Federal Employees News Digest

Paying for College Using Interest-Free Loans

Many federal employees have sons and daughters who will be attending college  this fall semester. The challenge for parents and children is how to pay the tuition and fees, room and board, and auxiliary fees associated with higher education. The following table presents the increasing average cost over the past few years for paying for a public and private 4 year and public 2 year college education, including the cost of tuition, fees, and room and board.

 

Growth in College Costs

Average Annual Costs for In-state Students 2016 - 2018

School

Tuition & Fees

Room & Board

Total

Average

Annual

Increase

2016 - 2017

2017- 2018

2016 -2017

2017 -2018

2016 -2017

2017 -2018

Public 4 Year

$9,670

$9,970

$10,480

$10,800

$20,150

$20,770

$620

Private 4 Year

$33,520

$34,740

$11,850

$12,210

$45,370

$46,950

$1,580

Public 2 Year

$3,470

$3,570

$8,170

$8,400

$11,640

$11,970

$330

Source: www.studentdebtrelief.us/news/average-cost-of-college-2018

Among the most common ways of paying is through student and parent loans. There are several types of student loans including Federal student loans, private loans offered by banks, and interest-free loans. This column discusses interest-free loans which could be a viable alternative to costlier private student loans.

 

The disadvantage with an interest-free student loans is that maximum loan amounts are small and not meant to cover the entire cost of a college education. Interest-free student loans can be useful for students who have exhausted opportunities for scholarships and grants and have reached the borrowing limits for Federal student loans. In particular, for dependent students the limit on Federal student loans is $5,500 for a first-year undergraduate, $6,500 for a second-year undergraduate, and $7,500 for a third-year undergraduate  and beyond. Students who are considered independent for financial aid purposes have higher loan limits.

 

After exhausting Federal student loans, students who need additional funding often turn to the private student loan market. Associated with many private student loans are high interest rates. The Web site https://www.credible.com is a student loan marketplace. Interest rates from multiple private student loan lenders range from 4 percent APR to as much as 14 percent APR. Rates depend on the lender, the borrower’s creditworthiness, length of the student loan, and whether the interest rate is fixed or variable.

 

 

 

In general, interest-free student loans are offered through local associations, religious organizations, charities and foundations. The loans are often geared toward borrowers with considerable financial need. A number of programs offered by religious organizations are rooted in the Old Testament’s prohibition against charging interest.

 

Loan amounts, eligibility requirements and repayment terms do vary by the organization offering to loan the money. One loan program might offer a maximum loan amount of $1,000 while another program may offer a maximum loan amount of $15,000. Some programs have state or local residency requirements, some programs are available only to undergraduate students, and some programs are linked to a student’s ethnicity or a parent’s military service. For most loans, a guarantor or multiple guarantors are required.

 

Interest-free student loan applicants need to do due diligence and read the fine print on the loan application to make sure they qualify and satisfy the repayment terms. Furthermore, interest-free loans do not offer the same types of borrower benefits and protections that federal student loans do. For example, federal student loans offer income-driven repayment options while interest-free loans do not.

 

Borrowers should also be aware that some interest-free loan providers do not provide as flexible repayment terms as the private student loans. Some interest-free loan providers required borrowers to start making loan repayments while they are still in school.

 

Finding interest-free student loans can be a challenge. Students are encouraged to talk to their financial aid office of their schools, local religious and community organizations, the agency in their home state responsible for higher education access and search online to seek interest-free loans for higher education.

 

Students and parents can also visit the International Association of Jewish Free Loans’ Web site at http://www.iajfl.org/for-borrowers/ to find programs that may be applicable to them in their local area. Other options for interest-free loans include the Bill Raskob Foundation (information may be obtained at http://www.billraskob.org/) open to any U.S. citizen after their freshman year and the Evalee C. Schwarz Charitable Trust for Education (information may be obtained at http://evaleeschwarztrust.org/) for both undergraduate and graduate students who have demonstrated exception academic performance and have significant need. The Military Officers Association of America offers educational assistance to military families (information may be obtained at https://www.moaa.org/).

 

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. 

 

 

 

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