Student Loans 101Student Loans 101

CASFAA Conference

December 8, 2008

Presented byThe Fashion Institute of

Design & Merchandising Thomas Garbrecht

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““As of November 2006, Americans As of November 2006, Americans owed roughly $70 billion to governments, owed roughly $70 billion to governments, institutions and banks for education loans.”institutions and banks for education loans.”

“In the first six months of 2008, almost “In the first six months of 2008, almost nine million students nationwide completed nine million students nationwide completed the federal aid application required for the federal aid application required for federal grants and loans, a 16 percent federal grants and loans, a 16 percent increase over last year.”increase over last year.”

Did You Know?Did You Know?

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The “Good”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

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The “Good”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

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The “Good”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%

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The “Good”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

The “Good”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; speech-language pathologists; school counselors

– Civil Legal Assistance Attorneys

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The “Good”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

The “Good”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

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The “Good”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

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The “Good”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

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The “Good”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

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Type of Loan ProgramsType of Loan Programs

• Federal– Perkins – FFEL/Direct

• Stafford Subsidized/Unsubsidized• PLUS/GPLUS• Consolidation

• Private

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Who’s Who and What Role They PlayWho’s Who and What Role They Play

• Lender/USED• Servicer• Guarantor• Secondary Market• United States Dept of Education• Credit Bureaus• School

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FFEL & Direct Loans: Program FFEL & Direct Loans: Program ComponentsComponents

• Through FFEL and Direct Loan programs, a school may choose whether to offer:

– Subsidized Stafford Loans

– Unsubsidized Stafford Loans

– PLUS

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FFEL & Direct Loans: Program FFEL & Direct Loans: Program ComponentsComponents

• 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 in-school, grace, or deferment periods or be capitalized

– Currently higher interest rate for these loans

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FFEL & Direct Loans: Source of FundsFFEL & 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

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FFEL & Direct Loans: Source of FundsFFEL & 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

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Stafford Loans: Eligibility CriteriaStafford 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

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Stafford Loans: Eligibility CriteriaStafford 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

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Stafford Loans: Eligibility CriteriaStafford Loans: Eligibility Criteria

• Must demonstrate need for subsidized loans

Cost of attendance (COA)

– Expected family contribution (EFC)

– Estimated financial assistance (EFA)

= Need

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Stafford Loans: Eligibility CriteriaStafford 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)

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PLUS Loans: Eligible BorrowersPLUS Loans: Eligible Borrowers

• Biological or adoptive parent

• Stepparent if stepparent’s financial information considered in performing student’s need analysis

• Graduate and Professional Students

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PLUS Loans: Eligibility CriteriaPLUS 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)

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FFEL & Direct Loans: Interest RatesFFEL & 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%

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Stafford and PLUS Loan FeesStafford 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 on-time pymts.

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Stafford Loan Annual Loan LimitsStafford 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

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Preparatory Course WorkPreparatory 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

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Stafford Loan ProrationStafford 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

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Stafford Loan Aggregate Loan LimitsStafford 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)

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PLUS Loan LimitsPLUS Loan Limits

Cost of attendance (COA)

– Estimated financial assistance (EFA)

= Maximum annual PLUS

• No PLUS aggregate loan limit

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““Many lenders and observers of borrowing Many lenders and observers of borrowing trends suggest that debt burdens should be trends suggest that debt burdens should be less than 8% in order to reduce the risk of less than 8% in order to reduce the risk of loan default”loan default”

“The typical federal student loan borrower “The typical federal student loan borrower who entered repayment in 2000 used about who entered repayment in 2000 used about 6.4% of annual income to repay student 6.4% of annual income to repay student loans” loans”

Did You Know?Did You Know?

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The “Bad”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

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The “Bad”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

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The “Bad”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

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The “Bad”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

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Master Promissory NoteMaster 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

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The Grace PeriodThe 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)

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• 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

Repaying Your Student LoanRepaying Your Student Loan

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Loan Repayment ChartLoan Repayment Chart

Federal Stafford Loans (subsidized & unsubsidized)

Interest Rate

7.00% 8.25%

Total Amount

Borrowed

Number of

Payments

Monthly Paymen

t

Total Interes

t

Number of

Payments

Monthly Paymen

t

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

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Money-Saving BenefitsMoney-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

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Loan ConsolidationLoan 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

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DefermentDeferment

• Postponement of payments• Not automatic

– You must apply & receive approval from lender

• Primary reasons– In-school – Unemployment– Economic hardship– Military service

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ForbearanceForbearance

• 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

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Loan Cancellation Loan Cancellation

• In extreme extenuating conditions:– Total & permanent disability– Inability to complete course of

study due to school closure– False certification by school– Death

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The “Ugly”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

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The “Ugly”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

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The “Ugly”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

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Avoid Delinquency & DefaultAvoid 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

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Life After DefaultLife 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

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Management of LoansManagement 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

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Management of LoansManagement 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

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Management of LoansManagement 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

Tips for Schools to StudentsTips 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

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OmbudsmanOmbudsman

• 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

AssistanceU.S. Department of EducationRoom 3012, ROB #37th and D Streets, SWWashington DC 20202

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Questions & AnswersQuestions & Answers

Thank You