Financial Aid Answers - presented by eLearners.com : Loans

How Do You Select a Lender?

ter — Thu, 11 Dec 2008 22:45:00 GMT

Some of you have had questions on selecting a Stafford Loan lender. This is really tricky. The bad part of this whole thing is that schools can no longer recommend a lender to students. The same applies to private alternative loans. What I can tell you is that schools are allowed to publish a Preferred Lender List, which can only be accomplished by issuing a Request For Information (RFI). Lenders submit the RFI with pertinent information about their interest rate rebates, fee charges, and customer serice. Remember, interest rates, loan limits and repayment options are the same for all Stafford Loans.

The school uses the lender RFI to determine the best Stafford Loan company for students. However, this isn't always the case since lenders have the option of completing an RFI. Not all lenders reply for consideration of being a Preferred Lender.

With Direct Lending, the loan is distributed by the school through the Department of Education. You do not have a choice in a lender. So selecting a lender only applies to schools that use the Federal Family Education Loan Program (FFELP).

Here are some things to consider when selecting a FFELP lender:

Look at the stability of the lender. Is it an institution that's volatile and will sell your loan to another company as soon as the loan is disbursed? If so, it could be confusing for you to keep track of who actually owns your loan.
What are the fees? All lenders must charge an origination fee and default fee, which reduces the actual money you receive. In the last few years, most lenders paid this on your behalf, and you received 100% of the amount you borrowed. However, with the lender crisis in the last year, many are back to charging the fees, of up to 4%, back to the student. Ask what upfront fees are charged.
Check out the customer service. Believe it or not, this is important. Do you have the option of talking to a real person? Check out the company's overall status. Have they laid off workers? If so, this usually means a shift in job duties and you may be dealing with customer support staff who aren't fully trained. Our office has found this to be an issue even when we call on behalf of the student.
What happens if you can't make your loan payments? Is the lender generally supportive of offering a forbearance if you run into tough times and can't make your payment? A forbearance means payments are temporarily suspended, but you continue to accrue interest.
Reduction in the interest rate can save you money. Ask the lender if they offer a reduction in interest rate if you set up automated payments, or you make consistent payments for a specified amount of time.
Be sure to look at how the loan will be disbursed. Is the lender set up to electronically process disbursements to your school? With the change in no longer assigning a lender to students, we are now gettng loan applications that actually require a paper application, which really slow down the whole application process.

Again, your school may offer a Preferred Lender list, but you're not required to choose from this list. I sound like a broken record when it comes to student loans, but do some research. Hopefully the items I listed will help you make your decision.

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Lender Crisis Revisited

ter — Thu, 13 Nov 2008 23:23:00 GMT

Wow, I have stacks of reports to read through, especially since the presidential election. This may end up being the first part of a series of posts related to our financial educational future. From what I've skimmed over so far, things aren't going to be as promising as expected. We'll hold that thought for now, because I have some interesting history to share in another post.

If you've followed the student lending crisis over the past year and a half, you'll remember that our government cut federal subsidies to lenders which caused many lenders to cease making student loans through the Federal Family Education Loan Program. In addition, students received borrower benefits such as a reduction in the interest rate for direct deposit payments, or no upfront fees taken out of disbursements. Those days are mostly long gone.

Last May, the government provided a bail-out to lenders by offering to purchase the lender's loan portfolio. This allowed an influx of cash to lenders which in turn allowed them to make more loans to students. However, only loans made between May 1 2008 and July 1 2009 were eligible for purchase.

Congress has recently expanded its bail-out option to lenders by extending the program through 2009-10 and purchasing loans back to 2003-04. What does this mean for you? Expect lenders, especially the big players like Sallie Mae, to remain in the FFELP student loan lending business if they take this option. The downside? Our government just goes farther into debt.

Don't be surprised if your school exits the FFELP program and goes into Direct Lending. Both programs award Stafford Loans. Direct Lending eliminates a lender and funding is sent directly from the Department of Education. With Direct Lending, you sign the Master Promissory Note with your school instead of a lender. With all the lender hoopla over the past year with cancelling borrower benefits and terminating loan applications, many schools are exiting FEELP and joining the Direct Lending program. The Department of Education has seen a 50% volume increase in Direct Lending this fall alone.

If your school does stay with FFELP to process Stafford Loans, hopefully there won't be another mass exodus of lenders with the bail-out option. I know how hard it has been for our office to keep up with lenders dropping out of the program, I can't imagine how students can possibly follow their loan paper trail with various lenders.

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Getting Down to (Loan) Business

ter — Sat, 21 Jun 2008 17:26:00 GMT

Happy first day of summer! It's beautiful where I am, so I should be working outside. I just got home from presenting at a freshman registration session at our school, which reminded me that I need to point out some more legislative changes regarding student loans. The side benefit is that I get to hear the Cub game as I write this.

In my last post I outlined the federal student loan interest rates. However, there is clarificiation to some differences in student loan rates depending on which type of loan you take. This is especially important for those who take both a subsidized and unsubsidized student loan.

For undergraduates: Effective July 1 2008, subsidized loans have the fixed 6.0% interest rate for loans made on or after July 1, 2008 and before June 30, 2009. The unsubsidized loan interest rate remains at a fixed 6.8%.This is for both the FFEL and Direct lending loan program. So, if you take out a subsidized Stafford Loan of say, $3500, and the new additional unsubsidized loan of $2,000, you will be repaying your loan at two different interest rates. Sound crazy? I think so. In the 24 years I've been in this profession, this is the first time I can remember any difference in interest rate between the two types of loan.

For graduates: your loan(s) will remain at the 6.8%, regardless of whether the loan is subsidized or unsubsidized.

For parents: The parent PLUS loan interest rate will be 8.5%. As in the past, repayment of a PLUS loan begins 60 days after the last disbursement of the loan. New legislation (effective July 1) is now allowing parents to request a deferment of PLUS repayment until the student graduates or ceases to be a half-time student. This is not automatic. If your parent wants to defer the PLUS repayment, he or she must request the deferment with the holder of the loan. Keep in mind that your parent will accrue interest while the loan is in deferment, so repayment after the 60 days is still the best option if affordable. This is for PLUS loans disbursed on or after July 1, 2008.

Back to student loans. Every year the new interest rate is set on student loans. It's very important that you keep track of your loan paperwork to ensure that you are paying the correct interest rate. You may not think much of it now, but your repayment amount on these loans may decide whether or not you consolidate into one repayment at a different interest rate after you graduate.

Enjoy the longest day of the year! I'm off do to some gardening.

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Which Loan Do You Have?

ter — Tue, 10 Jun 2008 23:13:00 GMT

Things have been pretty quiet on the student loan front with the exception of Congress approving the increase in Unsubsidized loan for undergraduate students. Still, I expect things to pick up this fall as enrollment begins for the more traditional schools.

I figure this might be the time to compare the two types of student loans available, depending on which your school uses: Federal Family Education Loan Program (FFELP) or Federal Direct Lending. It is possible that a school can participate in both programs, but I'm not aware of any that do. So, what's the difference?

First, let me point out the similarities:

Annual loan limits effective July 1, 2008. Both are:

$9,500 with no more than $3,500 Subsidized for freshman
$10,500 with no more than $4,500 Subsidized for sophomores
$12,500 with no more than $5,500 Subsidized for juniors and seniors
$20,500 with no more than $8,500 Subsidized for graduate students

Interest rates, effective July 1, 2008, for both are:

6.0% undergraduate level
6.8% graduate level

Grace period for both loans is 6 months after the student graduates or ceases to be a student. The standard repayment term for both is 10 years, but can be adjusted.

Sound just alike, right?

Direct Lending
Uses the Department of Education/U.S. government as the lender. You will repay your loan to the Department. There is no bank involved.
You sign your Master Promissory Note at your school, or the online designation
A processing fee of 4% is taken out of each disbursement
The school initiates all disbursements
Consistency in using the Department of Education from year to year. Your contact for loan questions is always the Department.
Stafford Loan through FFELP
uses an actual bank as the lender. You will repay your loan to this lender or the loan servicer it uses.
You sign the Master Promissory Note with the lender, usually online
A processing fee of up to 4% may be taken out of each disbursement. Some lenders are still paying this fee, so you don't have to. Others are either charging the full 4% or a reduced amount, such as only 1%. For those charging less than 4%, you will get more money from your loan.
The lender initiates all disbursements based on the school's provided disbursement dates
The lender industry has been on very shaky ground, meaning some students have had to change lenders numerous times, making it harder to track loans borrowed overall. Your contact for questions may involve several lenders unless you consolidate after graduation.

There has been great debate over which student loan is better, and Congress sometimes pushes for schools to leave the FFELP program and enter into Direct Lending in order for our government to make more money. Both have their advantages and disadvantages, as you can see. Direct Lending makes it much easier to track loans in repayment, while Stafford Loan through FFELP may not charge as high a processing fee.

Unfortunately, it's highly unlikely you will have any decision in which type loan you can take. The school will make the determination in which program they choose to be involved. Either way, the FAFSA must still be filed for a federal loan.

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What Aggregate Loan Limit Means

ter — Tue, 20 May 2008 23:16:00 GMT

Well, our finals were the week of May 5 and graduation was May 10. I thought I would have a better handle on my time after school let out, but that hasn't been the case! And just as I feel the need to search for blog topics, some new project or issue comes across my desk which spurs my thoughts. Hopefully I'll remember them for my next post.

I mentioned in my last post that I would talk about aggregate loan limits. What does aggregate mean? According to the Webster College Dictionary, aggregate means 1) collect into a sum, mass, or body 2) amount to (a number) 3) gross amount. So how does that come into play with your loans? You not only have a federal limit to how much you can borrow per academic year, you have a limit as to how much you can borrow overall while you are in college. This amount you borrow throughout your entire college experience is called the aggregate, or sum of all loans.

These are the new federal aggregate limits effective July 1, 2008:

Undergraduate students:

Dependent: A maximum of $31,500, of which no more than $23,000 can be subsidized loan
Independent: A maximum of $57,500, of which no more than $23,000 can be subsidized loan.
In essence, an undergraduate student cannot borrow more than $23,000 subsidized loan and the rest of the aggregate limit can be in unsubsidized.

Graduate and Professional students:

A maximum of $138,500, of which no more than $65,500 can be subsidized loan.

Preparatory Coursework and Teacher Certification:

Maximums will most likely be the same as an undergraduate student.
Still undetermined since academic year loan amounts have not yet been finalized.

Once you have reached your aggregate loan limit, you are no longer eligible for federal subsidized/unsubsidized loans for the type of degree you are seeking. If you pursue an advanced education, your loan aggregate could increase, but will always include the amount you have previously borrowed.

For example, say you are an independent undergraduate student who has borrowed $57,500 as of May 2008, but you don't plan to graduate with your bachelor's degree until December 2008. You then plan on returning in January 2009 as a graduate student pursuing a graduate degree. You are not eligible for a subsidized/unsubsidized loan for fall 2008 because you have already borrowed the aggregate limit of $57,500 as an undergraduate. However, when you return in the spring semester, you will now be a graduate student and eligible for up to $138,500 in total loans, which includes the $57,500 you have already borrowed at the undergraduate level.

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