Although most undergraduate students must provide their parents’ financial information when applying for federal financial aid for college, not all parents may want or be able to help their children pay for college. Colleges and universities, however, typically do expect parents to make some financial contribution to their dependent children’s college costs.
When applying for college aid, dependent students – those students who are claimed on someone else’s tax return – may be eligible, depending on their and their parents’ income, for federal grants and student aid, state-funded grants and school loans, and a school’s institutional student aid.
Graduate students and non-dependent undergraduates may also apply for federal, state, and institutional financial aid.
PLUS Parent Loans
In many cases, a financial aid package may not be enough to cover what your school expects you and your family to pay for college, even when combined with any scholarships and savings you’re bringing to the table.
If you’re an undergraduate and a dependent of your parents, and if your parents are willing to help you pay for college, they may be able to take out a federal parent loan – known as a PLUS loan – that can be used to pay for the cost of attending college.
PLUS parent loans are available in loan amounts that cover up to 100 percent of your certified cost of attendance.
PLUS Graduate Student Loans
PLUS loans, however, are no longer just for parents and their dependent undergraduates.
Beginning in 2006, the federal government opened up the PLUS program to graduate students as well. PLUS graduate student loans, known as Grad PLUS loans, can be used, like PLUS parent loans, to pay up to 100 percent of your certified cost of attendance.
Under federal rules, graduate students are automatically regarded as non-dependents and are thus ineligible for PLUS parent loans, which are only available to parents of undergraduates.
Grad PLUS loans offer graduate students an additional college financing option to scholarships, grants, fellowships, and federal Stafford graduate student aid.
PLUS Loan Eligibility
Eligibility for PLUS parent loans and graduate loans is determined, in part, by the information you submit on the FAFSA, the Free Application for Federal Student Aid. All students, both graduate and undergraduate, who are looking for federal financial aid for school must complete a FAFSA each year.
PLUS and Grad PLUS loans, unlike federal Perkins college loans and federal Stafford student loans, are credit-based loans that require a modest credit check.
In order to meet PLUS credit requirements, parent and graduate student applicants must be free of serious adverse credit items, such as a recent foreclosure or bankruptcy, significant delinquencies (defined as 90 days or more) on credit accounts, or a default on another federal parent or student loan.
Undergraduate students whose parents fail to qualify for a PLUS loan are eligible to receive additional money in federal student aid to help meet their expected family contribution to their college costs.
PLUS Loan Interest Rates
Loans made through the federal PLUS program allow you to borrow money for college at a fixed interest rate.
PLUS loans, both for parents and graduate students, currently carry a fixed interest rate of 7.9 percent. For graduate students looking at their graduate loan options, this rate is slightly higher than the fixed 6.8-percent rate available on federal Stafford graduate student aid.
PLUS and Grad PLUS loans are also subject to a 4-percent servicing fee, which is deducted from the loan proceeds at the time the loan is issued.
Repaying Your PLUS Loan
Until 2008, repayment on PLUS parent loans would begin 60 days after the loan funds were disbursed. However, under new legislation passed in 2008, parents may now defer repayment of their PLUS parent loans until their student graduates or leaves school, and for an additional grace period of six months following graduation.
The rules for PLUS graduate student loans are slightly different. As a graduate student, you may defer repayment on your Grad PLUS loans while you’re still in school at least half-time, but there’s no six-month grace period once you leave school. This timetable should be an important consideration and puts additional pressure on you to have a repayment plan in place before graduation.
Unlike some federal student loans, PLUS and Grad PLUS loans are not subsidized, so interest accrues on the loan balance from the time the loan is made, even if you’re currently deferring your loan payments.
The standard repayment term for PLUS and Grad PLUS loans is 10 years. You may, however, be able to extend your repayment term in order to lower your monthly loan payments. You can call the Department of Education to discuss repayment and extension options.
Loans issued under the PLUS program can be consolidated into a single federal consolidation loan, although parent loans must be consolidated separately from student loans. Parent loans can’t be commingled with student loans into a single account for the purposes of repayment.
Conventional loans are typically the hardest to obtain for real estate investors. Some lenders don’t allow income from investment properties to be counted toward total income, which can make global underwriting a problem for certain investors, especially those who already have several existing conventional, conforming real estate loans reporting on their credit. In these cases, the investor must look outside conventional funding for their investments. Two of the more popular choices for alternative financing are portfolio loans and hard money loans.
These loans are loans made by banks which do not sell the mortgage to other investors or mortgage companies. Portfolio loans are made with the intention of keeping them on the books until the loan is paid off or comes to term. Banks which make these kinds of loans are called portfolio lenders, and are usually smaller, more community focused operations.
Advantages of Portfolio Loans
Because these banks do not deal in volume or answer to huge boards like commercial banks, portfolio lenders can do loans that commercial banks wouldn’t touch, like the following:
- smaller multifamily properties
- properties in dis-repair
- properties with an unrealized after-completed value
- pre-stabilized commercial buildings
- single tenant operations
- special use buildings like churches, self-storage, or manufacturing spaces
- construction and rehab projects
Another advantage of portfolio lenders is that they get involved with their community. Portfolio lenders like to lend on property they can go out and visit. They rarely lend outside of their region. This too gives the portfolio lender the ability to push guidelines when the numbers of a deal may not be stellar, but the lender can make a visit to the property and clearly see the value in the transaction. Rarely, if ever, will a banker at a commercial bank ever visit your property, or see more of it than what she can gather from the appraisal report.
Disadvantages of Portfolio Loans
There are only three downsides to portfolio loans, and in my opinion, they are worth the trade off to receive the services mentioned above:
- shorter loan terms
- higher interest rates
- conventional underwriting
A portfolio loan typically has a shorter loan term than conventional, conforming loans. The loan will feature a standard 30 year amortization, but will have a balloon payment in 10 years or less, at which time you’ll need to payoff the loan in cash or refinance it.
Portfolio loans usually carry a slightly higher than market interest rate as well, usually around one half to one full percentage point higher than what you’d see from your large mortgage banker or retail commercial chain.
While portfolio lenders will sometimes go outside of guidelines for a great property, chances are you’ll have to qualify using conventional guidelines. That means acceptable income ratios, global underwriting, high debt service coverage ratios, better than average credit, and a good personal financial statement. Failing to meet any one of those criteria will knock your loan out of consideration with most conventional lenders. Two or more will likely knock you out of running for a portfolio loan.
If you find yourself in a situation where your qualifying criteria are suffering and can’t be approved for a conventional loan or a portfolio loan you’ll likely need to visit a local hard money lender.
Hard Money and Private Money Loans
Hard money loans are asset based loans, which means they are underwritten by considering primarily the value of the asset being pledged as collateral for the loan.
Advantages of Hard Money Loans
Rarely do hard money lenders consider credit score a factor in underwriting. If these lenders do run your credit report it’s most likely to make sure the borrower is not currently in bankruptcy, and doesn’t have open judgments or foreclosures. Most times, those things may not even knock a hard money loan out of underwriting, but they may force the lender to take a closer look at the documents.
If you are purchasing property at a steep discount you may be able to finance 100% of your cost using hard money. For example, if you are purchasing a $100,000 property owned by the bank for only $45,000 you could potentially obtain that entire amount from a hard money lender making a loan at a 50% loan-to-value ratio (LTV). That is something both conventional and portfolio lenders cannot do.
While private lenders do check the income producing ability of the property, they are more concerned with the as-is value of the property, defined as the value of the subject property as the property exists at the time of loan origination. Vacant properties with no rental income are rarely approved by conventional lenders but are favorite targets for private lenders.
The speed at which a hard money loan transaction can be completed is perhaps its most attractive quality. Speed of the loan is a huge advantage for many real estate investors, especially those buying property at auction, or as short sales or bank foreclosures which have short contract fuses.Hard money loans can close in as few as 24 hours. Most take between two weeks and 30 days, and even the longer hard money time lines are still less than most conventional underwriting periods.
Disadvantages of Hard Money and Private Money Loans
Typically, a private lender will make a loan of between 50 to 70 percent of the as-is value. Some private lenders use a more conservative as-is value called the “quick sale” value or the “30 day” value, both of which could be considerably less than a standard appraised value. Using a quick sale value is a way for the private lender to make a more conservative loan, or to protect their investment with a lower effective LTV ratio. For instance, you might be in contract on a property comparable to other single family homes that sold recently for $150,000 with an average marketing time of three to four months. Some hard money lenders m lend you 50% of that purchase price, citing it as value, and giving you $75,000 toward the purchase. Other private lenders may do a BPO and ask for a quick sale value with a marketing exposure time of only 30 days. That value might be as low as $80,000 to facilitate a quick sale to an all-cash buyer. Those lenders would therefore make a loan of only $40,000 (50% of $80,000 quick sale value) for an effective LTV of only 26%. This is most often a point of contention on deals that fall out in underwriting with hard money lenders. Since a hard money loan is being made at a much lower percentage of value, there is little room for error in estimating your property’s real worth.
The other obvious disadvantage to a hard money loans is the cost. Hard money loans will almost always carry a much higher than market interest rate, origination fees, equity fees, exit fees, and sometimes even higher attorney, insurance, and title fees. While some hard money lenders allow you to finance these fees and include them in the overall loan cost, it still means you net less when the loan closes.
Weighing the Good and the Bad
As with any loan you have to weigh the good and the bad, including loan terms, interest rate, points, fees, and access to customer support. There is always a trade-off present in alternative lending. If you exhibit poor credit and have no money for down payment you can be sure the lender will charge higher interest rates and reduce terms to make up for the added risk.
When dealing with private lenders make sure to inquire about their valuation method.
Also, with hard money lenders, you should be careful in your research and background checking. While hard money loans are one of the more popular alternative financing options, they are often targets for unscrupulous third parties. Before signing any loan paperwork make sure to run all documentation by a qualified real estate attorney and/or tax professional. If you suspect fraud or predatory lending contact the state attorney general office.
For more information on loan scams and stories of predatory lending read the article listed in the resource box below or visit http://www.directlendingsolutions.com.
Examples of Loan Scams – http://www.directlendingsolutions.com/scams-using-western-union.htm
Craig Grella is an author and contributor to Direct Lending Solutions, a website dedicated to personal and small business finance and credit education. Mr. Grella holds a degree in Civil Engineering, teaches entrepreneurship classes through city community centers, and is a visiting lecturer at many national investment clubs.
College students are often cautioned to avoid private loans unless absolutely necessary, urged instead to take advantage of all other financial aid options first.
The advice is sound. Generally speaking, private student loans, which are offered by banks, credit unions, and other private lenders, don’t offer the same level of borrower protections and benefits that government college loans do.
As a student, you should seek out grants and scholarships first — money for college that you won’t have to repay — before taking on college loan debt. Then, if you’re still going to need college loans, you should, in general, make sure you’ve maximized all your available government loans before you consider taking out a private student loan.
Interest Rates & Repayment Options
Federal education loans have fixed interest rates and more flexible repayment terms than private loans. The Department of Education offers income-based repayment options that keep your monthly payments at a figure you can afford, repayment extensions to give you more time to repay, and loan deferments and forbearances that can temporarily postpone your college loan payments if you’re facing financial hardship.
If you go to work in the public sector, you may also be eligible for the discharge of some or all of your government loan debts.
With private student loans, on the other hand, your interest rate is almost always variable, and private lenders aren’t required to provide the kind of repayment flexibility that comes standard on federal college loans.
The current foreclosure crisis that began mushrooming, in part, because of adjustable-rate mortgages should be enough to make anyone leery of adjustable-rate loans on anything.
But it’s worth keeping in mind that when interest rates are low, as they are now, adjustable-rate private student loans can have a lower interest rate than their fixed-rate federal counterparts.
If you have excellent credit, or if you have a parent or co-signer with excellent credit, you may qualify for the lowest-rate private college loans, which currently carry interest rates that are as much as 3-percent to 6-percent lower than the rates on federal student and parent loans.
Interest rates are destined to rise as the economy continues to recover from the recession, so private loan rates won’t always be this low, but if you or your parents are in a position to pay that private student loan off relatively quickly, you may be able to save money over a government-issued college loan.
Covering Your College Costs
So why take out a private student loan at all?
Private student loans are meant to “fill the gap” in college funding that may be left after you reach your federal student borrowing limits. In many cases, families find that scholarships and federal financial aid simply aren’t enough to cover the rising cost of college.
Without private student loans, you may not be able to pay for college or continue your studies.
Statistically, college graduates have a better chance of being gainfully employed than non-graduates do, and college graduates, on average, earn more money in their jobs than workers who don’t have a college degree. For you as a college student, better job and salary prospects may make the burden of a reasonable amount of private student loans easier to bear.
Working With Private Student Loan Lenders
College loan companies aren’t deaf to the economic realities that college graduates are facing. Recently, some of the largest private student loan lenders have instituted new guidelines for the repayment and forgiveness of college loan debt.
Wells Fargo and Sallie Mae, for example, both announced this year that they would begin discharging private student loans upon the death of the borrower. Beforehand, that debt was being left to the co-signer to repay.
And as the recession and large swaths of unemployment among recent college graduates has led to higher rates of delinquency and default on college loans, some private lenders have shown a slight uptick in their willingness to work out modified repayment plans with troubled borrowers who are unable to repay their private student loans.
Being a Smart Student Borrower
For students who must turn to private education loans, it pays to shop around. Interest rates are always important, but they aren’t the only factor worth considering. Repayment policies, payment deferral options, default and late-payments penalties, interest-rate caps, and other terms may give some private student loan programs a clear advantage over others.
Always be mindful of the total amount of your debt from all sources, school loans and otherwise, and aim to limit your reliance on college loans, both federal and private.
The Department of Education’s National Student Loan Data System can help you track all your federal loan debt. Additionally, if you’re carrying debt from multiple federal college loans, the Education Department’s student loan debt consolidation program can help simplify the repayment process and may lower your monthly loan payments.
As you begin to repay your school loans, make it a priority to pay off the higher-interest loans first.
By taking advantage of college scholarships, using all your federal financial aid options, and minimizing the amount of debt you take on to pay for school, you can benefit from the careful and limited borrowing of private student loans to help pay for your college education.
private college loans [http://www.nextstudent.com/private-loans/private-loans.asp], scholarships [http://scholarships101.com/]
Jeff Mictabor is an enthusiast on the topic of student loan issues in the news. He has been writing for the past 10 years for a variety of education publications. He now offers his writing services on a freelance basis.
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