Rising tuition costs and a difficult economic climate have made financing tuition a necessity for many American families. Many families either lost money that was being saved for college in the market or were forced to dip into that savings after taking an economic loss. These tough times have forced many families to resort to public and private financial aid to secure higher education. The first step for many families is the completion of the Free Application for Federal Student Aid (FAFSA). The FAFSA is used to apply for federal, state, and college-sponsored aid. Such aid includes grants and work study programs.
There are two types of federal student loans. The first one is Government-subsidized student loan which tends to charge less interest than private loans do. They also don’t charge you interest until you begin to repay the loan after leaving school, because the government subsidizes your interest payments during that time. On the other hand, the second type, which is unsubsidized loans begin charging interest immediately and that interest is capitalized, meaning that you’ll be paying interest on that debt as well. This means that even after receiving financial aid it may be necessary for families to supplement the funds provided by the government with additional money. Private student loans and home equity loans are options for families attempting to raise supplemental funds to pay for tuition.
Private Student Loans
Federal student loans have maximum limits that may still leave families with a balance to pay. Private student loans are one way to meet that difference. Private student loans are generally available through a bank, credit union, or private student loan lender. The rates on private student loans are higher than those paid on federal student loans and applicants typically have to have good credit to obtain them. On the plus side, private student loans are not subject to the strict application deadlines associated with federal student loans. Further, they are available both before tuition is due and later on in the year when unknown expenses arise.
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Benefits/Disadvantages of Private Student Loans
- Private student loans can be used to meet any education related expense.
- Private student loans are often funded faster than federal student loans.
- Private student loans are based on creditworthiness rather than financial need.
- Interest rates on private student loans may be variable rather than fixed.
- Repayment terms are generally fixed rather than versatile.
Home Equity Loans
Home equity loans (HEL) are available to homeowners who owe less on their mortgage than their house is worth. The difference between the value of the home and the amount of money owed on the home is called equity. Many banks allow borrowers to borrow on the equity in their homes. Home equity loans currently boast far lower rates than private student loans but home equity loans have variable interest rates so that may not be true in the future. Also, the loan is tied to the value of the home so if it decreases then the lender may close the line of credit.
Benefits/Disadvantages of Home Equity Loans
- Mortgage interest is often tax deductible.
- Home Equity Loans are flexible, allowing homeowners to only pay interest on the amount of money they have pulled out of their equity.
- Current interest rates are lower than those of traditional private student loans.
- A homeowner’s home is at risk if they are not able to pay back the loan.
- Payments cannot be delayed, deferred, or forgiven in times of economic difficulty.
Loans that must be repaid are not the best to pay for college. The financial assistance office in most colleges can refer students to a range of scholarships and grants that are available to help pay for higher education. Many universities also offer work-study programs that pay wages to students in exchange for working on campus. Finally, reaching out to family members for financial assistance is a good way to avoid the stresses associated with loan programs of any type.
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