Stafford Student Loan News

To clear up some confusion…on July 1, 2008 interest rates are decreasing by approximately 3%…BUT only for Stafford loans that were disbursed prior to July 1, 2006…so if you have Stafford loans at 6.8% , these will not be affected by the rate drop. If you just recently graduated, your loan portfolio probably looks like this:

Stafford loan for $2625 from 2005 @ 6.62% variable

Stafford loan for $3500 from 2006 @ 6.62% variable

Stafford loan for $5500 from 2007 @ 6.8% fixed

Stafford loan for $5500 from 2008 @ 6.8% fixed

So on July 1, 2008, the loans at 6.62% will drop to 3.6%, but the loans at 6.8% will remain the same. If you consolidate the 4 together, the weighted average rate will be 5.75%…for the life of the loan. This model is only true for those in their grace period.

If all your Stafford loans are at 6.8%, you will not be affected by the rate drop whatsoever.

Effective July 1, 2008…

Variable rate Stafford loan disbursed prior to July 1, 2006, that is IN GRACE (IG) = 3.6%

Variable rate Stafford loan disbursed prior to July 1, 2006, that is IN REPAYMENT (RP) = 4.21%

Variable rate Parent plus loan disbursed prior to July 1, 2006 = 5.01%

* note that any Stafford and PLUS loan that were taken out before July 1, 2006, and has never been consolidated, will have these new rates

* note that with consolidation, these rates are rounded to the nearest 1/8% which would make them:

3.625% Stafford in grace

4.25% Stafford in repayment

5.125% Parent Plus

For those who don’t know, if you have past drug convictions, for selling or possession while you were receiving Federal aid, then this can affect your aid eligibility. Your eligibility for Federal aid is revoked for a period of time (directly correlated to the type and number of convictions). I did some research on this, and it appears that as long as you have completed an “acceptable drug rehab program”, you can still receive federal aid. There are no time constraints on this…you could be convicted of selling/possessing drugs, enter a rehab program, complete it, and still get Federal aid right away. An acceptable drug rehab program consists of:

An acceptable drug rehabilitation program must include two random drug tests.

The program must also:

• Be qualified to receive funds from federal, state, or local governments

OR

• Be qualified to receive funds from a federal or state licensed insurance company

OR

• Be administered or recognized by a federal, state, or local government agency or court

OR

• Be administered or recognized by a federal or state licensed hospital, health clinic, or medical doctor

I also found that if this drug conviction (for selling or possessing) was 2 or more years ago, then a drug rehab program is NOT required, and you should still be able to get federal aid. If you have more than 1 drug conviction in the past 2 years, then your eligibility is suspended for longer. So basically, if you have more than 1 drug conviction in the past 2 years, you have to wait longer in order to be eligible for Federal aid. (it appears that each drug conviction you have = 1 year of lost eligibility). If you have 3 or more drug convictions in the past, then you are ineligible for Federal aid indefinitely.

Via NASFAA:

Beginning July 1, 2008, HR 5715 passed by Congress will allow parents to choose to defer payments on a PLUS loan until six months after the date the student ceases to be enrolled at least half time. Accruing interest could either be paid by the parent borrower monthly or quarterly, or be capitalized quarterly.

Special Provision for Parents Delinquent on Mortgage Payments

The bill would allow lenders to consider parents eligible for PLUS loans even if, during the period January 1, 2007, through December 31, 2009, the parents are or were:

* No more than 180 days delinquent on a mortgage payment on their primary residence

* No more than 180 days delinquent on any medical bill payments

* No more than 89 days delinquency on the repayment of “any other debt”

From NASFAA:

Increase Annual and Aggregate Stafford Loan Limits

HR 5715, as passed by Congress, will increase the following loan amounts for loans first disbursed on or after July 1, 2008:

* Increases the additional unsubsidized Stafford annual limits by $2,000 for independent undergraduate students, and for dependent undergraduate students whose parents cannot borrow PLUS, but appears to reduce the additional unsubsidized limit for teacher certification to $6,000 for “undergraduate” students

Note - The original legislation also increased the additional unsubsidized Stafford annual limit for graduate and professional students by $2,000, but that provision was later eliminated by an amendment in the House

* Increases unsubsidized Stafford limits for dependent students by introducing additional unsubsidized amounts of $2,000

* Increases aggregate unsubsidized loan amounts for undergraduate dependent students from $23,000 to $31,000 (minus subsidized borrowing) but does not appear to extend additional unsubsidized funds for preparatory coursework or teacher certification for these students.

* Increases aggregate unsubsidized loan amounts for undergraduate independent students from $46,000 to $57,500 (minus subsidized borrowing) .

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.

It is always wise to know what kind of loans you have borrowed, how much you owe, and who services your loans. Being knowledgeable about your loans now, will help you repay them later. Here are instructions on how to look up your Federal loans on the US dep’t of Education’s loan Database:

1. Start by visiting: NSLDS on the Web. Click on Apply Now.
Find federal loan information at pin.ed.gov

2. Read the privacy notice, then click Next.
Privacy notice about your federal loan information

3. Fill out the PIN form. Make sure you include a working email address.
Use your PIN to locate student loan data

4. Agree to the terms
Remember, to protect your privacy and reduce the possibility of identity theft, NEVER share your PIN, even with the Student Loan Network.
Get your PIN to access federal loan info
You’ll receive your PIN via email in about 2 days. Once you have your PIN, you’ll be able to log onto the NSLDS website and obtain your student loan information.
Your PIN allows access to the National Student Loan Data System

5. Visit NSLDS at http://www.NSLDS.ed.gov on the Web
NSLDS allows you to find student loan info

6. Read the privacy notice and click Accept
National Student Loan Data System for federal loan info

7. You’ll be asked what kind of encryption you want
If you are surfing the Web with Firefox, choose the left option. If you are surfing the Web with Internet Explorer, choose the right option. If you’re not sure, choose the one on the right.
Your student loan information is encrypted

8. Log in with your PIN and other identifying information
Your PIN provides access to the NSLDS

9. On your personal NSLDS homepage, you’ll be presented with a list of your loans and current status. Print this page.
The national student loan data system supplies your current loan info

10. For each of your loans, click on the blue number next to them and print the summary page about the loan.

One final word of caution: this change by the Department of Education may increase the potential for identity theft. Do not mail your information to any company that you did not request an application from!

There’s been much talk recently about some student loan companies withdrawing from the student loan marketplace, and whether students will be materially harmed by a smaller marketplace. The short answer? No.

Federal student loans such as the Stafford loan are unaffected by changes in credit insofar as the borrower is concerned. Stafford federal student loans have no credit requirements.

As for private student loans, there will almost certainly be changes in who is eligible for private student loans. Higher credit limits and cosigners required are the most likely outcomes, and in fairness, that’s not a bad thing. It is in no one’s best interests to issue a loan to someone who cannot repay it. The borrower loses, the bank loses, everyone loses, so if students and families with poor credit are turned down for a private loan, it will mean they need to energize their scholarship search efforts to make up shortfalls in financial aid.

If you haven’t done so already, be sure to file your FAFSA, too.

A question recently came up on the blog - if a student loan company goes out of business, do the loans need to be repaid?

The answer is an unequivocal yes. Except for a few rare circumstances (such as a loan being fraudulently issued) borrowers are always obligated to repay the loan.

More often than not, if a student loan lender goes out of business, the loans are sold as part of the company’s liquidation. They’re treated just like office furniture or any other tangible asset, and buyers will buy the loans (and the potted plants and desks). The borrower will receive notification that their Stafford loan has been sold or transferred to a new company, and that they must now make payments potentially to a new address.

That’s one of the many reasons why it’s important to stay in touch with your lender and keep them updated on your address and contact information - otherwise, you could potentially go into default on your federal student loans and not even know it.