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College Talk Blog

The 7% Solution

Families of this year's graduating seniors are celebrating graduation and making final plans to pay any college costs not covered by grants and scholarships. A majority of parents previously tended to take what I am calling (this year) "The 7% Solution". That is they borrowed from the government student loan program. The interest rate this year is 7%. The government loan for parents is called the PLUS loan (parent loan for undergraduate students). Parents can borrow up to the full amount of college costs for their student each year of undergraduate school (minus scholarships, grants and other student loans).

Increasingly, parents are looking at other options. Credit unions and banks offer increasingly more attractive options to parents. For example, instead of parents borrowing from the federal government at 7%, the student who has already borrowed the maximum federal student loan at 4.45% might consider borrowing any unpaid balance through a bank or credit union with a parent willing to co-sign. Some student loans given by banks to students are currently at 4.79%. Parents can also borrow the remaining balance to be paid for college costs through banks and credit unions.

Banks and credit unions are offering many of the same benefits as federal loans. One benefit that some do not all offer is a loan forgiveness in the event that the student becomes disabled or dies. But there are lenders offering insurance to allow that type of benefit.

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