My neighbor’s daughter, Jane Doe, just graduated High School. Her parents haven’t been very helpful in financial support or guidance. This isn’t a judgement on the parents - they don’t have the knowledge or experience, and Mom has been out of work for a year or more.
Jane was having trouble understanding some Sallie Mae private loan documents. She brought them to me so that I could explain what they meant. Her loan offer was for about $32k for the first year. The term was 19.2 years. It had a variable rate with no cap. The rate was currently 10.75%, and based off the 1 month LIBOR + some margin. This was with her parent as co-signer.
The 1 month LIBOR is at around .33, meaning the margin on her loan was somewhere in the neighborhood of 10.5%.
Is this common? Why so high?
She’s looking to go to school to be a pharmacist and expects to be in a 6-year program. For the first 4 years alone, assuming identical borrowing amounts, she’d be paying at least $2000/month. The way I understand it, the last 2 of 6 years would be graduate work (at least I’m assuming this), meaning that her need would be even higher. When she graduates, she’d owe north of $3000/month, just on this private loan.
payments on the Stafford loans
any increase in rate (let face it, the LIBOR is incredibly low now and not likely to stay there in 6 years time)
I’m guessing that she’d realistically owe $4000/month for 20 years after graduation. Assuming an effective tax rate of 30%, she’d have to make $68,572 a year just to stay current on her loans. This doesn’t seem practical to me.
Could these loans be consolidated into some lower-interest loan when she finally lands a job?
Should she really be taking these loans? How can she afford to go to school?
I’m all for not tearing down a kid’s dreams, but I don’t see where this is a practical option.
Wow, I’m no finaincial whiz (I started dozing off at “variable rate with no cap” :o) but that doesn’t seem right.
I’m a returning college student currently with student loans, one subsidized and one unsubsidzed, and the rates on both are well below the rates you cite. (like half)
Did she do her FAFSA (Free Application for Federal Student Aid…on-line) to see what federal and state funding she is elegible for? With her mom’s implied income level, she stands a good chance of getting grants and/or loans with much better terms, it seems. (I got a Pell Grant which covers my tuition and just got the loans to help pay the bills while I was attending).
My son just got accepted to the University where I attend, and we still don’t know what, if any, funding he will get. I sure hope my having loans already won’t screw up his chances of getting some (and hopr more that he gets scholarships and grants which can cover most or all of his tuition, since then he wouldn’t NEED loans)
I’ll be watching to see what advice others more knowledgable than myself in this area have to say.
I would not go the route of private loans unless ALL Federal options have been exhausted. As noted above, all you have to do is fill out the FAFSA. Federal loans include Stafford and PLUS and are now apparently known under the umbrella term “Direct Loans.” The current rate on Stafford is 6.8% fixed.
After exhausting Federal funding, turn to your state for a similarly organized program. (in NY, for example, we have NYHELPS)
Only after Federal + state loans failed to meet my needs would I consider a private loan. And I would consider a couple years at a good community college to knock out basic requirements before I would consider private loans (if possible).
I’m not privvy to all of her family’s info, but I know this amount is what she needs after Stafford loans. I’ll mention that she should look and see if NJ has anything. I mentioned to Jane that the PLUS loan was a better option than this private loan, should that be an option for her family.
I get the impression that her family isn’t willing (or able?) to take on debt on her behalf. That is, they can’t or won’t get a PLUS loan, and home equity is out-of-the-picture at least for housing market reasons. What makes me sad is that her parents are pushing for her to take on this debt… a debt she doesn’t really understand the implications of. I’d guess that her parents don’t understand it either, but I’m not going to start lecturing my neighbors on such personal business. I offered only my opinion on the loan (which Jane solicited) and suggested some alternatives to explore.
That does seem very high. I graduate from high school in 2002, and got all of my loans through Sallie Mae, and in looking at the Sallie Mae website they are all Stafford loans.
I’m currently in pharmacy school, and I’m taking out the maximum in Standford and GradPLUS loans. The current interest rate is 6.8% on federal loans. I’m currently paying $9,625 a quarter in tuition, and will graduate next year with about $120,000 in loans, which is about normal for a private pharmacy school. A state school would be cheaper (at around $40,000-$50,000 total).
Pharmacy is a minimum of 2 years of undergrad, and 4 years of graduate school. If she is having trouble paying for her undergrad courses, she might think about going to a cheaper school. I was able to do my undergrad at the local community college and paid out of pocket for it, so didn’t have to start taking loans till I got into actual pharmacy school.
It is so rare for a H.S. grad to really know what they want to do in graduate school and wind up doing it. If she is not competitive for merit-based aid and doesn’t have family in professional jobs, it’s even less likely that she really understands enough about this to pull it off.
That’s not to say she might not become a pharmacist, or something similar. She may well do that. But the approach of planning out the whole 6 years at once is not what I’d recommend.
I’d suggest she find an affordable way to get the first 2 years out of the way while taking the prerequisites that set her up for a broad array of health science careers. Some schools are even starting to have health science majors that prepare students for a variety of masters-level programs. That way in 2-4 years, when she’s seen more of the world, she will be able to make a wiser decision that includes pharmacy, physician assistant, nurse practitioner, physical therapy, or even medical school, etc.
I’m not sure if she will be open to that kind of suggestion if she’s just asking you about the loan. But borrowing now as if she knows she’s going to be a pharmacist in 6 years is a big risk, IMHO.
I agree. I wish there were some way I could convince her family of that without being a nosy jerk. I asked my wife (who’s better at tact than me) to offer up our time to give them some advice from someone who’s been there somewhat recently.
I don’t know anything about pharmacy school but that just doesn’t sound like a good idea. I could see a grad student taking on that loan commitment, (ETA: I wouldn’t suggest it but I could see it) but not someone who just finished HS. At least not a recent HS grad who has to go to their neighbor to get help with the paperwork …
There was recent NYTimes article about college grads who find their loans are far more of a burden than they expected. Perhaps it would be helpful (to whom I’m not sure):
I was thinking of that article. It sounds crazy to acquire $32,000 just to get through freshman year. Community college was already suggested, and that sounds like a much better idea to get started. (And perhaps she could work in a pharmacy, both to earn some money now and to get some idea of what the work is like. And perhaps if she goes to work for one of the big chains, she could apply for some sort of employer-based tuition assistance.)
Taking out what is, in effect, a personal loan for what could be $150,000 at 11% is insane. If I was forced to go with that rate, I might as well just put it on credit cards because at least I could get some airline milage or hotel stays out of the deal.
By the end of her six years of education, she’ll be paying $16,000 a year just to keep even with interest. With that following her around, she’d better pray for a 100K a year job coming out the gate because even declaring bankruptcy won’t remove the albatross.
11% would be a “good” scenario. Care to hazard a guess how many points the 1 month LIBOR will rise from 2016 through 2036? The 10.75% rate is based on a 0.375% 1mLIBOR. 10 years ago, it was 6-7%. One could reasonably expect the average APR of the loan to be at least 15-19% over the life of the loan.
Could you imagine trying to qualify for credit for pretty much anything after you got out of school? If she paid it off dutifully and without missing a payment, she’d be 45 before she could even qualify for a car loan on a base Hyundai… and pretty much forget about ever having kids if she doesn’t marry very rich.
This is one of those spots where tearing down dreams is the best possible thing.
Private school?
Those loans aren’t reasonable. I agree with 2 years of community college - sponge off her parents as much as possible and work and save during those two years. Then two years of public school - living at home again if possible and working, if possible. Then pharmacy school if she is still interested. Debt load will be cut in half.
The OP just isn’t making any sense to me. When you borrow for college, you borrow only enough to cover one school year at a time. Each year, you fill out the FAFSA again and your situation is re-evaluated. As an incoming freshman, the OP’s niece has no credit score to speak of; therefore, she is a poor credit risk. Next year, after she’s completed a year, not flunked out and not defaulted on anything, she will likely get a better award from FAFSA (grants and such) and better interest rates to make up the difference.
It sounds to me like you don’t have enough of the details for this particular situation for us to really be able to conclude anything. Nobody borrows for 6 years into the future right up front in the first year of school. You do it one school year at a time. Sometimes you get campus jobs, work/study, or internships that mean you don’t have to borrow as much. Or tuition will get hiked up anywhere from 6% to 12% each year. There is no possible way to know exactly how much 4-6 years of school will cost right now. Both the school’s and the students’ financial pictures change a bit each year.
Will they change so drastically? Her need each year is likely to be more and more. She may get some grants, maybe a lower margin on the private loan; but I can’t imagine a situation where the borrower’s credit will be markedly improved. The loans all have deferred payments. In my mind, this could only mean that she’d be a larger risk and subsequently get higher rates… Or worse, since she’s already near the worst possible rates, she might find herself not approved at all.
In case anyone else is interested, her parents qualified for and agreed to take a PLUS loan @ 7.9% fixed. Not the greatest loan out there, but helluvalot better than a 10.75% variable rate.
For her sake, hopefully the subsequent years give her better financing options.