Key Sources of Financial Aid – Least Good Sources – Non-Subsidized and Higher Interest Rate Loans

Unsubsidized Federal Stafford Loans

Depending on a family’s eligibility for financial aid, students may qualify for a subsidized or unsubsidized Stafford loan. The basic difference between the subsidized and unsubsidized Stafford loan is that the federal government pays the interest while the student attends college, during the six-month post-school grace period, or during periods of authorized deferment on subsidized Stafford loans and interest on unsubsidized Stafford loans starts to accrue immediately.

Unsubsidized Stafford loans are available without regard to financial need. As with the subsidized Stafford, depending on the student’s year in college, dependent undergraduate students may borrow amounts ranging from $2,625 to $5,500 a year to finance their studies using the unsubsidized Stafford. The Stafford loan interest rate is variable but cannot exceed 8.25 percent. The student borrower is responsible for paying the interest but can allow it to accumulate while in school. If the interest is allowed to accumulate while in school, the interest will be capitalized at repayment. Capitalizing the interest in this manner will increase the overall amount and cost of the loan. It is to the borrowers advantage to pay as you go. 

Repayment for unsubsidized Stafford loans follows the same terms as those for subsidized Stafford loans and is not required until six months after the student leaves school. Interest paid on Stafford loans may qualify for the federal education loan interest tax deduction. 

There is a single application/ promissory note for Federal Stafford loans.

Leveraged Loans
Leveraged loans are most often repaid over several years typically ranging from three to thirty years. Because leveraged loans means borrowing against an individual’s or family’s personal assets, you are actually borrowing money from yourself. Leveraged loans often have favorable interest rates and repayment terms. However, the rates and terms are influenced by the quality and value of the asset as well as credit history and rating. Examples of leveraged loans include home equity loans, lines of credit, second mortgages, and margin loans on your equity (stocks & bonds) accounts. 

Home equity loans have become a widely used means for families to pay for college. Parents who own their home may be able to borrow against the equity value that has accumulated over the years to fund higher education expenses. Interest rates and repayment terms vary. Home equity borrowers also may incur administrative costs, such as a home appraisal fee. On home equity loans under $100,000 ($50,000 for a married taxpayer filing separately) interest may be fully deductible, if taxpayers itemize deductions on their federal tax return. Of course, borrowers who fail to make payments on a home equity loan risk losing their house.

If the family has access to enough federal education loans to meet the educational cost they might not want to borrow against the equity in their home. Nevertheless, having the potential for borrowing against your assets gives you flexibility but it also places family assets in jeopardy. Families should carefully management the leveraging of family assets to pay for college. It is strongly advised that the family consult with their professional financial advisors when considering leveraged loans as a means for paying for college. 

Private (Alternative Loans)
Private loans provide supplemental funding when other financial aid does not cover costs. Private Loans, also known as Alternative Loans, help bridge the gap between the actual cost of education and the limited amount the government allows students and parents to borrow from its programs. Private loans are offered by private lenders (banks or other financial institutions and schools to parents and students) and there are no federal forms to complete. Private Loans, unlike Federal loans may set credit criteria and consider the borrower’s credit score.

Many families turn to private loans when the federal loans don't provide enough money or when they need different repayment options. For example, a parent might want to defer repayment until the student graduates, an option that is not available from the government parent loan program. 
Lenders provide different types of private loans, depending on the student's level of study. 

Personal Unsecured Loans
Unsecured commercial and private loans are an expensive way to pay for college. The most common personal unsecured loans are credit cards. Because credit cards tend to carry high interest rates that may exceed 25% and more when fees and penalty charges are added and are so easy to use, it’s best to consider them as a very dangerous last resort in paying for college. The Education Resource Center is firmly against using credit cards and personal unsecured loans or lines of credit to pay for college. We do recognize that students and families have used this source to pay for college, however, we must caution families against reliance on this source.

Use the Education Resource Center’s Paying for College – Seven Step Approach to Paying for College to create, organize and execute your plan to pay for college.