Transcript Overview of Financial Aid

CASFAA Conference
December 8, 2008
Student Loans 101
Presented by
Thomas Garbrecht
The Fashion Institute of
Design & Merchandising
Did You Know?
“As of November 2006, Americans
owed roughly $70 billion to governments,
institutions and banks for education loans.”
“In the first six months of 2008, almost nine
million students nationwide completed the
federal aid application required for federal
grants and loans, a 16 percent increase
over last year.”
2
The “Good”
• For the Student
– Student loans make the difference between
receiving an education or not
• Education is an investment in their future ability to
earn a realistic salary
• Those who earn a degree or certificate will increase
their earning potential
• With education comes confidence
3
The “Good”
• For the Student
– Student loans help borrowers build “credit”
• Student loans will show up on credit report
• Lenders/Servicers “must” report on-time payments to
credit bureaus
• Building a solid credit foundation may lead to better
financing options for the future
• Lenders like to see borrowers capability of managing
large debt
4
The “Good”
• For the Student
– Don’t have to be employed
• Many consumer loans require a previous
employment history
• Allows student to focus on academics rather than
work
– Low interest rates
•
•
•
•
Undergrad Stafford (Subsidized) = 6.0%
Undergrad Stafford (Unsubsidized) = 6.8%
Graduate Stafford (Sub and Unsub) = 6.8%
PLUS/GPLUS = 8.5%
5
The “Good”
• For the Student
– Very good repayment options
• Different repayment plans allow student to find plan
that best fits
• Most repayment plans are long-term allowing for low
monthly payments
• Monthly payments may be as low as $50
• Borrower receives six month grace period
• Some lenders offer borrower repayment incentives
6
The “Good”
• Loan Forgiveness Programs
– Teacher loan forgiveness
– Areas of National Need
• Includes: early childhood educators, nurses in certain
environments, foreign language specilists; librarians;
highly qualified teachers serving limited English
proficient students/serving low-income
communities/working in an educational service
agency/who are from an underrepresented population
in the teaching field; child welfare workers; speechlanguage pathologists; school counselors
– Civil Legal Assistance Attorneys
The “Good”
• For the Student
– Ability to post-pone payment
• Deferments (Gov’t pays interest on Subsidized)
– In-school (made slightly easier in HEOA)
– Unemployed
– Economic Hardship
• Forbearance (Gov’t does not pay interest)
– Borrower may post-pone payment for any reason that
seems reasonable to lender/servicer
– Up to two years with possibility of one year extension
8
The “Good”
• For the Parent
– Effective with HEOA, parents may request a
deferral
• During the period the student on whose behalf the
loan was borrowed is enrolled at least half-time
• During the 6-month period beginning on the day after
the student is no longer enrolled at least half-time
• If the parent is a student during the 6-month period
beginning on the day after the parent is no longer
enrolled at least half-time
9
The “Good”
• For the Graduate/Professional Student:
– May request a deferral
• During the 6-month period beginning on the day after
the student is no longer enrolled at least half-time
10
The “Good”
• For the School
– Increase in enrollment
• Student loans help students make decision to attend
school
– Increase in revenue
• More money brought into the school helps keep staff
and faculty employed
• Money can be used to better the facility
• Money can be used to purchase and upgrade
equipment and labs
• Money can be used for training
11
The “Good”
• For the Economy
– Graduates fill empty employment gaps
• Leads to decrease in unemployment rate
• Jobs stimulate the economy
• People give back in the form of taxes
– Decrease in the need for public assistance
programs
• Students able to remove themselves and their
families off public support programs
• This builds confidence in individuals
12
Type of Loan Programs
• Federal
– Perkins
– FFEL/Direct
• Stafford Subsidized/Unsubsidized
• PLUS/GPLUS
• Consolidation
• Private
13
Who’s Who and What Role They Play
•
•
•
•
•
•
•
Lender/USED
Servicer
Guarantor
Secondary Market
United States Dept of Education
Credit Bureaus
School
14
FFEL & Direct Loans: Program
Components
• Through FFEL and Direct Loan programs,
a school may choose whether to offer:
– Subsidized Stafford Loans
– Unsubsidized Stafford Loans
– PLUS
15
FFEL & Direct Loans: Program
Components
• Subsidized loans: need-based
– Interest paid by federal government during
in-school, grace, and deferment periods
• Unsubsidized loans: non-need-based
– Interest paid by student
– Interest may be paid as it accrues during inschool, grace, or deferment periods or be
capitalized
– Currently higher interest rate for these loans
16
FFEL & Direct Loans: Source of Funds
• FFEL Program
– Private lender capital provides funds
– Guaranty agencies insure loans; federal
government reinsures guaranty agencies
• Direct Loan Program
– Federal government provides funds
17
FFEL & Direct Loans: Source of Funds
• Federal funds pay
–
Interest subsidies (subsidized Stafford
Loans)
–
Special allowances to FFEL lenders
–
Reimbursements for default, death,
disability, false certification, closed school,
unpaid refund claims and in some cases
bankruptcy
18
Stafford Loans: Eligibility Criteria
• Student borrower must meet general student
eligibility and program-specific criteria, and
student for whom PLUS obtained must meet
general student eligibility criteria
– Enrolled at least half time
– Regular student, except
• Certain teacher certification programs
• Preparatory course work
• Certain requirements if prior loan discharged due
to total and permanent disability
19
Stafford Loans: Eligibility Criteria
• Must have determination of Federal Pell
Grant eligibility, if undergraduate student
• May not be in a medical internship or
medical residency unless the internship or
residency is part of an eligible program of
study
• May not be incarcerated
20
Stafford Loans: Eligibility Criteria
• Must demonstrate need for subsidized loans
Cost of attendance (COA)
–
Expected family contribution (EFC)
–
Estimated financial assistance (EFA)
=
Need
21
Stafford Loans: Eligibility Criteria
• Not required to demonstrate need for
unsubsidized or PLUS loans (unsubsidized loan
may replace all or part of EFC)
Cost of attendance (COA)
–
Estimated financial assistance (EFA)
=
Unsubsidized loan eligibility (subject
to loan limits)
22
PLUS Loans: Eligible Borrowers
• Biological or adoptive parent
• Stepparent if stepparent’s
financial information
considered in
performing student’s
need analysis
• Graduate and Professional Students
23
PLUS Loans: Eligibility Criteria
• Sign statement of educational purpose
• Provide SSN
• Must not be in default or owe repayment of
Title IV aid
• Must meet Title IV citizenship status
criteria
• May not have adverse credit history
• May use co-signer/endorser (for many lenders)
24
FFEL & Direct Loans: Interest Rates
• Stafford Loans:
– Variable rate prior to 7/1/2006
•
May not exceed 8.25%
– Fixed rate on or after 7/1/2006
•
6.8% (Subsidized); 6.0% (Unsubsidized)
• PLUS:
– Variable rate prior to 7/1/2006
•
May not exceed 9.0%
– Fixed rate on or after 7/1/2006
•
8.5%
25
Stafford and PLUS Loan Fees
• FFEL: 2.0% (both origination and default
fees) for Stafford; 4.0% (both orig. and
default fees) for PLUS
• Direct Loan: 2.0% (both origination and
default fees) for Stafford; 4.0% (both
orig. and default fees) for PLUS; rebate
(upfront) of 1.5% for 12 consecutive ontime pymts.
26
Stafford Loan Annual Loan Limits
• Undergraduate programs-Stafford
–
$3,500 (sub); $4000 (unsub); $2000
(addtl. Unsub if not dependent PLUS
approved)
–
$4,500; same unsub above: second year
–
$5,500; same unsub above: third and
subsequent years
• Graduate or professional degree programs
–
$8,500; unsub of $12000
27
Preparatory Course Work
• Students enrolled in preparatory course work
necessary for enrollment in an eligible program may
receive FFEL or Direct Loans
• First-year annual loan limit applies to student taking
preparatory course work necessary for enrollment in
an undergraduate program
• Fifth-year annual loan limit applies to students who
have a baccalaureate degree and are taking
preparatory course work necessary for enrollment in a
graduate or professional program or certain teacher
certification programs
28
Stafford Loan Proration
• Loan proration does not apply to graduate
students or PLUS
• Proration of undergraduate Stafford Loan
annual limits required when:
– Program is shorter than full academic year
– Program is one academic year or longer, but
remaining portion is less than full academic
year in length
29
Stafford Loan Aggregate Loan Limits
• Dependent undergraduate: $31,000
• Independent undergraduate and
dependent undergraduate whose parents
can’t obtain PLUS: $57,500 (no more than
$23,000 which can be subsidized)
• Graduate and Professional Students:
currently $138,500 (no more than $65,000
which can be subsidized)
30
PLUS Loan Limits
Cost of attendance (COA)
– Estimated financial assistance (EFA)
= Maximum annual PLUS
• No PLUS aggregate loan limit
31
Did You Know?
“Many lenders and observers of borrowing
trends suggest that debt burdens should be
less than 8% in order to reduce the risk of
loan default”
“The typical federal student loan borrower
who entered repayment in 2000 used about
6.4% of annual income to repay student
loans”
32
The “Bad”
• A loan is a loan is a loan
– No matter how you put it, loans must be repaid
– It takes responsibility to repay a loan debt
– Not repaying the loan may have serious
consequences
• Not borrowing for educational expenses
– Student loans were meant to pay for college
cost
33
The “Bad”
• Borrowing more than you can afford
– Students should know the earning potential
they will have after graduation
– Will students be able to afford minimum
monthly payment after graduation?
– Borrowing more than you have the potential to
earn can lead to defaulting on the loan
34
The “Bad”
• Adding student loan debt to other
consumer debt
– Student loans make up a small percentage of a
borrower’s consumer debt
– Borrowers must learn to control the amount of
consumer debt
– Borrowing private loans in addition to federal
loans can impact ability to pay off loans
35
The “Bad”
• Loans can be sold
– Most lenders must sell the loan in order to free
up capital for new borrowers
– Many lenders cannot sell their loan portfolies in
today’s economic climate
– Students might not be aware their loan was
sold to another company
36
Master Promissory Note
• Legal contract between borrower & lender
– Loan amount is not disclosed on the MPN; thus
Affirmative Confirmation process
• Promise to repay all Federal Stafford Loan
funds received
• Sign each year
– New MPN required
– Change of lender
– Transfer to new school
– After 10 years
37
The Grace Period
• One-time grace period
– Six months
– Begins after you graduate, leave
school or drop below half time
– Monthly payments begin when your grace period
ends
• PLUS borrowers must request the grace
period (vs. Stafford borrowers who find it
automatic)
38
Repaying Your Student Loan
• Federal loans must be repaid
– Regardless of program completion
or obtaining employment upon completion
• Four repayment plans
– Standard repayment
– Graduated repayment
– Income-sensitive repayment
– Extended repayment
39
Loan Repayment Chart
Federal Stafford Loans (subsidized & unsubsidized)
Interest Rate
7.00%
8.25%
Total Amount
Borrowed
Number of
Payments
Monthly
Payment
Total
Interest
Number of
Payments
Monthly
Payment
Total
Interest
$2,000
46
$50
$284
47
$50
$347
$2,625
63
$50
$518
65
$50
$643
$4,000
109
$50
$1,404
117
$50
$1,827
$5,000
120
$58
$1,967
120
$61
$2,359
$6,625
120
$77
$2,606
120
$81
$3,126
$8,000
120
$93
$3,146
120
$98
$3,775
$10,000
120
$116
$3,933
120
$123
$4,718
Interest rates on most federal Stafford loans are variable and adjusted annually every July 1
40
Money-Saving Benefits
• Rebate for consecutive on-time
payment
• Automatic deduction sign-up
– Ask your lender for details
• Tax credits include Hope and Lifetime
Learning
– www.irs.gov
41
Loan Consolidation
• Combine loans into one single new loan
– You agree to new terms & conditions
• One monthly payment
– Lower payment/longer repayment period
• Payments begin at consolidation
• Be informed
– www.finaid.org
42
Deferment
• Postponement of payments
• Not automatic
– You must apply & receive approval
from lender
• Primary reasons
–
–
–
–
In-school
Unemployment
Economic hardship
Military service
43
Forbearance
• Temporary reduction or postponement of
payments
• Not automatic
– You must apply & receive approval from lender
• Primary reasons
– Poor health
– Residency program
– Payment exceeds 20% of monthly
income
• Interest will continue to accrue
44
Loan Cancellation
• In extreme extenuating conditions:
– Total & permanent disability
– Inability to complete course of
study due to school closure
– False certification by school
– Death
45
The “Ugly”
• Delinquency
– Occurs one (1) day after student does not
make payment
– Continued delinquency can lead to bad credit
• Lenders are required to report late payments of more
than 60 days to at least one credit bureau
– If delinquency continues for 270 or 360
continuous days, student is considered to be in
default
46
The “Ugly”
• Default
–
–
–
–
Loan not paid for 270/360 days
Student will lose Title IV eligibility
Student may have his/her wages garnished
Federal & state income taxes returns may be
withheld
– Continuous calls from collection agencies
– Collection fees and Interest added to original
loan amount
47
The “Ugly”
• School can lose Title IV eligibility
– If enough students default on their loans,
school may lose financial aid eligibility
• Three consecutive default rates of 25% or more
• One time default rate of 40% or more and school’s
financial aid eligibility is terminated
– School must implement a default prevention
plan
– Student loan defaults effect the entire financial
aid industry
48
Avoid Delinquency & Default
• Pay on time
• Participate in ACH or auto-debit
• A payment received one day late is
considered delinquent
• Delinquent payments are reported to
national credit bureaus
• Always call your school or lender for help
49
Life After Default
• Satisfactory payment arrangements
– Six voluntary consecutive on-time payment
– Not yet out of default
– Eligible for Title IV
• Rehabilitation
– Twelve voluntary consecutive on-time payments
– No longer in default
– One time only
50
Management of Loans
• Open and read your mail!
• Read all materials
– Loan application and Promissory Note
– Rights and Responsibilities
– Disclosure statements
• Know who your lender is
– Keep notices of sales or transfers
51
Management of Loans
• Keep paperwork - set up a file
• Create and use a school specific e-mail
– Application/Promissory Notes
– Loan disclosure statements
– Record of checks or EFT disbursements
– Loan repayment schedule
– Lender correspondence -
• FROM you and TO you
– Record of payments you make
– Record of who/when you talked with lenders/servicers
– Name & address of lender, servicer, guarantor
52
Management of Loans
• Know how much you borrow
• Prepayment
– Reduces total interest
– Saves lots of money
– No fees or penalty for paying early
– Easy to begin payment during grace period
53
Tips for Schools to Students
•
•
•
•
Pay some interest while in school
Borrow less
Read what you sign
Offer financial literacy/budgeting/tracking
what you spend
• Get a free credit report
• Write down contacts
• Help step-by-step through consolidation
54
Ombudsman
• For irresolvable problems, Department of
Education has an ombudsman
–
–
–
–
http://sfahelp.ed.gov
http://ombudsman.ed.gov
Toll free: 1-877-557-2575
Office of the Ombudsman Student Financial
Assistance
U.S. Department of Education
Room 3012, ROB #3
7th and D Streets, SW
Washington DC 20202
55
Questions & Answers
Thank You
56