Welcome to Student Loans 101 California Association of

Welcome to Student Loans 101 California Association of Student Financial Aid Administrators Saturday, December 12, 2009

Agenda Introduction – Overview of student loans Types of loans Loan availability Applying & determining eligibility How much can students/families afford to borrow?

Agenda, cont. How will a student repay the loan? What happens if a borrower can’t repay a student loan? Q&A

Loans Are Financial Aid Federal – As available as ever, even in this credit market Features – Fixed interest rates – Flexible repayment options – Opportunities for deferment, forbearance, forgiveness, and cancellation (discussed later)

Federal Loan Programs Stafford Perkins PLUS (Parent / Graduate)

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W i l l i a m D F o r d Types of Programs

Stafford Loan Types Subsidized – Need-based loan – No interest accrues while enrolled Unsubsidized – Non-need based loan – Additional unsubsidized amounts for: Independent Parent PLUS denial

Stafford Loan Program Fixed interest rate since July 1, 2006 (current rate depends upon enrollment status & loan type – Undergraduate vs. Graduate and Subsidized vs. Unsubsidized) 6 month grace period after student ceases to be enrolled at least half time

Stafford Loan Interest Rates Undergraduate Subsidized Loans only: First Disbursement of Loan: Interest Rate on unpaid balance Made on or after And made before July 1, 2006 July 1, 2008 6.8% July 1, 2008 July 1, 2008 6.0% July 1, 2009 July 1, 2010 5.6% July 1, 2010 July 1, 2011 4.5% July 1, 2011 July 1, 2012 3.4% July 1, 2012 ? 6.8%

Stafford Loan Interest Rates Graduate Subsidized Loans & all Unsubsidized Loans (Undergrad & Grad) : 6.8% For all loans disbursed on or after 7/01/2006

Stafford Loan Amounts As of 7/1/08 Academic Grade Level Base Loan Amount “Additional” Unsub Amt* Freshman 3,500 4,000 plus 2,000 in Unsub Sophomore 4,500 4,000 plus 2,000 in Unsub Junior/Senior 5,500 5,000 plus 2,000 in Unsub Graduate 8,500 12,000 *Additional Unsubsidized is for Independent students, or Dependent students whose parent was denied PLUS

P a c k a g e l o a n s Packaging Stafford Loans

I f s t u d e n t h a s Packaging Stafford Loans

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Perkins Program 5% fixed interest rate 9 month grace period after leaving school Campus-based program; Amounts determined by school: – up to 5,500 per academic year (undergraduate) – up to 8,000 per academic year (graduate)

N o n e w m o n e y –S c Hazy Perkins Future

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PLUS Basics FFEL Interest Rate 8.5% Direct Loan Interest Rate 7.9% Credit-based loan Repayment begins 60 days after last disbursement – Graduate students qualify for in-school deferment

F e d e r a l P L U S L o Two Programs

I f P a r e n t P L U S What if the loan is denied?

Private Loans Should be viewed as an additional financing tool like a home equity loan or credit card Less available due to credit crunch Only used as a last resort after other financial aid options Must be included in “Total Aid” calculation

Private Loans, cont. May be used: to pay past due balances for less than half time if not degree-seeking if not meeting satisfactory academic progress

Private Loans, cont. Credit based Typically have variable interest rates Application process varies Most will require a co-borrower New regulations/reporting requirements

Financial Aid Availability Federal loans available to all eligible students Recent federal government action to ensure loan availability Private loans and PLUS require a credit check Take-away: The Federal Trade Commission’s site on free annual credit reports at http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/ alt156.shtm

“Eligible Student” To receive a Stafford or Graduate PLUS Loan (or for a parent to receive a Parent PLUS Loan), the STUDENT must meet the “eligible student” definition (34 CFR 668.32), including: – Citizenship, selective service registration, matriculation, etc. – Not in default on Title IV loans or owe a repayment on any federal grant, – And be enrolled at least half-time

Applying for Financial Aid (loans) Complete and submit the Free Application for Federal Student Aid (FAFSA) at http://www.fafsa.ed.gov/ (avoid .coms!) Entrance Counseling Master Promissory Note (MPN)

Minimizing Loan Burden Never borrow more than needed Budget carefully: the cost of attendance can be reduced Consider working more during summer months or school year, but do not overcommit

Minimizing Loan Burden, cont. Work vs. loans – How much work is too much? How much loan is too much? Moving students and families to a balanced approach – More than 15 hours during the academic year is not recommended for full-time students Private loans and credit card debt are the most expensive, risky ways to borrow for college

How Much Can Students/Families Afford to Borrow? Know in advance who will be responsible for repayment Consider likely future career, income, and monthly repayment amount Consider impact on post-college finances, including purchasing a car or a home, starting a family, career choice, and saving for retirement

How Much Can Students/Families Afford to Borrow? (cont.) Know about reducing or eliminating monthly repayment amounts – Income-based repayment available for federal loans – Forgiveness for public service and other careers Take-away: The student loan repayment calculator at http://mappingyourfuture.org/paying/standard calculator.htm

How Much Can Students/Families Afford to Borrow? (cont.) Take-away: The student loan repayment calculator at http://mappingyourfuture.org/paying/standard calculator.htm

What Type of Loan Is Best in a Given Situation? (cont.) Unsubsidized Stafford and PLUS loans for parents should be considered before private loans Only consider private loans as a last resort after all other options have been exhausted

Considering Private Loans Evaluate the interest rate, repayment, and other terms very carefully – Higher interest rates – In-school repayment – Few options for borrowers having trouble making payments Be aware that having a co-signer with an excellent credit score can result in more favorable terms

Considering Private Loans (cont.) Take-away: “Student Loan Options in a Tight Credit Market” at http://projectonstudentdebt.org/files/pub/mark et options.pdf Take-away: “Questions to ask about private loans” at http://projectonstudentdebt.org/private loan questions.vp.html

Considering Private Loans (cont.) Take-away: “Private Student Loans: A Guide to Responsible Borrowing” at http://www.nchelp.org/elibrary/PrivateLoanDo cumentation/FinancialLiteracyMaterials/Privat eLoansAwarenessBrochure.pdf Take-away: “Private Student Loans: Understanding the Cost of Borrowing” at http://www.nchelp.org/elibrary/PrivateLoanDo cumentation/FinancialLiteracyMaterials/Costo fStudentLoanBrochure.pdf

How Will a Student Repay the Loan? Standard repayment plan – Lowest total interest costs over life of the loan – Ten-year repayment term Graduated repayment plan – Monthly payments are smaller at the beginning of the repayment period and increase over time – The maximum repayment term is ten years

How Will a Student Repay the Loan? (cont.) Extended repayment plan – Lengthens repayment term up to 25 years – Must have a minimum loan balance of 30,000 to qualify Income-sensitive repayment plan – Monthly payment varies according to gross monthly income – Payment includes at least monthly accruing interest Income-contingent repayment plan (in Direct Loan Program)

How Will a Student Repay the Loan? (cont.) Consolidation – Combine multiple loans into one convenient payment – Consolidation done mostly through the U.S. Department of Education recently – Lock in fixed interest rate on variable rate loans from before July 2006 Averages rates of all loans being consolidated

How Will a Student Repay the Loan? (cont.) Deferment – Period during which payments are not required – Examples include graduate school, Peace Corps or other public service, active military duty, unemployment, and economic hardship

How Will a Student Repay the Loan? (cont.) Forbearance – If borrower does not qualify for deferment but still needs relief, can appeal to lender or servicer for forbearance – Can reduce or postpone payments or extend the time for making payments – Forbearance requests typically are granted for periods of up to 12 months.

How Will a Student Repay the Loan? (cont.) Loan forgiveness and benefits – Teacher and nurse forgiveness (cancellation) for working in low-income or shortage areas – Borrower benefits (interest rate reduction) for electronic debit and on-time payments Borrower benefits and student loan interest deductions on tax returns

New Option: Income Based Repayment Effective July 2009 Keeps monthly payments affordable with caps based on income and family size Forgives any debt that remains after 25 years of payments

Income Based Repayment, cont. Monthly payments for earnings below 150 percent of poverty level for family’s size are 0 Monthly payments for earnings above that are capped at 15 percent of earnings above 150 percent of poverty level Monthly payments usually amount to less than 10 percent of total income

New Option: Public Service Loan Forgiveness Forgives remaining federal student loan debt after 10 years of qualifying payment and eligible employment Loans must be through federal Direct Loan program

Public Service Loan Forgiveness, cont. Eligible employers/organizations include – Non-profit, tax-exempt 501(c)(3)’s – Federal, state, local, or tribal governments, including military and public schools and colleges – AmeriCorps (full time) Employment/payments made after October 1, 2007 count toward 10-year requirement

How Will a Student Repay the Loan? (cont.) Take-away: http://ibrinfo.org A service of the Project on Student Debt. Website providing independent, nonprofit source of information about new federal student loan payment and forgiveness programs.

How Will a Student Repay the Loan? (cont.) Take-away: The U.S. Department of Education’s “Repaying Your Loans” at http://studentaid.ed.gov/PORTALSWebApp/st udents/english/repaying.jsp

How Will a Student Repay the Loan? (cont.) Take-away: Nursing Education Loan Repayment Program at http://bhpr.hrsa.gov/nursing/loanrepay.ht m Take-away: IRS Tax Topic 456: “Student Loan Interest Deduction” at http://www.irs.gov/taxtopics/tc456.html

What Happens If a Borrower Can’t Repay a Student Loan? Student loans must be repaid whether or not the student finishes his/her program of study Student loans are rarely dischargeable in bankruptcy

What Happens If a Borrower Can’t Repay a Student Loan? (cont.) Default happens after nine months of nonpayment – Default ruins credit score – Wages and even Social Security may be garnished – Tax refunds may be offset Communication with loan holder is key and may prevent default through alternative repayment arrangements

What Happens If a Borrower Can’t Repay a Student Loan? (cont.) Take-away: NCHELP’s “Student Loan Guaranty Agencies” at http://www.nchelp.org/initiatives/access/ GuarantyAgenciesList08.pdf Take-away: The Federal Student Aid Ombudsman’s Web page at http://ombudsman.ed.gov/start.html

Q&A