Finally, students and parents can celebrate a little good news: It's getting a little easier and cheaper to borrow for higher education.
The government has responded to the credit crunch by allowing all undergraduates to borrow more money from one of the cheapest federal loan programs, cutting interest rates for needy students, and easing repayment for strapped parents. In addition, while turmoil in the financial markets has driven some banks out of the student loan business, it has attracted upstart companies that are now offering students help making alternative arrangements, such as borrowing from rich relatives. So with a little shopping around, students and parents should be able to find lenders offering at least a small discount on modest-size educational loans.
More money: New federal rules taking effect July l increase the amount that almost every full-time undergraduate will be able to borrow from the federal Stafford program to at least $5,500. The newly expanded federal Stafford loan program will allow upperclassmen to borrow up to $7,500. Students older than 24 or who are independent from their parents can borrow at least $6,000 more than that.
The Stafford loan will cost students no more than 6.8 percent a year in interest and 2 percentage points in fees, for a total annual rate of 7.25 percent. And despite the credit crunch, some lenders are still waiving the fees and offering other small discounts.
Lower-cost loans: In addition, Congress cut the interest rate Stafford loans will charge students who qualify as needy to just 6 percent for the academic year that starts in the fall of 2008. It also has ordered further small cuts to the "subsidized" Staffords (which go only to needy students) in future years. Those reductions will cut the total cost of repaying the loan over 10 years by hundreds of dollars.
Best of all, nearly every student who fills out a Free Application for Federal Student Aid—even those who filled out a FAFSA just a few weeks before school starts and whose parents have high or low incomes—can receive a regular federal Stafford loan.
Once students have graduated, those who go into low-paid public service jobs may eventually get some of their education loans forgiven.
Payment flexibility: Parents are also getting a break under the new rules. Parents who take out a new federal PLUS loan—which can cover their child's full cost of attendance after considering other financial aid—will be able to defer payments until six months after the student leaves school. Also, parents facing financial difficulties because of the housing crunch or medical bills may now be able to get a PLUS loan, despite a poor credit record.
Although they offer some special goodies, such as free insurance, PLUS loans aren't cheap. Lenders can charge a maximum fixed rate of 8.5 percent a year plus 4 percentage points in fees, giving a true maximum annual percentage rate of 9.4 percent. (If a parent gets rejected for a PLUS loan because of credit problems, the student can borrow as much as $7,000 a year more through the Stafford program.) Education loan payments are tax deductible to parents with low and middle incomes.
That's why many parents with good credit, solid income, and home equity find that private loans are often better deals. Parents who can persuade a bank to let them tap their home equity despite today's housing and credit crunches may find banks willing to offer rates that start out as low as 4 percent in the summer of 2008 (though, of course, those rates and payments will very likely rise over time). Homeowners not subject to the alternative minimum tax may be able to deduct the home equity payments from their taxes.
Parents who don't want to touch their home equity may be able to find banks willing to make unsecured loans at similarly attractive rates. Discover Financial Services, for example, says it is offering borrowers with credit ratings in the top 20 percent private education loans at half a percentage point below the prime rate—which means it's charging just 4.5 percent in the summer of 2008. Of course, the payments on those loans will rise when prime rises, as it probably will.
Many parents also prefer private loans because they hope to eventually transfer the debt to the child. But advisers warn that although the student's name may be first on the loan, it can be hard to remove a parent's responsibility for the debt if the student ever defaults.
New and different: Several upstart companies have emerged to help students and parents looking for even cheaper and easier ways to borrow. Students who find a friend or relative willing to lend them college money can pay a small fee to Virgin Money or Greennote to do the paperwork to turn informal lending agreements into business deals that are billed and treated like bank loans. Fynanz is attempting to line up investors willing to lend to students they don't know. It typically demands students be backed by a cosigner.
Saturday, July 5, 2008
Cheaper, Bigger, and Cooler Student Loans
July 1 Brings Record-Setting Drop in Student Loan Interest Rates
PHOENIX, AZ -- 07/02/08 -- Both new and current student loan borrowers of certain federal Stafford student loans saw two interest-rate drops go into effect yesterday that could save them significant amounts of money on these fixed- and variable-rate student loans. Borrowers with variable-rate Stafford loans saw the biggest rate drop -- three percentage points -- due to the general interest-rate cuts made by the Fed over the past year.
Borrowers holding both subsidized and unsubsidized variable-rate Stafford student loans -- those Stafford loans that were disbursed between July 1, 1998, and June 30, 2006 -- received their record-setting rate reduction when the interest rate on those student loans reset on July 1, as it does every year.
As a result of the rate cuts made by the Fed, borrowers with variable-rate Stafford loans that are in repayment or forbearance saw their interest rate drop from 7.22 percent to 4.21 percent. Borrowers with variable-rate Stafford student loans who are still in school, in their grace period, or in deferment saw the interest rate on their student loans go from 6.62 percent to 3.61 percent.
Borrowers with subsidized Stafford loans that were disbursed on or after July 1, 2006, also saw a reduction in their interest rate, albeit a much smaller one. The rate on these student loans, which was previously fixed at 6.8 percent, dropped to 6 percent yesterday and will continue to fall over the next four years for both new and current borrowers, eventually dropping to 3.4 percent in 2011.
This phased-in reduction to subsidized Stafford loan rates comes as part of the College Cost Reduction and Access Act of 2007, which also increased federal grant aid to needy students. The fixed rates on subsidized Stafford student loans will be incrementally reduced on July 1 each year until July 1, 2012, when interest rates are set to revert back to 6.8 percent, barring new legislation that keeps the rate reductions in place.
Unsubsidized Stafford student loans are unaffected by the legislation. Unsubsidized student loans are those in which borrowers are responsible for all interest that accrues, even if they are not currently required to make any payments on their student loan, as when they are in school at least half time or in an authorized period of deferment. With subsidized college loans, on the other hand, the government will pay any interest that accrues while borrowers are in school at least half time, in an authorized deferment period, or in the grace period they are granted after leaving school, before they must begin repayment on their college loan.
The interest rate on unsubsidized Stafford loans that were disbursed on or after July 1, 2006, remains fixed at 6.8 percent.
Yesterday's rate reductions also apply to federal consolidation loans, which allow borrowers to bundle all their eligible federal college loans -- both fixed-rate and variable, subsidized and unsubsidized -- into one single student loan with a fixed interest rate. Those who consolidate their Stafford student loans while in their six-month grace period could consolidate at a fixed rate as low as 3.61 percent.
"This is not only the biggest drop ever in the in the interest rates on variable loans," says Mark Kantrowitz, publisher of the financial aid website FinAid.org, "but the lowest rates in the history of the student loan program."
About NextStudent
NextStudent, Federal Lender Code 834051, is dedicated to helping students and their families find affordable ways to pay for college. NextStudent offers one-on-one education finance counseling and has a portfolio of highly competitive education finance products and services, including a free online scholarship search engine, private student loans, and information on parent loans, student loan consolidation programs, and college savings plans.
Sunday, June 22, 2008
Student Loans Make Money for Taxpayers
Good way to Student Loans Make Money for Taxpayers ,As banks and private lenders quit offering what they say are money-losing educational loans, one group is making nice profits from some student and parent borrowers: taxpayers. Government agencies estimate that for every $10,000 a parent or graduate student borrows through the federal PLUS loan program in the next year or two, taxpayers will collect anywhere from about $600 to $3,000 above the total cost of the loan by the time the debt is repaid.
Ironically, taxpayers are reaping healthy 5.5 to 30 percent profits on PLUS loans for the same reasons private lenders are losing money. The government has saved money by requiring lenders to send the government a higher percentage of each PLUS payment. And the credit crunch that has raised borrowing costs for private companies has lowered federal interest rates.
That's why PLUS loans are still the cheapest option for many parents. PLUS loans made directly by the federal government charge a fixed 7.9 percent in annual interest and an additional 4 percentage points in upfront fees, for a total annual percentage rate of 8.8 percent. Some private loans are advertising initial rates as low as 5 percent for people with excellent credit. But most borrowers would be charged several points more than that because they have less-than-perfect credit records. In addition, most private loan rates are variable, so payments will rise when other interest rates bounce up. Finally, private loans don't offer PLUS loans' free insurance or flexible repayment options and won't be reduced if a grad student takes a public service job.
As taxpayers, parents are glad that the PLUS program reduces tax burdens, but James Boyle, president of College Parents of America, says that the potential size of the profits raises concerns. "PLUS loan margins need to be watched closely, so that greater benefits go to parents and not the U.S. Treasury," he says. Rep. George Miller, chairman of the House Committee on Education and Labor, noted that the extra money generated from last year's reduction in subsidies to lenders helps increase Pell grants for lower-income students and funds loan repayment programs for public servants and borrowers who end up in low-paying jobs. And that makes "college more affordable for millions of Americans," he says.
The gains from PLUS loans also offset losses from student loans . Undergraduate and graduate students who qualify as needy and thus get a subsidized federal Stafford loan in the next year or so will end up paying back about 16 percent less than the loans ultimately cost taxpayers, according to estimates by the Congressional Budget Office and the Office of Management and Budget. Subsidized Stafford loans cost taxpayers because they don't charge any interest while students attend college. These loans also charge only about 6 percent annual interest once the student leaves school.
Any student who doesn't qualify as needy can take out an "unsubsidized" Stafford loan, which is likely a wash for taxpayers. Those students are charged interest of 6.8 percent a year—and the interest builds up while they are in school—plus 1 to 2 percent in upfront fees, raising the total annual percentage rate to about 7.2 percent. The OMB estimates those loans cost taxpayers about 3 percent, but the CBO estimates taxpayers will make about 2 percent on those loans.
Because the government lends about five times more in costly subsidized Stafford loans than it does as PLUS loans, the entire federally guaranteed educational lending program is projected to cost taxpayers about 2 percent next year, the CBO and OMB agree. In a March analysis—its most recent of the federal education loan program—the CBO estimated that the federal government will make $73.2 billion worth of educational loans in 2009. By the time all those loans are repaid, the loans will very likely have cost taxpayers about $1.7 billion more than the government received in principal, interest, and fees. That's nevertheless a dramatic improvement for taxpayers. As recently as 2005, federal education loans were much less advantageous for taxpayers.
