Magazine article The CPA Journal

College Loans 101: The Education of a CPA Parent

Magazine article The CPA Journal

College Loans 101: The Education of a CPA Parent

Article excerpt

Considerable help is available these days in planning for children's college education: financial assistance centers at colleges, websites (mostly unnavigable and unable to answer questions that vary from the script), and telephone operators. Saving early, using home equity loans, scholarships, IRC section 529 plans are tried-and-true action plans to avoid college funding destitution. But there is much more.

An article in the Boston Globe talked about Sallie Mae (www.salliemae.com), a government-sponsored lender of education funding. I called the toll-free number, and after 10 minutes of giving information to a very helpful and knowledgeable person, I was approved.

The "Parent (PLUS)" loan that I qualified for was straightforward. I borrowed money to pay the tuition; the interest rate, fixed for one year stalling July 1, 2003, was 4.22%. I was so excited that I told other fathers about it, amazed that none of them had heard of the program. One father followed up, but soon was asking, "Why didn't you tell me about the points that must be paid on the loan?" He said he had talked to three different people at Sallie Mae who gave him two different answers. Several phone calls confirmed that he was right: The Parent (PLUS) loan carries a 3% fee paid to the department of education.

A few days after Sallie Mae preapproved me for a Parent (PLUS) loan, a postcard arrived instructing me to call the indicated telephone number to reconfirm the process. In so doing, I was told that if I paid the loan back on time for 48 months the interest rate would be lowered by 2%, which they had not told me earlier.

Interestingly, the organization that sent the postcard, Next Student, is not part of Sallie Mae, but a competitor. Parent (PLUS) is a federal program open to all lenders. I realized that I had signed two promissory notes-one to Salue Mae, one to Next Student.

Parent (PLUS) Menu 1:10-Year Plan

Parent (PLUS) loans are open to all parents of college students, based on credit history; they are not need based. When an applicant is qualified, the lender coordinates with the school's financial aid office to determine the exact amount of the loan. Once the final payment to the college for the year is made, the repayment cycle of the program begins (generally 60 days after final payment to the college). The basic repayment period is over 10 years. Assuming the student has a $5,000 scholarship, the financial aid office estimates costs of $30,000, and the interest rate is 4.22%:

The monthly payment due February 1 (assuming first payment December 1), estimated over 10 years, comes to $263.41 per month. Over four years, the payments would be as shown in Exhibit 1.

As the exhibit shows, the borrower can elect to pay interest only. In this example, interest-only monthly payments would be $90.55, compared to $263.41 for a 10-year payoff of the principal and interest. The interest-only election can be made for the years the student is in college. Because no principal would have been paid, monthly payments will be higher in years 5 though 10 as the loan is paid off (assuming the rate stays at 4.22%, monthly payments beginning in year 5 would be $1,621.80 for 72 months).

A third way to repay the loan is to request forbearance, which is the term Parent (PLUS) uses to describe a request to pay nothing while the child is in school. The interest is added to the principal, resulting in a bigger loan to repay and higher monthly payments once repayment begins. Assuming the same circumstances, the payments over the first four years would look like Exhibit 2. …

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