March 31 (Bloomberg) -- For parents looking to pay for college, one of the best deals comes with a 1.2 percent, no-fee loan. The hitch: Your kid has to get into Princeton University.
Princeton, which accepts only 7.3 percent of applicants, is alone in the eight-member Ivy League in offering financing to parents. Its loans are cheaper than those offered by the federal government, and families with annual incomes of up to $500,000 may qualify.
“That’s the best deal of the century,” said Ron Them, co-founder of the National Institute of Certified College Planners.
While wealthy colleges like Princeton are generous in need-based financial aid, families are still responsible for the portion of costs not covered by grants and scholarships. Princeton’s loans -- at 4.3 percent for fixed and 1.2 percent for variable -- aim to help parents better afford their children’s education, said Robin Moscato, director of undergraduate financial aid.
Princeton’s endowment was valued at $18.2 billion as of June 2013, making it the fifth-richest school in the U.S., according to the National Association of College and University Business Officers. The university is able to provide families with a lower-cost alternative and to help them stretch out payments, Moscato said.
“We should do it, and that’s what we do,” Moscato said.
The interest rate on the U.S. government’s parent PLUS loan is 6.4 percent, and it carries a 4.3 percent origination fee, which the Princeton, New Jersey-based school doesn’t charge on its loans. Congress sets the rates for federal education loans every year linked to financial markets. Undergraduates can take federal loans in their own names at 3.86 percent, with an annual limit of $5,500 to $7,500.
Outstanding education debt in the U.S. has climbed to $1.2 trillion, more than total credit card debt. Parent borrowing for college makes up almost 13 percent, according to estimates from Mark Kantrowitz, publisher of Edvisors Network Inc., a Las Vegas-based operator of college financial-aid websites.
For families that have tapped Princeton’s parent loans, the average annual amount borrowed is $19,000 for those receiving need-based aid and about $36,000 for those that don’t.
Princeton uses its creditworthiness to secure loan funds through Bank of America Corp., said Martin Mbugua, a spokesman. The school doesn’t dip into the endowment. Through June 2013, Princeton has extended about $102 million in loans, of which $43.3 million is outstanding, he said.
The loans are available based on a family’s credit history and their ability to meet repayment terms. Parents have 10 years after their child graduates to repay.
In the past four years, about 10 percent of undergraduate parents -- about 500 families -- have taken out any type of parent loan, and 95 percent of them used the Princeton program, Moscato said.
“Based on the very low rate of borrowing, those who are using the program are exactly those we intended it for,” Moscato said. “Otherwise you’d see higher participation of families wanting to take advantage.”
Princeton offered admission to 1,939 students for the class entering this fall out of more than 26,600 applicants, the school said last week.
Families that don’t qualify for need-based aid can borrow from the school up to the cost to attend, which can top $60,000 a year. Tuition, fees, room and board for the 2014-2015 academic year are $55,440. Other costs include transportation and books.
The average grant for incoming freshmen receiving financial aid is expected to be $42,700, according to Princeton. Its financial-aid budget for the next academic year is $131 million. Princeton doesn’t include student loans in its financial-aid package.
The university will also consider loans to families with incomes over $500,000 with special circumstances, including having more than one child in college or high medical expenses.
Princeton has been offering parent loans since at least the mid-1980s, Moscato said.
Some schools, while not extending loans to parents, have direct loan programs for students, some of which are interest-free. As of 2008, Pomona College, a liberal arts college in Claremont, California, has offered no-interest loans to students, though they are limited to about $5,000 annually, said Mary Booker, director of financial aid.
Other universities offer loans, mostly for international students who don’t qualify for U.S. government borrowing. Interest rates on loans made by Brown University, in Providence, Rhode Island, range from 7 percent to 9 percent. Yale University, based in New Haven, Connecticut, has a loan that carries a 7.5 percent rate.
Cornell University, based in Ithaca, New York, has a three-decade-old, need-based student loan program for undergraduates. The loans have an 8 percent rate, and they don’t accrue interest while students are in school, unlike most federal loans.
Princeton’s loans for students who don’t qualify for federal aid are mostly at 5 percent. While the students remain in school, any accrued interest is picked up by the university, Moscato said.
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