What Happens Next?Understanding Award Letters and Loan Basics

Spring 2010

We will be covering three major areas:

Understanding and Comparing Award Letters

Types of Federal and Private LoansTerms, borrowing process, funding sources, repayment, etc.

Responsible BorrowingBorrowing responsibly and keep debt down!

Today’s Session….What Happens Next?

Cost of attending school Award types and amounts Comparing cost to aid Filing in the pieces Questions to ask of the school Things to keep in mind

Key Concepts What Happens Next?

Cost of Attendance Schools include tuition, fees, room,

board, books, travel and miscellaneous expenses when determining eligibility

Some of these costs are actual and some are simply estimates or averages and can be very “underestimated” (such as travel)

When looking at costs, try to compare “apples to apples”

Cost of Attending SchoolWhat Happens Next?

I recommend comparing “direct” cost or costs billed by the school: Tuition and Fees Room and Board

Be sure you know what assumptions are being made by the school: Enrollment status - full time vs. part

time Housing – on campus, off campus or

living at home

Cost of Attending SchoolWhat Happens Next?

Fall Spring Total

Tuition and Fees $4,750 $4,750 $ 9,500

Room and Board $4,000 $4,000 $ 8,000

Books and Supplies $ 500 $ 500 $ 1,000

Transportation $ 1,000 $1,000 $ 2,000

Miscellaneous $ 1,000 $1,000 $ 2,000

Total $11,250 $11,250 $22,500

Direct Costs $17,500 Total Costs $22,500

Example of CostsWhat Happens Next?

Look at the various types of aid and total by the award type:

Grants and Scholarships (don’t have to be repaid)

Federal Loans (Perkins & Stafford)

Federal Work Study or other Work Programs

Other Loans

Award Types and AmountsWhat Happens Next?

Fall Spring Total

Federal Pell Grant $ 2,775 $ 2,775 $ 5,550 Federal Supplemental Grant $ 500 $ 500 $

1,000Federal Stafford Loan $ 1,750 $ 1,750 $

3,500Federal Work Study $ 1,500 $ 1,500 $

3,000 Federal Perkins Loan $ 1,000 $ 1,000 $

2,000Maine State Grant $ 1,000 $ 1,000 $ 2,000College Grant $ 750 $ 750 $

1,500Total $ 9,275 $ 9,275

$18,550

Total Grants $10,050Total Perkins/Stafford Loans $5,500Total Work Study $3,000

Example of an AwardWhat Happens Next?

Direct Costs $17,500Total Grants - $10,050Total Perkins/Stafford - $ 5,500

Total Remaining Balance $ 1,950

Focus on grants and federal loans Don’t include Work Study as it is not applied

directly to the bill Don’t be fooled by schools who include large

loans to fill need – all schools can offer PLUS and Alternative Loans

Compare Cost to AidWhat Happens Next?

Be sure to read the materials that accompany the Award Letter – will provide many more details

If other loans are listed on the Award Letter, learn more about them (we’ll talk more about all of this in a minute): Interest rate/fees Deferment options Repayment options Approval criteria - credit based?

Contact school to discuss remaining options

Filling in the PiecesWhat Happens Next?

Are the scholarships renewable?

If scholarships are renewable, what is the criteria?

What happens if the student receives outside scholarships, for example, from graduation?

Will the financial aid award stay the same from year to year?

Questions to Ask….What Happens Next?

Many schools will ask you to accept or reject aid…. I recommend that aid is not rejected unless the student is absolutely sure they don’t want the aid: may not be able to get it back once rejected can always return loans during the year, even if

already processed

If circumstances have changed from what is on the FAFSA, the student should contact school to discuss appeal.

Things to Keep in MindWhat Happens Next?

Three categories of loans:

Federal Loans

Private/Alternative Educational Loans

Institutional/University Loan

All About Loans…..What Happens Next?

Federal Perkins Loan

Federal Stafford Loan (Direct or FFEL) Subsidized and Unsubsidized

Federal PLUS Loans (Direct or FFEL) Regular PLUS and Grad PLUS

Alternative Loans

University/Institutional Loans

Types of LoansWhat Happens Next?

The current Perkins Loan Program is subject to change…your schools will keep you updated.

Federally regulated

Student is the borrower

Student must be enrolled at least half-time

Money comes from the federal government and previously repaid Perkins Loans

Federal Perkins Loan OverviewWhat Happens Next?

Must complete the FAFSA and meet eligibility requirements

Need-based loan

Student repays the school the loan funds

Not all schools have Perkins Loan Funds (1,800 out of 4,400 institutions have Perkins)

Federal Perkins Loans OverviewWhat Happens Next?

Undergraduate – up to $5,500 a year $27,500 aggregate as an undergraduate

Graduate – up to $8,000 a year $60,000 aggregate, including

undergraduate loans

Amount actually received depends on financial need, amount of other aid and availability of funds at school

Federal Perkins Loans – AmountsWhat Happens Next?

5% fixed interest rate No fees No interest accrues while in school 9 month grace period Up to 10 years to repay depending on

amount owed Numerous deferment and cancellation

provisions exist

Perkins Loans – TermsWhat Happens Next?

No separate application – simply complete the FAFSA and the school will award Perkins if student is eligible and funds are available

Student signs a Master Promissory Note the first time they borrow – good for 10 years

Disclosure must be completed each year

Exit Interview needs to be completed when student no longer enrolled at least half-time

Perkins Loans – Application ProcessWhat Happens Next?

Typically schools either participate in the Direct Loan program or the Federal Family Education Loan Program (FFELP) – although some schools do both.

Direct Loans funded through the federal government – student repays the feds

FFEL Loans funded through private lending institutions – student repays private lender

What Happens Next?

Federal Stafford Loans Overview

Federally regulated

Student is the borrower

Student must be enrolled at least half-time

Direct and FFEL are virtually identical except for the funding source.

From this point forward, I’ll refer to them simply as Stafford Loans

What Happens Next?

Federal Stafford Loans Overview

Virtually all schools participate in the Stafford Loan program

Two types of Stafford Loans Subsidized – Need based Unsubsidized – Can replace EFC or fill

need

Students must complete the FAFSA to determine student’s eligibility and level of need

Federal Stafford Loans OverviewWhat Happens Next?

Dependent Undergrad 1st year - $5,500 of which no more than $3,500 may be sub 2nd year - $6,500 of which no more than $4,500 may be sub 3rd and 4th year - $7,500 of which no more than $5,500 may be

subsidized

Aggregate - $31,000 of which no more than $23,000 can be subsidized

Independent Undergrad* 1st year - $9,500 of which no more than $3,500 may be sub 2nd year - $10,500 of which no more than $4,500 may be sub 3rd and 4th year - $12,500 of which no more than $5,500 may be

subsidized

Aggregate - $57,500 of which no more than $23,000 can be subsidized

*Dependent students whose parents are denied a Plus Loan can also borrow

at these levels

Stafford Loans - AmountsWhat Happens Next?

Graduate Student $20,500 of which no more than $8,500 may be

subsidized

Aggregate - $138,500 of which no more than $65,500 can be subsidized

The graduate debt limit include Stafford Loans received for undergraduate study

Stafford Loan – Amounts (cont.)What Happens Next?

The interest rate on Stafford loans first disbursed after July 1, 2010 is fixed at 4.5% for subsidized Stafford Loans and 6.8% for unsubsidized Stafford Loans

During any deferment periods the federal government pays the interest on subsidized loans

• Default fee is 1%

The default fee is deducted proportionately from each disbursement of the loan

Stafford Loan – Interest Rates and FeesWhat Happens Next?

6 month grace period

Student has between 10 and 25 years to repay, depending on the amount owed and the type of repayment plan selected – this is where federal loans are much better than private loans.

Numerous deferment provisions as well as some cancellation provisions exist

Stafford Loan - RepaymentWhat Happens Next?

Check with individual schools to determine application process

Student signs a Master Promissory Note the first time they borrow – good for 10 years

Entrance interview must be completed the first time a student borrows prior to receiving any funds

Exit interview must be completed when student is no longer enrolled at least half-time

Stafford Loans – Application ProcessWhat Happens Next?

Borrower is the parent of a dependent undergraduate student (graduate students are potentially eligible, but I’m going to focus on it as a parent loan for this presentation)

As with Stafford, the Direct and FFEL versions of the PLUS Loan are virtually identical except for the funding source.

Direct PLUS Loan funded through the federal government – parent repays the feds

FFEL PLUS Loan is funded through private lending institutions – parent repays private lender

Federal PLUS Loans Overview – Direct & FFELWhat Happens Next?

PLUS Loans can fill need and/or replace EFC

Students do not have to file a FAFSA in order for the parents to borrow a PLUS Loan (although recommended)

Parents must:• pass a credit check• be citizens or eligible non citizens• not in default on federal student loan • not owe a refund on any federal student

aid program (nor can the student)

Federal PLUS Loans OverviewWhat Happens Next?

Student’s cost of attendance

- Other aid student receives

= Maximum loan amount

No aggregate maximum

PLUS Loan - AmountsWhat Happens Next?

The interest rate on FFELP PLUS Loans first disbursed after July 1, 2006 is fixed at 8.5%; for Direct PLUS Loans the rate is fixed at 7.9%.

PLUS Loan charges loan fees of up to 4%, deducted from each disbursement

While in deferment interest accrues

PLUS Loans – Interest RateWhat Happens Next?

Typically repayment begins 60 days after the funds are fully disbursed, but parents can request a deferment while the student is enrolled in school at least half-time

There is no grace period as there is with the Stafford Loan program

Other deferments similar to Stafford

The repayment term is up to 10 years

PLUS Loans - RepaymentWhat Happens Next?

Check with individual schools to determine application process

After credit check, parent will be notified of approval or denial

Parent borrower signs a Master Promissory Note the first time they borrow – good for 10 years – tied to individual student

PLUS Loans – Application ProcessWhat Happens Next?

Student is the borrower

Often require co-signer with good credit history and debt to income ratio

Do not need to complete the FAFSA but student should so they can borrow federal loans first

Funded through private lenders

Not federally regulated

Alternative Loans OverviewWhat Happens Next?

Student’s cost of attendance

- Other aid student receives

= Maximum loan amount

Aggregate maximum – varies by lender

Alternative Loans - AmountsWhat Happens Next?

Interest rates and fees vary by lender

Most interest rates are variable and set based on the Wall Street Journal prime rate or the LIBOR rate

Often interest rates and fees are structured so that they are less for those with better credit and debt to income ratio

Alternative Loans – Interest Rate and FeesWhat Happens Next?

Repayment varies from one lender to another

Typically principal is deferred while student is in school, but interest accrues

Many loans do have a grace period

Repayment is not based on income but is set based on repayment term and interest rate

Alternative/Private Loans cannot be consolidated with Federal Loans

Alternative Loans - RepaymentWhat Happens Next?

Contact the school to see what is recommended

Often, next step will be to contact the lender directly (either by phone or website) to apply

If approved, lender will have student sign promissory note (typically cover only that loan) and then send information to the school so that the school can “certify” the loan

Some schools will require loan counseling

Alternative Loans – Application Process What Happens Next?

Amounts, interest rates, fees, repayment terms and application process will vary by school and even by loan fund

Not all schools have institutional or university loans available

Institutional/University LoansWhat Happens Next?

Borrowing some loan funds is a given for most students

The average amount borrowed in Maine from the schools that responded to recent survey was over $17,000

Varies tremendously from one school to the next… not necessarily tied to the cost of the school

Individual choices have a huge impact on the amount eventually borrowed

Responsible BorrowingWhat Happens Next?

We’ll discuss the following items that impact on the amounts students borrow: School selection Choice of major Enrollment levels Amount of hours worked Housing options Optional purchases including owning a

car Credit Cards

Limiting BorrowingWhat Happens Next?

Great website to visit is Peterson’s (www.petersons.com)

Give you a general idea of what the various averages are at different schools

Examples….

School SelectionWhat Happens Next?

Harvard University $36.9B endowment Avg loan debt = $10,813 Avg need based gift aid = $36,850 Cost = $52,000 100% of need met

Boston College $1.6B endowment Avg loan debt = $19,358 Avg need based gift aid = $25,547 Cost = $52,039 100% of need is met

Examples from MassachusettsWhat Happens Next?

Simmons College $182.2M endowment Avg loan debt = $42,174 Avg need based gift aid = $13,781 Cost = $43,500 64% of need met

Examples from Massachusetts (con’t)What Happens Next?

Important that students compare award packages when selecting a school

Key to apply on time to get the best package possible

How “loan heavy” is the package?

What types of loan are included in the package?

School Selection (con’t)What Happens Next?

What is the school’s packaging policy – will loan amounts increase?

Consider attending a community college (lower tuition) for the first two years and then transfer to a four year school for the remainder of the program

State schools often cost less (if you are from that state)

School Selection (con’t)What Happens Next?

Choice of major will impact the number and types of schools available to student

Also need to consider earning potential once out of school

Major can also impact whether or not student can receive loan forgiveness

Choice of MajorWhat Happens Next?

Is tuition charged based on “per credit hour” basis or based on enrollment level (ie. full time)?

Reducing credit load may save money at that time, but trade off is length of time needed to complete school

Impact of attending school year round

Enrollment LevelsWhat Happens Next?

Working more may result in borrowing less

However, need to be sure it doesn’t negatively impact studies

Working during the summer can be very beneficial depending on the other choices student makes during the summer

Even saving $1,000 per summer to put toward college will reduce loan debt by $4,000 (which translates to about $5,200 when repaid w/ interest)

Amount of Hours Worked What Happens Next?

On campus vs. off campus– in the area where the student is attending school, is one option cheaper than the other?

Need to consider cost of rent, transportation and food

If on campus, type of room can impact cost – singles typically cost more than doubles and “suites” tend to cost more than standard rooms

Housing OptionsWhat Happens Next?

If off campus, is the student willing to share with several people?

Living at home is an option that is usually cheaper, but what are the tradeoffs?

Housing Options (cont.)What Happens Next?

Car

Cable/Internet

Cell phones

Clothes

Vacations

Entertainment

Optional PurchasesWhat Happens Next?

These can be deadly… Consider a debit card

Have credit card available only for emergencies and have limit on it

Student need to better understand the cost of credit and how expensive it is

Credit CardsWhat Happens Next?

Students and parents need to be as informed as possible

Having good information can save a lot of money in the long run

Easier than ever to get information through the internet

In closing…What Happens Next?

Any questions? Follow-up

Thank you!!

Wrap-UpWhat Happens Next?