Stafford Student Loan News

Just a reminder for folks who have waited a little longer before applying for federal financial aid - the FAFSA is a required form that must be completed and filed prior to receiving any federal financial aid, including the Stafford loan. If you haven’t filed your FAFSA, pretty much your only option is a private student loan, which typically has fewer advantages than federal student loans.

Filing your FAFSA takes a relatively short amount of time for the benefits it delivers - file today if you haven’t already done so.

For those who aren’t familiar…colleges that participate in the Federal loan program must be either a ffelp school or a direct school. What this means is this:

1. Schools that choose to be a direct school, process all their loans direct through the government. Most everything is done electronically, and it is a direct relationship between the school’s financial aid office and the governement’s loan dep’t, Direct Loans.

2. Schools that choose to be part of the ffelp program (federal family education loan program)…require that the student choose a lender for their Stafford loan. Often times the FAO will provide a “preferred lender” list to the student, with instructions on how to apply for it once they choose a lender.

Just recently a question was asked…”my school is a direct lending school and they are charging me a fee to get the loan, can I look for a ffelp Stafford loan that is not charging a fee?”

The answer is…yes and no. Although as a loan borrower, it is your choice of who you borrow from …you are gonig to have a very difficult time getting a DL school to certify a FFELP loan. It is not impossible to do, but I suggest meeting with an FAO advisor at your school, so they can tell you what you need to do in order to get this FFELP loan. The last thing you want is for the loan not to be disbursed to the school because you didnt travel through the channel the school uses. Also, before you consider doing this, definitely make a list of the differences between the Direct Stafford loan and the FFELP Stafford loan. The differences may not be worth the time and the hassle.

As far back as 2001, Congress, looking at incredibly high interest rates on federal student loans (8.25% statutory maximum on the Stafford loan, 8.5% on the PLUS loan) decided to legislate a mandatory fixed rate of 6.8% on Stafford loans beginning July 1, 2006. At the time, it seemed like a good idea to legislators to try “fixing” market prices. Prior to that legislation, Stafford and PLUS loans had variable rates of 2.3% and 3.1% + the 91-day Treasury Bill rate at the last auction in the month of May.

Fast forward to today - 2008. With the economic uncertainty, the 91-day Treasury Bill’s current rate is a shockingly low 0.21% (as of noon 3/20/08). If Stafford loan rates were still variable rate loans and rates were set today, the Stafford loan would have a variable rate of 2.51% - lower than student loan interest rates have ever been. For students now paying 6.8%, a rate of 2.51% would mean paying about $50 less per month on $20,000 in federal student loans. Had Congress also left student loan consolidation alone (not reducing subsidies to lenders, thereby reducing availability of consolidation loans to students) that same rate change would mean paying 56% less interest for the life of the loan.

This is a lesson for all of us - when government attempts to manage free markets, unintended consequences may result, and those consequences may be financially quite harmful in the long term.

To celebrate our 10th anniversary, the Student Loan Network is giving away a $10,000 scholarship! Enter to win our drawing at:

and then start participating in Scholarship Points.

Who can win?

Any college student or graduate student attending school in 2008.

Money will be paid directly to the financial aid office, and the contest ends on Leap Day, February 29, 2008.

For prospective or current college students, it is important to know the 2 different types of the Stafford loan. It is not news that if you are going to take out a loan, you should be well educated about the loan, for obvious reasons….but equally as important is realizing what these loans mean for your financial future. Remember it’s your Education and your money…two things that have extreme importance in todays world. Ok so here goes: Subsidized Stafford loan means that no interest accrues on this loan while you are in school at least part time. Interest starts accrueing on it 6 months after you graduate, or withdraw from school…or 6 months after you drop below part time. The goverment puts limits on how much you can borrow, because they are the ones paying the interest for you to the lenders.

Unsubsidized Stafford loan are a bit different. They accrue interest from the moment it is disbursed. You, the borrower, have the option to pay the interest monthly, or let the interest accrue and be capitilized. For a 3500 Unsub Stafford loan, with a rate of 6.8% - this will accrue about $20 per month in interest. So $20 a month for four years will add about $1000 to your original loan balance by the time you graduate….and this will increase if you have the interest capitlized.

So here is the big picture….

Four years of school…you take out as much Sub as you can….you also take out some Unsub to help cover tuition costs….so you have $17125 in subsidized Stafford, and 10,500 in unsubsidized Stafford

Scenario # 1 (you paid the interest monthly for 4 years)

Total loan debt: $27,625

Monthly Payment: $ 318/ month for 10 years

Total Interest Paid: $10,535

Scenario # 2 (you did not pay your interest)

Total loan debt: $29,605

Monthly Payment: #341/ month for 10 years

Total Interest paid: $11,315

As you can see, it is wiser to pay the interest monthly, if you can afford it. If you cannot afford it, thats ok…you can make up for it later by paying not taking the full 10 years to pay the loan. Federal loans have no prepayment penalties. So the sooner you pay them off, the less you will end up paying in interest. Got Questions or Comments…..

Financial Aid Forum

There was a very interesting article on the NAFSAA website that I found last night. I’m copying the whole article here as it’s an article EVERY parent should read:

“Most parents have misperceptions about the amount of financial aid their children will receive, but have a relatively good idea about the cost of college, according to a recent survey published by AllianceBernstein Investments. The survey, Failing Grades? American Families and Their College Saving Efforts, found that 95% of all parents intend to pay at least some of their children’s college expenses and feel that helping with those expenses would be the best investment they could make in their child’s future. However, when asked to rate themselves on being financially prepared to pay for their children’s college educations, 34% gave themselves a grade of “D” or worse.

Of the 1,358 parents surveyed, only 27% felt they were very likely to reach their college savings goal. The study suggests there is a lack of urgency partly because 84% of parents felt that there were lots of scholarships that will help them pay for some of their child’s higher education costs. Meanwhile, almost all of the 200 financial aid administrators (FAAs) surveyed thought that parents “have a false sense of security that colleges will help them cover education costs.”

“It’s important to remember that financial aid is meant to be a last resort, not a way for mitigate college costs,” said Dallas Martin, president of NASFAA.

The reality is much different than most parents’ perception, according to the survey. Two-thirds of aid administrators surveyed said the current system does not meet the needs of many students and their families. Nearly 75% said that less than half of those who apply for aid are financially able to meet their expected family contribution, and 61% said they thought it would be a major financial hardship for the average family applying for aid to meet their EFC.

“The discouraging reality is that college costs have skyrocketed and federal financial aid has eroded,” Martin said. “The result is that the doors of educational opportunity have closed for many of our nation’s youth because they cannot afford to attend college. It’s critical for parents to have more realistic expectations for financial aid and adjust their savings efforts accordingly.”

An overwhelming 97% of all FAAs surveyed felt that families have become more reliant on financial aid in recent years and 99% said that even wealthier families are looking for ways to reduce or avoid college costs.

“With college costs at an all-time high, parents are more likely to limit how much they are willing to spend on higher education expenses,” Martin said. “As a result, many young adults are picking up more of the tab for their undergraduate educations, and accumulating heavy debt burdens in the process.”

The survey found that parents’ believed that graduating without debt was an advantage, but 63% saw student debt as a “fact of life.” However, 57% of the administrators surveyed said they would not let their own children take out the average loan amounts borrowed by today’s college students.

Aid administrators also saw the amount of borrowing as a potential problem. Nearly 95% of administrators expressed concern about the amount students were borrowing and nearly all said that they expect borrowing to continue to increase in the next decade.”

The entire Alliance Bernstein report is available online.

By Justin Draeger
NASFAA Assistant Director for Communications

This article appeared today in the Boston Globe:

Panel retreats on proposal to cut student loan aid

By Paul Basken, Bloomberg News | August 10, 2006

WASHINGTON — A Bush administration panel has withdrawn a proposal to eliminate most federally backed student aid after protests from colleges, students, and banks.

“The current situation doesn’t allow the commission an opportunity to understand the details or defend the idea,” Charles Miller, chairman of the Commission on the Future of Higher Education, wrote yesterday to fellow commissioners.

A draft of the commission’s final report included a proposal that would allow federally backed loans only for low-income students. Miller’s withdrawal of the idea removes from consideration a plan that opponents warned could hurt 5 million students and veterans and cost them an estimated $32 billion in benefits.

Miller’s panel is due next month to issue its final report on ways of making college more affordable and relevant to US economic needs. It is to meet today in Washington to review the draft of its final report.

The draft proposed a 45 percent increase in the main federal grant program for college students. The plan also suggested the elimination of 75 percent of the federal loan programs that are not based on financial need.

University and student groups protested, saying the recommendation fails to understand that much of that lending comes at no cost to the federal government.

Even banks expressed concern, since the additional protections help lenders serve middle-income students who otherwise might not be eligible, said John Dean, special counsel to the Consumer Banking Association. The bulk of federally backed student loans are handled by banks that lend to students with a promise of government repayment in the case of default.”

I found an interesting article on nj.com this week, a news site dedicated to New Jersey, but the question bears looking at.

A consumer asks “Can money in a 529 college savings plan be used to pay charges for study abroad programs or to pay off Stafford Loans upon a student’s college graduation?”

Lets back up a step and talk about what a 529 savings plan is. Named after the section of the federal tax code that governs them, 529 plans are programs that help families save for college while offering tax advantages. Selecting a plan does requires homework – there are two types. All 50 states offer at least one 529 plan, and the tax advantages, investment options, restrictions, and fees can vary a great deal.

Before buying a 529 plan, you’ll want to compare and contrast the plan(s) you are considering. Request an offering circular or official statement from the plan sponsor or your financial professional or from the corporation’s website. You can find links to 529 plan Web sites on The National Association of State Treasurers’ College Savings Plans Network Web site or you can call them toll-free at 877-277-6496.

Now back to the question:

*Can a 529 plan be used to pay for a study abroad program?
Maybe. If the school is an accredited US institution and the entire check goes to that college, then you’re probably safe. If some of the money goes to an outside organization, then it might not be legal. You can look on the US Department on Education’s website and use the school-code lookup tool. If the school’s study abroad program has been assigned a code, you can assume it is eligible. However, you CAN NOT use the money to pay for transportation costs.

*Can a 529 be used to pay back a Stafford Loan?
No – money from a 529 cannot be used to repay a Stafford Loan or any other federal financial aid.

A lot of people are confused by what’s behind the Stafford and PLUS programs, so I though I’d give a little background information, hoping to make it all a bit clearer. Let’s start with the Department of Education.

The U.S. Dept. of Education began operating in 1980. It’s one of the last items President Carter signed into Law. It’s official acronym is ED, though you’ll often hear Department of Ed or DOE (this last one rightly refers to the Department of Energy, but you’ll hear it for the Department of Education as well).

Unlike the educational system of most other countries, education in the U.S. is not centralized, meaning that the federal government and Department of Education are not heavily involved in determining curriculum or educational standards. The main focus of the Department of Ed is to formulate federal funding programs involving education and to enforce federal educational laws.

So what does this mean to you? The Deptarment of Ed runs the Stafford and PLUS loan programs, which means either you will be dealing with them or you will be affected by them. While some issues, such as the recent rate hike, are decided by Congress, others are decided by the Deptartment of Ed. They can change their policies or their take on federal language independant of Congress. Sometimes this benefits the borrower, sometimes it doesn’t.

That’s the Department of Ed in a nutshell.

Sometimes, when you’re looking for financial aid information, you can get the wrong answer, or at least the not quite right answer. Take this Yahoo site for instance: http://answers.yahoo.com/question/?qid=20060617163838AAbG7w8

Here a person asks why they need to apply for a Stafford Loan and whether deadlines are important. There are three answers. All are partially correct, but not completely. That’s the danger in asking strangers for information.

The deadlines can be floating, as the first answer says, but the second person makes an important point - schools have a fixed amount of money to allocate. If you miss the deadline, you may not get as much, or you may not get any. If you’re lucky, everything will turn out fine. But to be certain get your documents in on time! Think of it like you’re first college test. You need to get your tuition finances straight before you can begin attending classes.

And the third answer is also partially correct - you DO need to pay back Stafford Loans. It’s not free money, like most scholarships are. It is at a much lower interest rate than non-Federal loans, but it is still a loan and you must pay it back. Scholarships are going to be your best bet as you don’t repay them.

For more information on Stafford Loans visit www.StaffordLoan.com

Visit www.StudentScholarshipSearch.com/ to look through more than one billion dollars in scholarship money.