Personal Loans and College Expenses

[Aug 14, 2010.]

 

It's almost time for students to go back to school, but some college students may be wondering if they are going to have enough funds to make it to graduation. If you're already admitted to a college, you've probably applied for financial aid and been notified about how much money you can expect this school year. But if you don't think that money is going to be enough, keep the following things in mind.

Federal vs. Private Student Loans

It's a shame that so many young people have to go into debt to get a college education. But if you do have to borrow money for school, federal student loans generally can't be beat because of their low interest rates. Even if you received a federal student loan, however, it may not be enough to cover all your costs. If you're like many students, you may be considering a private student loan.

Private student loans carry higher interest rates than federal loans, and the interest is usually variable. However, private student loans have lower interest than most credit cards. To get the best rate on a private loan you (or your parents) need a high credit score. Some students won't qualify for a private student loan unless they have a parent or other responsible borrower co-sign.

Loans from Retirement Accounts

Borrowing money from a parent's IRA of 401(k) may seem like an easy solution to paying for education expenses. It's pretty simple to get a loan from a 401(k) and gradually pay yourself back, but are you sure you want to do that? Many parents have nothing but good intentions when taking money out of their retirement accounts to help pay education costs, but they are really doing themselves a disservice.

There are no financial aid programs for old age, so people who tap retirement funds too early for other purposes are losing out on earning crucial interest during their working years. Rather than borrowing from retirement accounts, look for other sources of money or consider making some tough decisions about funding college.

Hard Choices that Don't Involve Personal Loans

Some families are deciding that they are unwilling to saddle their kids with too much debt to get an education. Some alternatives to taking out personal loans include attending college part-time while working full-time or living at home instead of paying thousands of dollars to stay in a dorm. Another alternative may be to attend a less expensive community college near home the first two years, then transfer to the school of your choice for the last couple years.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.