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Student loan question


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This is a question of pragmatism first and foremost.

My 18 year old daughter wants to go to cosmetology school.  As a 'dependent' the max federal student loan she can take is $5,500.  If she is 'independent' the max is $9,500.  There are two circumstances in which she could be considered 'independent'.; 1.) I apply and am denied for the Parent PLUS loan; and 2.) she is married.

Arizona is a community property state, however a prenup can be used to separate all debts (and assets) so that if she were to get married and take out a student loan, her spouse would be isolated from her student loan debt.

She has been dating the same guy for 3 years and he just turned 18 so of course he would be the lucky guy and she would probably marry him eventually anyway.

Before I say anything to her and set a train wreck in motion, I wanted ask here to see if there is any part of this I haven't considered that makes this a really bad idea.  I'm not interested in opinions of a emotional or sentimental nature.  I will discuss these things with her as a part of any conversation that takes place.

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2 hours ago, Harry Seaward said:

I wanted ask here to see if there is any part of this I haven't considered that makes this a really bad idea. 

I would submit that the idea of taking on student loan debt is a bad one. Obviously, we're not talking about a lot of money here, but, generally speaking, if there is any way to get the money through alternative means, I would certainly exhaust those possibilities first.

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I financed my bachelor' using a combination of Pell Grants, scholarship, and federal student loans.  I attended a state school and my loan payment is a very affordable $278 a month.  Taking out loans is not necessarily a bad idea if it is well planned out to ensure that the repayment is reasonable.  

The one thing I do know that unless she is living on her own supporting herself that she won't be considered independent by FAFSA criteria.  Before she enrolls you need to check out the school and find out how many of their graduates are working in the field and what the loan repayment is likely to be to ensure that this is the right path for her as far as borrowing money to finance school.

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If possible, borrow money from another source.

Ideally, unsecured debt such as a low interest balance transfer or even credit card itself.

After that, say you were going to put $ 5 k down on a car - well, go ahead and finance that $ 5k, which would then be available for school.

Second mortgage is still better than a student loan.

Of course, you could borrow using student loans, and subsequently pay off student loan with a balance transfer, etc., as becomes available.

Do not co-sign for any student loans.

All of above said, assuming a money making profession, better to get education when you can and go out making better money rather than letting years go by trying to save money avoiding debt.

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Go for the minimum loan needed, research cosmetology school grants and other sources. If you have to borrow I'm not seeing why it would be beneficial to incur the same amount of debt in another form such as a credit card.

A federal student loan if you have to take one out has a big negative- pretty much impossible to get rid of through bankruptcy but the pluses are numerous repayment plans based on income (a good time to see what job prospects are for this field) tax deductible and if things don't pan out the loan can be forgiven after about 20 years if you met the repayment criteria, no defaults.

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1 hour ago, BV80 said:

@Happybluesky

I absolutely disagree with a 2nd mortgage.

Lets say $200 k house with $50 k equity. That leaves up to $50 k exposed to creditors, unless in homestead state. Regardless of education expenses, good idea to equity strip with home equity line of credit, which in the public record shows as a lien.  So live a little, borrow $20 k and stash in CDs set to mature according to anticipated school needs.  

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@Happybluesky

On 4/8/2016 at 3:22 PM, Happybluesky said:

Lets say $200 k house with $50 k equity. That leaves up to $50 k exposed to creditors, unless in homestead state. Regardless of education expenses, good idea to equity strip with home equity line of credit, which in the public record shows as a lien.  So live a little, borrow $20 k and stash in CDs set to mature according to anticipated school needs.  

Most states have a homestead exemption.   If a state doesn't have one, it may allow one to use the federal exemption.

In any case, unless the CDs accrue more interest than that charged on a HELOC, it's a bad idea.   Also, if you need to withdraw money from a CD before it matures, you pay a penalty. 

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Good practice is to encumber home equity with a line of credit.

The idea is to have a friendly lien protecting the asset.

The credit can be exercised for many reasons, or never used.

In a homestead state, you might go the other way, and protect exposed cash by paying down an existing mortgage on your primary residence.

Obviously, rental properties and such have to be protected in some way even in homestead states.

The idea here is just a suggestion.

You can make up any if ands and buts - but the intersection of legal and financial advantages most likely means there is some cst financially for a legal advantage, which could be a huge financial advantage if in the future creditor seas get stormy.

 

 

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7 hours ago, Happybluesky said:

The idea is to have a friendly lien protecting the asset.

Actually this is a REALLY bad idea for another reason:  in many states once you take out a home equity loan you give up your right to a homestead exemption because you have used the equity for a line of credit.

You REALLY should stop giving advice until you are better educated on debt collection and the law.

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Harry,

You being a long time poster know that taking a "Student Loan" is the worst thing an 18yo can or should do.  You asked for pragmatism.  A quick google search says the number is between $5 and $20K for Cosmo school, YIKES!

I have 3 daughters my middle was very head strong and believed she knew what she wanted at 18.  Began online college via loans, accomplished a psychology degree at a cost of $37K.  She is now 29, married then divorced has a son.  Is currently with the right guy and pregnant with second child.  They just or should I say he just bought the house they live in.  They want to marry, but once they do deferment of loan payments disappears and the Sallie Mae becomes their new friend on a monthly basis....

One of my biggest regrets is I didn't understand the Debt/Loan game better.  I supported her decision when she began due to lack of knowledge, hell I was proud of her.  Today I know that was the worse decision and weakest parenting I did.

Certainly my experience could be in actual practice very different from what happens with your daughter, but statistically speaking odds are against it.  What would be my advice today to one of my kids? 

My youngest is a good example.  Graduated high school wasn't sure what she wanted to do.  Worked a few odd jobs, then got on as an admin assistant for a criminal defense attorney.  Did well they paid for her para-legal school.  She married her high school sweet heart at age 25.  He is becoming a nurse via working as an Emergency Room tech, starts nursing school in the fall, paid for in part by the hospital.  The rest being cash flowed, via savings they have made.

Two kids very different outcomes.  What was the difference?  When I arrived at the CIC and was trying to eliminate $72K in credit card debt, I used my daughters para-legal skills in the early going.  It helped me learn formatting of my filings and how the Clerks office worked.  But during this time I would share with her about the debt mistakes we had made.  This transparency of the financial mess we had created had a big impression, obviously it ended my marriage eventually.

In the end of the day the 18yo can do what they want and you can only share your experiences and insights.  Best of Luck on what ever guidance you decide to give.

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Obviously, asset protection has to be contextual.

Even in a homestead state, at least as of a few years back, there was a 40 month federal residency rule. So you couldn't just move to a homestead state, plow all your wealth into your primary residence, and thumb your nose at your creditors.

Let's say you were in a state with a $20 k exemption. If your equity was $20 k, then the asset would be fully equity stripped and useless to a creditor. But if you had $150 k equity on a $200 k house, that would leave $130 k exposed equity. A $100 k home equity line of credit would equity strip $100 k, leaving only $30 k exposed equity. A potential judgment creditor sees only $30 k to go after, which is a much less attractive target for a lawsuit. In the event of  lawsuit, the credit could be used, and perhaps a $30 k second mortgage coud strip the remaining $30 k in equity. The home then would be worthless to a judgment creditor. In that scenario the fees and interest on the encumbering loans would be the financial price for a huge legal advantage.

As for student loans, we know that the IRS, for example, can take your home regardless of state homestead laws. That might be true of federal student loans. So don't co-sign for a student loan without thoroughly considering the negative possibilities.

 

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1 hour ago, BV80 said:

@Happybluesky

By "exposed cash", are you referring to savings or equity?

 

 

Cash as in bank accounts including CDs.

Liquid assets such as Treasuries could also be sold, or perhaps used as collateral for a loan, and the cash used to pay down the mortgage or improve the property.

Basically, cash and iquid assets are what the creditor is after, but those can be converted into an exempt asset - namely your primary residence in a state with a generous homestead exemption (ideally 100% in a true homestead state).

Treasuries used as loan collateral are obviously protected by the encumbering debt. Nobody likes paying fees and interest, but that may be the financial price necessary for the legal advantage of keeping assets out of the reach of creditors.

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