Another Way To Get Loan for Collage

Life Insurance Policy Cash Value Loan

Whole life, variable life and universal life insurance policies all have a cash value component that can be borrowed against. The interest rates for loans on these types of policies will vary among companies and policies, but generally range from 5%-9% annually. As the owner of the policy, you determine when to repay the loan. However, if you don’t at least pay the interest on the loan each year, the interest charges from the loan will begin to eat away at your cash value and could eventually put your policy at risk of having insufficient cash value to stay in force over time, even if you continue to pay the normal premiums.

401k Loans

In most households these days, at least one parent has a 401k retirement plan through their employer and makes regular contributions to the plan directly out of their paycheck. Most of these plans have a loan provision that permits account owners to borrow from their savings. The maximum loan by law is 50% of the vested account balance, and must be repaid within five years through payroll deductions. The interest rate is set by the plan and is usually tied to the prime rate. The problem with 401k loans is that you have to repay them over such a short period of time (five years). If you fail to do so, the unpaid balance of the loan is treated as a non-qualified withdrawal and therefore is subject to ordinary income tax rates plus a 10% excise tax (penalty) if you are not over age 59 1/2. Borrowing against your retirement savings through a 401k for example, is different than tapping into a retirement plan, and taking distributions from the plan to pay for college. If you are considering tapping your retirement savings to pay for college, read this post by FORBES Janet Novack. Before you take this leap, however, remember that your child can borrow for college, but you cannot borrow for retirement. Moreover, with increasing taxes and low yields on fixed income investments, you’ll need all the retirement savings you can put away. Depleting your retirement funds to pay for college is not usually a wise decision.

Summary of Loans for Students

Various studies have shown that when students are at least partially responsible for paying for their own college education – by way of work-study, using their own money or taking out student loans – they tend to do better academically than students who are not responsible for any share of their education costs. As parents, if you want your child to be responsible for paying a part of her college costs and she will need a loan to do so, you can either lend her the money yourself (Intra-family loan) or let her take out a student loan. Depending on whether she demonstrates a financial need for student aid, exceptional financial need or no financial need at the college that she attends, she will end up with a Subsidized Stafford loan, a Perkins loan, an Unsubsidized Stafford loan and/or a private student loan. In general, the best loans are the Subsidized Stafford and Perkins loans followed by the Unsubsidized Stafford loan, and as a last resort, private student loans. Special offers from lenders change constantly for private student loans, so it may require some homework using the internet and by talking with your college to determine which lender has the best overall rates, origination fees and repayment terms.

Generally, mortgages offer the longest terms of repayment with the lowest interest rates, and the interest for some taxpayers is tax deductible. For these reasons mortgages frequently have the lowest monthly payments for a given amount of borrowed money. Home equity loans and lines of credit have to be repaid over shorter periods of time at higher rates of interest, so their payments tend to be higher than mortgages. But remember that all of these types of loans require a credit check and are collateralized by your home. Intra-family and life insurance cash value loans don’t require a credit check and can often be paid back on more flexible terms and favorable interest rates. Parent PLUS Loans are a good option for parents who don’t have a home or don’t have enough home equity to tap into. A Parent PLUS Loan might be better than a mortgage or home equity loan in some cases because the loan isn’t collateralized by your home, the interest rate is fixed, and the loan is insured against the borrower’s death and disability. 401k loans have to be repaid over shorter time periods (five years) than other loans and usually have a higher rate of interest than home loans, and the interest is not tax deductible.

By Troy Onink and Forbes.com