Paying for college is a brow-furrowing challenge. But it's particularly confusing this year. From interest rate resets to loan providers exiting the market, there's so much going on that you could spend your summer sifting through the news. Instead, allow me.
Colleges going direct: Despite all the news about turmoil in the student loan markets, Joe and Jane College should be able to find the money they'll need. No question it's been a tough market for financing student loans, and because there are fewer incentives for lenders to offer federally guaranteed loans, 119 outfits have exited or taken breathers from the business in recent months, according to Finaid.org Publisher Mark Kantrowitz's tally. But financial aid directors are doing everything in their power to ensure that students aren't left loanless.
The turmoil has renewed interest in the Direct Loan Program run by the federal government. Locally, Macalester College and the University of St. Thomas in St. Paul are making the switch to government loans to guarantee that students will have access to funds. Without the switch, almost four in 10 borrowers returning to Macalester would have needed to switch lenders for the coming school year. At St. Thomas, more than half the students would have been in the same boat.
New Web tools for loans: Students in need of private loans have a growing list of resources at their fingertips. Greennote.com lets students borrow money from their social network at a rate rivaling federally guaranteed loans without needing a cosigner or a credit check. The loans have a competitive fixed rate of 6.8 percent; borrowers also pay $49 or a 2 percent "document fee." Lenders earn 5.8 percent on their money after Greennote takes a 1 percent administration fee. Virgin Money USA's Student Payback service (www.virginmoneyus.com) allows parents to borrow money for college from their preferred sources and then sets up a formal agreement for the students to pay back all or part of that debt. File an application with Tuitionbids.com, and lenders will bid on your loan. Simpletuition.com lets you compare various loan types for the best terms.
As always, look to federally guaranteed loans before shopping for alternatives. And read the fine print, even though you don't want to.
Big changes
On Tuesday, a host of changes went into effect that should perk up the ears of students heading to school or making loan payments.
Rates went down: The fixed interest rate for new subsidized Stafford loans dropped Tuesday, from 6.8 to 6 percent; the unsubsidized rate stays the same, courtesy of the College Cost Reduction Act passed by Congress last year. The act cuts the rate in half over the next four years.
This will save Minnesota students entering college in 2008 an average of $2,510 in interest, according to U.S. PIRG, the federation of state Public Interest Research Groups.
Stafford loans taken out before July 1, 2006, have variable rates that reset each year. This year, the rate dropped 3 percentage points, to 4.2 percent. This means it's a fine time to consolidate. If you don't, that sweet rate could go up in July 2009. If you do, you'll lock in at 4.2 percent. Recent graduates within their six-month grace period can lock in at 3.6 percent.
There aren't as many lenders offering consolidation loans because of the unfavorable student loan market and borrower benefits for paying on-time or allowing e-payments have pretty much dried up. But you can consolidate directly with the government, through www.loanconsolidation.ed.gov.
Student loans? You're forgiven: Consolidating through the direct loan program is the road to loan forgiveness for students planning at least a decadelong career in public service. The list of details is lengthy, so do your homework The Project on Student Debt -- www.projectonstudentdebt.org -- is a good place to start.
The College Cost Reduction Act also provides upfront tuition assistance for students who commit to be teachers in high-need areas. Visit studentaid.ed.gov and look for TEACH Grant info. The same site also has a wealth of information about much of what I've covered here.
And speaking of free money, Pell grants for low-income students also increased, from $4,241 to $4,731. This is the first of five increases for the Pell.
Kara McGuire • 612-673-7293
By KARA McGUIRE
Sunday, July 6, 2008
Paydirt: Student loan locator
Saturday, July 5, 2008
Five Charged With $690,000 in Student Loan Fraud
A ring of five Seattle-area women has been charged with taking out more than $690,000 in fraudulent private student loans, raising concerns by some federal officials that the kinds of abuses that have hammered the subprime mortgage sector may also be lurking in the student lender field.
In an indictment filed in early June in Seattle's federal district court, prosecutors allege that beginning in 2005, Kathy L. Hardy, 59, of Renton, Wash., her two daughters, ages 35 and 20, and two 36-year-old associates filed more than 70 applications for private student loans, often using other people's names or Social Security numbers.
According to the indictment, the vast majority of the women's applications were unsuccessful. But it charges that at least 24 fraudulent loan applications were approved. In a search warrant recently made public, investigators allege that the lenders sent checks—some for more than $40,000—to the women's addresses.
Although made to students, private educational loans are simply standard business transactions, little different from, say, auto loans. Banks typically charge comparatively high interest rates but try to make the applications quick and easy. In contrast, to obtain low-cost federally guaranteed Stafford or Perkins education loans, the federal government requires that students fill out the extensive Free Application for Federal Student Aid, and it requires schools to certify much of that information. The federal government caps the amount it will loan to an undergraduate, typically at a few thousand dollars a year. In addition, federal loan payments are usually made directly to a college and aren't sent to a student's home address.
Investigators and prosecutors say the women took advantage of private lenders' eagerness to make big, higher-interest loans. They also believe the defendants took advantage of a wrinkle that makes fraud in student loans harder to catch than, for example, mortgage fraud. Many lenders allow students to defer payments for as long as they are in school, which can easily mean four or five years. That means borrowers with no intention of paying don't attract lenders' or identity theft victims' attention by defaulting quickly. Finally, the investigators believe the women were able to keep taking out loans for two years despite a trickle of complaints from identity theft victims in part because of the Federal Bureau of Investigation's shift in focus to terrorism, which has slowed prosecution of some other types of cases.
While the credit crunch and some reform proposals may make things tougher for future fraudsters, federal officials say the details of this case raise worries that "there are more cases like this out there." Joseph Velling, the Seattle-based special agent in the Social Security Administration's Office of the Inspector General, who spearheaded the investigation, said lenders approved loans based on applications that should have raised warning flags. "What I found surprising was that these checks were mailed to people living at addresses that hadn't been verified well enough. . . . Banks can check Social Security numbers and names" to make sure they match, for example, he noted.
Some of the fraudulent techniques alleged in the indictment and search warrant appeared to be sophisticated. Velling said, for example, that the defendants used Social Security numbers of people who have the same name or a similar name as the defendants. And the search warrant alleges that the women sometimes provided copies of doctored driver's licenses.
But the search warrant also charges that many loan checks were sent to the same addresses. And it says that in some of the applications, the applicants' names did not match Social Security numbers. Velling added that in at least one case, the Social Security number of a dead person was used.
He said the lenders' investigators became aware of the possible fraud but had trouble persuading federal agencies to take an official interest: "These companies are sitting on more fraud, but they can't get anybody to work them."
Velling said he happened to be working the Seattle FBI office on another case last fall when a call came in from a victim complaining that someone improperly had taken out a student loan in her name. The FBI asked Velling to lead the investigation. By teaming up with other federal and local investigators, as well as the fraud investigators employed by lenders, he says he found many other loan checks that went to the same home addresses or to people with similar-sounding names. "The applications were all done on the Internet. I don't know of one case where there was a face-to-face meeting," Velling added.
The Problem with Federal Loan Forgiveness Programs
One of the Education Department's top higher education officials says there are significant problems with two of the most-trumpeted new loan forgiveness programs designed to help students afford college.
The public service loan forgiveness program that will begin in 2009 makes good headlines, Diane Auer Jones, assistant secretary for postsecondary education, told attendees of a Washington, D.C., College Savings Foundation conference this month. But many idealistic students hoping to get out from under their federal education debts will be sorely disappointed, she says.
"Guess what? You have to make 10 years of payments," before the remainder of the loan is forgiven, she notes. And most federal education loans are 10-year loans, which means there will be nothing left to be forgiven.
The Education Department is worried "some students will see the program and take on more debt than they would have otherwise, not realizing it is unlikely that most of it will be forgiven," she says.
In addition, the new "Teach grants" that this year started paying up to $4,000 a year to those studying to be teachers in needy schools will turn into costly mistakes for the vast majority of recipients, she says. Teachers who do not end up working in classrooms that qualify as "high need" will see those grants they received while in school turn into loans. Jones says the Education Department's experience with other similar programs indicates 80 percent of the recipients of Teach grants will have to pay them back with interest. The problem, she says, is that newly graduated teachers are having trouble getting hired by what she called "dysfunctional" but needy schools.
Robert Shireman, director of the Project on Student Debt, says that people should realize the new public service forgiveness program will help only those who take low-paying public service jobs. Borrowers who take on high-paying government or nonprofit jobs will have to pay off their loans, he said.
Anyone hoping to take advantage of the loan forgiveness program should make sure to consolidate loans with the federal government's new Income-based Repayment option, Shireman said. That way, low-paid public service workers will have to pay only a reasonable portion of their salary toward their loans, which could be lower than the regular loan payment. After 120 payments, the remainder of the loan will be forgiven. More information can be found at ibrinfo.org.
Congressional staffers say they are working on fixes to the Teach grant law to prevent the kind of unhappy surprises Jones warns of. A major education bill currently being discussed in House-Senate negotiations would broaden the definition of high-need classrooms and give the Education Department the power to give breaks to students who try but fail to get hired by needy schools.
source: usnews
