graduates, the capital may well have ballooned to twice what was borrowed or more. I don't recommend that.

The credit union loan sounds decent as loans go, but you're still responsible for the interest while your son is in school. Use it to fill in after you run out of Subsidized Stafford, but keep in mind that you are still responsible for the interest during school. So you either want to make payments during schooling, or you want to be prepared for the capital to be higher at graduation than the borrowed amount. But, it may yet be lower than it would with the unsubsidized Stafford - as long as the variable interest rate stays below 5.6% most of the time.

I'm not crazy about loans in general. But if you need to use them, you should minimize the impact of interest as much as you can.
posted by Citrus at 1:57 PM on August 4

With Federal loans, you can consolidate them and lock in the interest rate for the duration of the loan. I did this in 2005, and got a great rate. Here's more info:

http://loanconsolidation.ed.gov/borrower/bconsol.html
posted by elder18 at 2:10 PM on August 4

Student loans won't have a dramatic impact on his credit score. Having that much of a loan through a credit union may have a negative effect, which may be an issue if he plans to buy a house in the near future, or finance a car, or anything else of that nature. Considering how much harder it is to get a loan now (and will likely be for the next while), that is something to think about.
posted by markblasco at 2:36 PM on August 4