Stafford Student Loan News

Starting with the 2008-2009 school year, the Federal Parent Plus Loan can now be deferred until 6 months after the child’s graduation. This is a big change, because typically Parent Plus loans were due immediately upon disbursement. This will help a lot of parents out who are trying to help their children to pay for College, but cannot afford the monthly payment while the student is in school. This also helps the parents who plan on having the child repay the loan when they are done.

Remember, that Parent Plus loans are the parent’s responsibility for the life of the loan. There is no way to switch the loan to the students name when the student is done (short of taking out a private loan to pay it off, which I don’t recommend).

Also, I am asked quite frequently if the Plus loan can be used to living expenses….if the student is living off campus. The answer to that is, IF the school agrees to it, then yes. They are the ones that certify the actual amount of the loan. Check with the school, and explain to them what you need the money for…this way the loan will be disbursed, and most of it will go towards tuition that is due, then the remainder would go to the parent or student to help with living expenses.

If you need a PLUS loan for this upcoming school year, and your child knows what College they are attending, apply for this loan NOW…every day lenders are dropping out of this loan program, due to an ever changing student loan industry…so its best to get your paperwork in now.

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.

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.

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

Here’s a very interesting article from the Washington Post. Michelle Singletry ask:

“We’re told over and over again that student loans are good debt. The conventional wisdom says that, like a home loan, student loan debt will turn into an asset. But what happens when it doesn’t turn out that way? What happens when people take on tens of thousands of dollars in loans that may take decades to pay off?”

I highly encourage you to read the entire article, but you can probably see the answer she comes to. So what does this mean for parents?

Do what you can to eliminate debt. Grants, scholarships, savings… there are things you and your childcan do to lower your debt burden.

It’s been nearly a month since the biggest single student loan interest rate hike, and it’s still making news. An article from Boise State University’s student newspaper explains how it’s affecting students.

They break down two loan scenarios, consolidation before going into repayment and comsolidating after; it explains exactly what it means in terms of what will be paid back over the life of the loan. Definitely a must-read for recent graduates.