The original plan was to not take any loans no matter what, but now I’m wondering if taking whatever is offered in subsidized would be a better plan? DS has enough money in an UTMA to pay off the loans after graduation and we should qualify for simplified needs test, so that asset would be ignored on the FAFSA. It’s in a pretty aggressive mutual fund and having to cash in chunks of it each semester and be at the whim of the market sounds a lot more complicated than just taking the loans and doing one lump sum payment at that end. I guess the alternative is we could move it all to a safer investment prior to starting school, but on the other hand 4 more years of growth might be nice (unless it crashes).
Just wondering if there are drawbacks to the subsidized I’m not thinking of. All I have now is, there’s probably a loan origination fee, and I don’t like the precedent it sets up for DS. I’m trying to steer him away from the borrowing mentality…mainly because in my 20’s and 30’s I was over my head in debt and worked all the time just to pay off loans.
Are they a PIA to deal with and not worth the trouble of 4 extra years to pay? Do you get them annually or by semester?
You apply for them annually, and they are distributed in parts by semester (or quarter if the college is on a quarter system). You can wait to apply until second semester, and receive the full year’s worth of the loan in that semester.
If the UTMA was intended for his college education, most parents would have the money in a fund timed to transition into less risky investments by the college years. So do think carefully about that. You are in a position to get your kid out of college with no debt, and with a strong example for saving and financial planning.
@happymomof1 - The grandparents control the UTMA right now and I’m guessing even though it becomes DS’s at 18, they’ll probably still hang onto it until he’s done with school and just dole out disbursements as needed. I would have preferred it be in an age-based transitioning fund which is how his 529 is invested, but I wasn’t about to dictate how they invested their gift, and truth be told, it’s done really well, so we lucked out there. Of course it could be down 30% tomorrow…
Have you discussed the investment mix with the grandparents? They may not realize that they may inadvertently create a gap between what your son needs vs. what is available if there’s a market pullback…
But your plan to take the loans and then pay them all off when he graduates does assume that the funds will be there in their entirety to pay off the debt. So again- you’ve got market risk no matter which way you slice it. Aggressive mutual funds go up, they go down, they slide sideways.
If they want to. The kid could force the issue when he reaches the state’s age of majority, but worst case scenario is that would take court action.
I see some issues in OP’s proposed options, some of which have already been pointed out.
-Paying loan origination fees for loans that can be avoided seems silly to me.
-Planning to need and use UTMA funds that are invested now in “a pretty aggressive mutual fund” for a current or soon-to-be college student’s education expenses is a really risky move.
-Cashing out the UTMA funds piecemeal over several tax years, instead of all at once, will generally be a good strategy to save on capital gains taxes. Any realized gains are taxable to the UTMA beneficiary.
DS doesn’t turn 18 until July 2020, so we have a little while yet. I think this Fall when we sit down to fill out the FAFSA it will open up the door for conversation with the parents about how the money is invested and such, as they’ll finally have to turn over account details. I really hate to rock the boat at all as I’m just grateful for the help any way they want to do it. They’re reasonable people and not control freaks with gifts, so I don’t expect them to take the money hostage and make demands on how it’s used. But…Science and Tech sector fund…I lost my shirt in those in 2000.
I dug into the subsidized loan info a little more and it appears the origination fee is 1.069%. The max he could take out over 4 years is 19K, so about $200 fee to keep the fund going an extra 4 years. Right now there’s around 32K in it, but they’re still contributing and plan to keep doing so at least until he turns 18, not sure about after he starts school.
Maybe just taking X dollars out every year would be the best and I’m over-thinking this.
My daughter took just the subsidized loans. The 1% origination fee is fine. She mostly banked the money and at the end of college she had $8k left which she used to buy a car and pay the set up costs for her new apartment. It allowed her to buy the car she wanted and to live in the apartment (very expensive) she wanted to too. It was nice to have the float.
While I wanted her to just pay off the loan as soon as she could, it’s her decision and she decided not to do that. She wants to save money to buy a house and is fine with paying the monthly payment (about $150 per month). She also has a car loan and pays extra on that. Financially, it would make more sense to pay more on the student loans (~4%) and less on the car (3%), but emotionally she wants to own the car outright.
So go for it. If he doesn’t like it, he can pay the loan off at any time and he’ll only be out the origination fee.
Not really the best way to look at this problem. A better way is to think of it a series of strips (8 in total). Each one is for half the total loan amount for the year. The life of each strip is 6 months less than the first one (4.5 years). They are changing the 1% to have the money interest free for the life of the strip. If you invest the strips at a rate of 5%, you will make about $2,400 by the end of the grace period.
Will he also qualify for and be taking unsubsidized loans? If he has those, he will have debt anyway. The total loan burden (sub + unsub if eligible for sub, or just plain all unsub if not eligible for unsub) is $27,000, not $19,000. $5,500 freshman year, $6,500 sophomore year, $7,500 junior year, and $7,500 senior year.
But really, all this talk about avoiding loans might be moot. Unless you have some insider information about automatic scholarships that he’s fully qualified for and that won’t change between now and when he applies to college, there still is the variable of where he will be admitted and what the aid packages will look like. He might well need every cent of the 529, the UTMA, and a federal loan.
I was just calculating the subsidized max amount because we won’t be taking unsubsidized. He knows he needs to go in-state unless there is some amazing deal elsewhere and running the net price calculators has us between 10-12K/year for them. Our state has a pretty good grant program and he should get a full Pell, plus he has a guaranteed scholarship from his high school and an incoming merit one at a couple of the schools he’s interested in. As long as we stay under 16K/year from our funds we should be ok to cover it all, especially if he works a little at the same time.
If you are a full Pell eligible family, I don’t think you have the luxury of trying to time the market. That’s for folks with a cushion who are fully insulated from the vagaries of an aggressive growth strategy when it’s going South.
Ask the grandparents to move the investments (or half the money) into a money market account with a modest interest rate so at a minimum you know what you have and don’t have to worry about needing to pay tuition (or pay off a loan) when the fund is down.
Thank the grands for the foresight and generosity- and move into a low risk investment. You don’t have a lot of wiggle room here if there’s a pullback.
$19k max for the subsidized loans ($3500 + $4500 +$5500 +$5500).
My daughter didn’t have an option to pay them off at graduation with money from a trust or grandparents, but she has a good job and could pay the money off faster if she wanted to. Having the money banked gave her options and if she hadn’t gotten a job right away she could have used the money to pay the loans as she wouldn’t have needed a car or an expensive apartment.
They are her loans. She can pay them however she wants to. Her sister without the good job is going to be paying hers over the next 10 years, slow and painful.
@Eeyore123 - in post # 9, can you tell more about the changes in interest/origination fees? thanks. Is that a sure thing??
OP: if your kiddo needs a little extra wiggle room, and has the option for subsidized loans, they seem pretty decent and reasonable. That’s what we are doing with D16; subsidized only.
My D was eligible for subsidized loans. We chose to take them. Our logic is that she is planning on attending graduate school ( a DPT program) and will need to borrow money to pay for that. We had the money saved so that we could have paid her undergraduate in full but have kept that money to help her in graduate school. Since there is no interest accruing on the subsidized loans as long as she is attending college we figured we are saving the interest that would accrue on a portion of her graduate school loans while she is in school. We will see how it all works out.