Finding a reasonable loan for a student

[Hermit]

DS is in his 6th year of college. About time for him to take over his college costs. We applied for a Sallie Mae loan. About 12% for a nine year loan. I just can't do that. He would pay almost $30,000 on a $15,000 loan. That is just for the first semester with at least two more to go.

He has called some banks and it didn't look much better.

I called PenFed and can set up a secured loan against a savings account that I fund. He would need to be a joint owner on that account to be able to get his own loan. The loan cost is 2% over a savings account interest rate or currently 2.5%.

I have an appointment with my accountant to make sure I don't have an issue with gift taxes, but his thoughts over the phone was there would be no problem.

Has anyone had experience with setting up such a loan and using it for education?

 

[Mulligan]

I used to do those secured CD loans all the time. Although mostly for the reason of lower interest rate cost and unwillingness to trust myself to pay myself back. 2% above CD rate was the standard for me, although the standard loan term was 5 years. Will they extend the life of the loan out to the length you desire? If I remember mine was always the length of the CD term which was 5 years also.

I know you are well aware of this, but setting this up still doesn't absolve you from the commitment of bring on the hook for the loan since your assets are covering the loan commitment. I only mention it because you referenced the fact it was time for him to take it over. I hope the extra college years are for a more intensive degree and not just having an extended great time being a student!


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[LOL!]

I know folks say do not loan money to your kids, but when my oldest could see the light at the end of the college tunnel, we loaned her about $20,000. The first payment back is due next week and since she did graduate and get a decent job, I know the monthly payments will start coming in as she still has a shared bank account with mom.

She could not find a decent loan either as she was an unemployed student. OTOH, the interest rate we had her sign for is way higher than what CDs are paying nowadays.

We just had her find some loan documents online and we both signed it.

But she doesn't get any credit report benefit to this loan. And she has no credit cards yet, too.

 

[Walt34]

And she has no credit cards yet, too.

She might want to change that and get one or two since she has no credit rating at all. At the suggestion of an older sister I got a Sears card at 21. Bought a couple of shirts with it and paid it off. Next month bought a couple pair of jeans or something and paid that off when the bill came. Then put the card in a drawer and used it maybe twice a year.

That apparently was enough at that time to establish a good enough credit rating for me to get an apartment. YMMV.

 

[LOL!]

She wants credit cards and applies for them, but has always been denied.

My wife is still mad to this day that she got turned down for a Sears card in college while I was accepted.

 

[Hermit]

I used to do those secured CD loans all the time. Although mostly for the reason of lower interest rate cost and unwillingness to trust myself to pay myself back. 2% above CD rate was the standard for me, although the standard loan term was 5 years. Will they extend the life of the loan out to the length you desire? If I remember mine was always the length of the CD term which was 5 years also.

I know you are well aware of this, but setting this up still doesn't absolve you from the commitment of bring on the hook for the loan since your assets are covering the loan commitment. I only mention it because you referenced the fact it was time for him to take it over. I hope the extra college years are for a more intensive degree and not just having an extended great time being a student!

Thanks Mulligan,

I will check on the period of the loan, but with the difference in rates, this loan could be much shorter with the same payment. He is in the engineering department studying computer science at a major engineering school. I don't think $100k is an unreasonable starting salary. On paying it back, he will always have that choice, but between the negative impact on his credit rating and the negative impact on future help from Dad, I hope he would make good on his commitment.

 

[Walt34]

My wife is still mad to this day that she got turned down for a Sears card in college while I was accepted.

I can understand that. ~1976 I applied for an Esso (now Exxon) gasoline card and the ignoramuses turned me down! To this day the fuel gauge has to be pegged on empty before I'll buy Exxon gasoline.

 

[Hermit]

I know folks say do not loan money to your kids, but when my oldest could see the light at the end of the college tunnel, we loaned her about $20,000. The first payment back is due next week and since she did graduate and get a decent job, I know the monthly payments will start coming in as she still has a shared bank account with mom.

She could not find a decent loan either as she was an unemployed student. OTOH, the interest rate we had her sign for is way higher than what CDs are paying nowadays.

We just had her find some loan documents online and we both signed it.

But she doesn't get any credit report benefit to this loan. And she has no credit cards yet, too.

I don't have any qualms about being involved in educational loans for DS. It was always the late DW's desire that the kids left college debt free. I have funded their college to this point, but there just comes a time where he needs to move on and me paying all his bills is not helping that movement. This should also help him establish some good credit.

DD finished college in four years. (She turned down a request by the math department to move from a minor to a major in math with one or two more semesters.)

 

[Mulligan]

Thanks Mulligan,



I will check on the period of the loan, but with the difference in rates, this loan could be much shorter with the same payment. He is in the engineering department studying computer science at a major engineering school. I don't think $100k is an unreasonable starting salary. On paying it back, he will always have that choice, but between the negative impact on his credit rating and the negative impact on future help from Dad, I hope he would make good on his commitment.

That would certainly cut down the interest expenses a lot, Hermit. The rates you quoted are mind boggling. Mine back in the high interest rate era of the 80s were only 8% back then. What in the world has went on since then? You would think with current interest rates incredibly lower today than back then, student loans wouldn't be 4-5%. I know enough just off hand that there are different types of SL, but I remember with 100% clarity that I wrote my monthly SL checks to Sallie Mae.... Incredible what the rates are today.
After reflecting Hermit on your original question I am 100% sure for me anyways the CD length was tied directly to the loan rate. I remember one situation where I had to borrow money that involved using 2 separate CDs already deposited with two different maturity dates. They finagled it to make the loan work out. To them, the only thing that mattered was the money had to be tied up as collateral for the term I needed.
If nothing else if they were only willing to go out the length of a 5 year CD, you could always subsidize half the loan payment back to son and then re up the CD at maturity for 5 more years to in essence give him a 10 year CD backed loan.


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[Sunset]

She wants credit cards and applies for them, but has always been denied.

Have her go into the bank where she has an account, and request a secured credit card. Its one where you pay say $1,000 into it in advance, and then your limit is $1,000. Each month pay it off and you have a card with a $1,000 limit.

After 3-4 months of this, she can then go back to the bank and ask for a 'real' credit card put out by the bank. Best if she knows which card she wants in advance (airline miles, or points, or cash back, no fee , etc).

 

[Walt34]

Have her go into the bank where she has an account, and request a secured credit card. Its one where you pay say $1,000 into it in advance, and then your limit is $1,000. Each month pay it off and you have a card with a $1,000 limit.

After 3-4 months of this, she can then go back to the bank and ask for a 'real' credit card put out by the bank. Best if she knows which card she wants in advance (airline miles, or points, or cash back, no fee , etc).

After my divorce I had to do that and it worked.

The ex seemed to think that the solution to every "I wanna..." was charge it. Paying it back was optional. So my credit was pretty ragged but I had it cleaned up in a couple of years.

 

[NgineER]

What heloc rates can you get? This may also be an avenue for you.

 

[Hermit]

What heloc rates can you get? This may also be an avenue for you.

Well, unfortunately, I don't have a house! I don't think I could get much in the way of a loan on the motor home I am currently living in. Especially since it was given to me.

To top that off, I can't get a loan on the house I am building either while it is under construction or after it is completed. That is fine with me. I don't wish to have any debt now that I am retired.

 

[Hermit]

That would certainly cut down the interest expenses a lot, Hermit. The rates you quoted are mind boggling. Mine back in the high interest rate era of the 80s were only 8% back then. What in the world has went on since then? You would think with current interest rates incredibly lower today than back then, student loans wouldn't be 4-5%. I know enough just off hand that there are different types of SL, but I remember with 100% clarity that I wrote my monthly SL checks to Sallie Mae.... Incredible what the rates are today.
After reflecting Hermit on your original question I am 100% sure for me anyways the CD length was tied directly to the loan rate. I remember one situation where I had to borrow money that involved using 2 separate CDs already deposited with two different maturity dates. They finagled it to make the loan work out. To them, the only thing that mattered was the money had to be tied up as collateral for the term I needed.
If nothing else if they were only willing to go out the length of a 5 year CD, you could always subsidize half the loan payment back to son and then re up the CD at maturity for 5 more years to in essence give him a 10 year CD backed loan.


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That is pretty much what I am thinking. He should be able to borrow a series of loans while he completes college. Whether the loan is 5 years or 7 years, the payment amount will be a lot less than the Sallie Mae loans. He can borrow enough to make the payments while he finishes school. After he finishes school, he should have enough income to pay off the loans in a couple of years. If it is a shorter period, that means he cannot drag the loans out while he lives the high life.

BTW, I found it interesting that Sallie May assigned the interest based on DS's credit score, but was more than happy to have the loan secured by me. My credit score only entered the picture regarding whether they would approve the loan.

My take is Sallie May is now set up just as the quasi governmental home lending institutions. I'm sure the head of Sallie Mae makes the big bucks and it is obvious they are now in business to make a profit on the student loans. Unfortunately, the loans continue to be life long loans thanks to the kindness of the government in helping our kids go to college. Haven't done any research to see how Sallie May is set up now days, so the above is just my opinion.