What to Do Over the 12 Days of Christmas Break
Day 6: Familiarize Yourself with Federal Loans
1. For many families, the only federal aid that they will be eligible for will be federal college loans.
2. Students should turn to the Direct Loan first when borrowing for college.
3. Students should not consider borrowing through private loans unless their federal student loans are maxed out.
4. PLUS Loans for parents are a less desirable federal college loon.
5. Parents need to be careful because it’s easy to over borrow.
6. The federal government makes many billions of dollars off federal parent and student loans.
Direct Loans for Students
Roughly 70% of students are now borrowing for college. For students, the best college loan to obtain is the federal Direct Loan, which was formerly called the Stafford Loan.
Only students can borrow through a Direct Loan.
Here is why the Direct Loan is superior to other alternatives:
• The interest rate is almost always better than the rate for a private loan.
• Students regardless of their income qualify for this loan if they are enrolled at least half time and complete the FAFSA.
• Students receive the same rates regardless of credit scores.
• The loans offer a public service student loan forgiveness program.
The loans also offer student repayment plans based on a grad’s current salary rather than what they owe.
If students graduate from college and are unemployed or under-employed, they could qualify for one of the federal repayment plans that essentially have borrowers repay based on what they can afford rather than what they owe.
The best current federal repayment plan is called Revised Pay as You Earn.
SUBSIDIZED AND UNSUBSIDIZED DIRECT LOANS
There is a subsidized and unsubsidized version of the Direct Loan. Both types charge the same interest rate. The better loan is the subsidized version. Students who qualify for the subsidized loan don’t have to pay the interest that accrues while they are enrolled in college. The federal government pays this interest.
With the subsidized loan, borrowers also won’t have to pay the interest during deferments (when borrowers postpone payments due to financial difficulties) and during the six-month period after either leaving or graduating from college.
In contrast, borrowers with the unsubsidized loan are responsible for covering the interest that accrues while in college and after leaving.
Borrowers are expected to begin repaying their Direct Loans shortly after graduating or leaving college.
Students do have the opportunity to request a deferment or forbearance when repaying a loan is a financial struggle.
The interest rate on both the subsidized and the unsubsidized federal loans is currently 3.76%. The interest rate is linked to the 10-year U.S. Treasury note and is annually changed on July 1.
QUALIFYING FOR A DIRECT SUBSIDIZED LOAN
A federal formula is used to determine if a student, based on a family’s finances, is eligible for the better-subsidized deal. The majority of subsidized federal loans are awarded to students with household adjusted gross incomes of less than $50,000.
The college will determine if your child will qualify for a subsidized loan. Look at the financial aid package that your teenager receives to see what the breakdown is between subsidized versus unsubsidized loans.
DIRECT LOAN BORROWING LIMITS
There are limits to how much debt students can assume. Most undergraduates will be able to borrow up to these amounts:
Undergraduates who take more than four years to complete college can borrow up to $31,000.
The second type of federal option for students is the Perkins Loan. Students who are eligible for the Perkins have what the federal government terms as exceptional financial need.
The interest rate for the Perkins is five percent. With this loan, the student's institution is the lender and borrowers make payments to their school or the institution's loan servicer. If the money is available, the most a student is eligible to borrow is $5,500 a year. Whether your child will qualify for the Perkins will depend, in part, on where he or she attends school.
Because of the way the Perkin was established, not all schools can participate in the program and institutions that have access to more funds tend to be elite, private institutions.
Once a student has graduated, left school, or dropped below half-time status, he or she has a nine-month grace period before Perkins payments must start.
Federal Loans for Parents
The Direct PLUS Loan is designed to allow parents to borrow to pay the costs that aren’t covered by a child’s financial aid package. The maximum amount that a parent can borrow will depend on how much aid a student received in grants and federal student loans, as well as the school's cost of attendance.
Here's an example of how the PLUS Loan works: A freshman receives a $10,000 merit award from his/her college, as well as a federal Direct Loan of $5,500. The school's cost of attendance, which would include tuition/fees, room/board, books and transportation, is $50,000.
Cost of attendance $50,000
Grants/Federal student loan – $15,500
Amount can borrow via PLUS $34,500
The Direct PLUS Loan can be the only source of money for some parents after their children tap into the federal Direct Loan program. The interest rate is not an attractive one considering the low interest-rate environment. The PLUS Loan is currently charging a 6.31% interest rate with a 4.29% origination fee on all borrowed money. Everyone borrowing through a PLUS Loan receives the same interest rate for the year. The interest rate is tied to the ten-year U.S. Treasury, so the rate will be different each year.
To qualify for the PLUS Loan, parents must file the FAFSA. Parents have the option to begin making PLUS Loan payments right away or to wait until their child graduates or otherwise leaves school. To cut down on the total cost of the loan, parents should, if at all possible, begin making payments immediately.
PLUS LOAN CONCERNS
Some parents have gotten into financial trouble because they borrowed far more than they could handle simply because the federal government was willing to lend them the money. A parent can qualify for a PLUS without a good credit score or the kind of salary that would support future payments.
Borrowers, however, can’t have these adverse black marks on their credit histories:
• Parent has had discharged Chapter 7, 11 or 12 bankruptcy in the past five years.
• Parent has had a foreclosure in the past five years.
• Parent has had wages garnished in past five years.
• Parent can’t be more than 90 days late on paying debt over a certain amount.
IF YOU ARE TURNED DOWN FOR A PLUS LOAN
If the government rejects your request for a PLUS Loan, here are three things you can do:
1. You find an endorser who would agree to repay the loan if you don’t. The endorser can’t be the college student.
2. Appeal to the U.S. Department of Education that there are extenuating circumstances related to your adverse credit history.
3. Your child can borrow more money through the federal Direct Loan Program. The amounts will be $4,000 to $5,000 more each year.
Here is information about what type of extenuating circumstances can constitute a successful appeal.
PLUS loan obligations can rarely be dismissed in bankruptcy court. Lenders can pursue delinquent PLUS borrowers by garnishing wages, income tax refunds and even Social Security checks. In some cases, a parent with a professional license may not be able to get it renewed if his or her credit rating has been destroyed due to bad debt.
The PLUS does offer one welcome protection. If the parent who took out the PLUS dies, the PLUS Loan will be forgiven. (Only one parent takes out the loan.) Because of this provision, it could be advantageous for a parent in poor health to borrow through a PLUS Loan. The government will also discharge the PLUS debt if the parent borrower becomes "totally and permanently disabled."
The federal parent loan isn’t nearly as popular as the federal Direct Loan for students and it’s no surprise considering the high interest rate and fees.
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Join me, Chris Hitchens, IECA Counselor on.....
- Thursday March 7 at Jefferson Hills Library: For High School Athletes, Play Sports in College: How to Get Yourself Recruited
- Thursday March 14 at Whitehall Library: College Admissions 101: What Every Family Needs to Know about Financial Aid and Scholarships
- Wednesday March 20 at South Park Library: Athletes and Artists: How They Both Can Follow the Same Path to Find Their Dream College
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- Thursday April 11 at South Park Library: College Admissions 101: What Every Family Needs to Know about Financial Aid and Scholarships
- Thursday May 2 at Baldwin Library: Musicians, Thespians, Dancers, Cheerleaders, Majorettes, & all other Artists: Find Your Dream College
- Tuesday May 14 at Baldwin Library: For High School Athletes, Play Sports in College: How to Get Yourself Recruited
- Saturday May 18 at Baldwin Library: College Essay Workshop for Juniors
- Thursday May 23 at Baldwin Library: 12 Strategies Necessary to Get Into Tier 1 Colleges, Including the Ivy League