Private loans- if possible, a better option?

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
senorhosh
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Private loans- if possible, a better option?

Postby senorhosh » Fri Jun 21, 2013 3:36 am

I'm a little new to this.

Wouldn't private loans, if possible with lower interest rates, be better in the long run?

The downside would be: no gov. support (IBR, LRAP, etc.), hence no PI. You have to pay same amount regardless of your salary.
Upside: dischargeable through bankruptcy

This seems ideal for someone who is taking out large amounts but is biglaw or bust.
Bankruptcy sucks but wouldn't it be a MUCH better alternative to having a large loan balance accrue interest for 20 years until you're hit with a tax bomb?

Hrun
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Re: Private loans- if possible, a better option?

Postby Hrun » Fri Jun 21, 2013 3:46 am

I believe both private and government backed student loans are nondischargeable unless you can prove undue hardship. So I don't see any upside to taking out private loans.

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A. Nony Mouse
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Re: Private loans- if possible, a better option?

Postby A. Nony Mouse » Fri Jun 21, 2013 8:49 am

^This is correct. All educational loans are nondsichargable absent undue hardship, not just government educational loans.

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trojandave
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Re: Private loans- if possible, a better option?

Postby trojandave » Tue Jun 25, 2013 9:43 pm

Hrun wrote:I believe both private and government backed student loans are nondischargeable unless you can prove undue hardship. So I don't see any upside to taking out private loans.


Some private lenders are offering rates as low as 5.5% with no origination fee or fee of any kind. If you qualify, that's certainly better than the 6.8 of Stafford or 7.9 of Grad Plus, especially since those DO have additional fees on top of those percentage rates. Some private lenders let you pick a pay period of up to 20 years too, so while you are welcome to pay it off in 10 like a federal loan, if you hit hard times you can step the payments down to a 20 year plan and be A-ok. I think for people who can qualify for these solid rates, private makes a ton of sense

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Tiago Splitter
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Re: Private loans- if possible, a better option?

Postby Tiago Splitter » Tue Jun 25, 2013 10:06 pm

trojandave wrote:
Hrun wrote:I believe both private and government backed student loans are nondischargeable unless you can prove undue hardship. So I don't see any upside to taking out private loans.


Some private lenders are offering rates as low as 5.5% with no origination fee or fee of any kind. If you qualify, that's certainly better than the 6.8 of Stafford or 7.9 of Grad Plus, especially since those DO have additional fees on top of those percentage rates. Some private lenders let you pick a pay period of up to 20 years too, so while you are welcome to pay it off in 10 like a federal loan, if you hit hard times you can step the payments down to a 20 year plan and be A-ok. I think for people who can qualify for these solid rates, private makes a ton of sense

The interest rate is the only upside. And that's completely mitigated in most cases by the fact that under federal loans your payment drops to zero if you stop making money. See, under PAYE you can switch to the 20 year plan too, except that if your salary is low you don't even have to pay it back and what's left at the end is forgiven. No such luck with private loans.

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trojandave
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Re: Private loans- if possible, a better option?

Postby trojandave » Tue Jun 25, 2013 10:31 pm

Tiago Splitter wrote:
trojandave wrote:
Hrun wrote:I believe both private and government backed student loans are nondischargeable unless you can prove undue hardship. So I don't see any upside to taking out private loans.


Some private lenders are offering rates as low as 5.5% with no origination fee or fee of any kind. If you qualify, that's certainly better than the 6.8 of Stafford or 7.9 of Grad Plus, especially since those DO have additional fees on top of those percentage rates. Some private lenders let you pick a pay period of up to 20 years too, so while you are welcome to pay it off in 10 like a federal loan, if you hit hard times you can step the payments down to a 20 year plan and be A-ok. I think for people who can qualify for these solid rates, private makes a ton of sense

The interest rate is the only upside. And that's completely mitigated in most cases by the fact that under federal loans your payment drops to zero if you stop making money. See, under PAYE you can switch to the 20 year plan too, except that if your salary is low you don't even have to pay it back and what's left at the end is forgiven. No such luck with private loans.


Payments may drop to $0 but while you're not paying your loans, interest is still accruing and digging you into a deeper hole... You don't just stop paying money, you're still getting screwed by the debt and you will owe more each month than the month before. As such, the $0 monthly payment option shouldn't be seen as a fallback plan, just a worst case scenario to stop the bleeding for a few months should something terrible happen. No one should aspire to use this since their situation gets worse the longer they are in it... So as nice as it is if you need it, is having it worth the cost of what could easily be tens of thousands of dollars if you would have gone with a lower interest rate? I guess it depends on what your job prospects are so you can weigh the risk of actually needing this. But I feel like it should be viewed as an insurance plan, and possibly a very expensive one.

The total forgiveness option is actually pretty cool, but only for the select group of people who want to pursue the low paying jobs that qualify AND commit to staying in those jobs for the entire time necessary for forgiveness, which is either 10 years (public interest) or 20 years (everything else). Because from what I understand, there is no partial forgiveness. If you leave the job or are fired a month before the forgiveness date, you still owe the full amount of the loan PLUS all the interest that has been accruing during that time. And the kicker is that since you've been paying less than the amount to actually pay off your loan each month, you leave with the possibility of owing more than when you started the PAYE program so many years ago.

For people that have a good LRAP program at their school that includes private loans (which I know is super rare), or want big law and have a good chance to get it, I see no reason why not to go with the better interest rate. You can take out a really cheap term life insurance policy to protect your family should something awful happen too.

Thoughts on this though? Please tell me if you disagree here - I'm weighing this same choice for myself so I'd be very interested to see if I'm wrong. But to me it all seems to really depend on your career prospects and risk tolerance. But for big law or a solid lrap, why not go private if the rates are significantly better?

NYstate
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Re: Private loans- if possible, a better option?

Postby NYstate » Tue Jun 25, 2013 10:34 pm

As one of the posters here who saw people stuck with loans they couldn't pay after losing their jobs in the recession, holy shit, don't mess with private loans. Unless you have a private family source of funds or an SO to bail you out, you absolutely can not assume that you will never need help with loan repayment.

Just look at the Weil associates fromMonday. Many of them have to have debt. They have 6 months- then what? Their income is likely to drop significantly. And if they have private loans they will be in trouble. No one can count on their job lasting .

And only a small percentage of people will get the biglaw salary they need in the first place.

Most people here with high debt loads are looking at biglaw or PAYE/IBR as the only two options to manage debt. You cannot turn your back on that safety net.

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Tiago Splitter
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Re: Private loans- if possible, a better option?

Postby Tiago Splitter » Tue Jun 25, 2013 10:43 pm

trojandave wrote:The total forgiveness option is actually pretty cool, but only for the select group of people who want to pursue the low paying jobs that qualify AND commit to staying in those jobs for the entire time necessary for forgiveness, which is either 10 years (public interest) or 20 years (everything else). Because from what I understand, there is no partial forgiveness. If you leave the job or are fired a month before the forgiveness date, you still owe the full amount of the loan PLUS all the interest that has been accruing during that time. And the kicker is that since you've been paying less than the amount to actually pay off your loan each month, you leave with the possibility of owing more than when you started the PAYE program so many years ago.

You're misunderstanding the 20 year forgiveness under PAYE. First of all, yes, you must make 120 payments to get the loan forgiven under PSLF, but those payments don't have to be consecutive. For 20 year forgiveness, you can make zero payments for 20 years and the debt will be forgiven. It's supposed to be taxable at that point, but forgiven debt is only taxed to the extent it doesn't exceed your net worth, and many expect that the tax bomb will be reduced or eliminated.

You're right that PAYE is an insurance program and people shouldn't blindly take on huge debt thinking PAYE is an easy bail out, but with private loans you get no insurance program whatsoever.




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