Student Loan Question and Answer with FinAid Founder Mark Kantrowitz
Student loan information can be difficult to get at times. It is hard to know who to talk with and what questions to ask. Below are some questions asked by students and the answers given by a very reputable source. Mark Kantrowitz founded one of the most well respected websites in the field of financial aid. I constantly refer people to his site, www.finaid.org.
Mark_Kantrowitz: I am Mark Kantrowitz, Publisher of FinAid.org and Director of Advanced Projects for FastWeb.com. FinAid is the most popular web site for student financial aid information, advice and tools. FastWeb is the largest and most frequently updated scholarship matching site. Both sites are available to the public for free.
broke__Guest_: i’m sending U. Ma. a $400 deposit today. i haven’t look at financing because we just received the acceptance. what’s my next move and what’s the best loan.
Mark_Kantrowitz: You should start searching for student loans. Borrow federal first, as federal education loans are less expensive than private student loans. They are also more available and have better repayment terms. These loans include the federal Stafford loan and the federal PLUS loan. (The unsubsidized Stafford and PLUS loans are available without regard to financial need.)
Mark_Kantrowitz: The school’s preferred lender list is still a good starting point for finding an education lender. You can also find comprehensive lists of education lenders and their loan discounts on the FinAid site. (FinAid does not recommend any particular lender.)
Mark_Kantrowitz: The Stafford loan has a fixed rate of 6.8%. The PLUS loan has a fixed rate of either 7.9% or 8.5%, depending on whether the school participates in the Direct Loan program or the federally-guaranteed education loan programs. Fees on the Stafford loan (which are deducted from the disbursement check) will be 2% starting July 1, 2008 and 4% on the PLUS loan.
popmac__Guest_: can student get a plus loan or are they for parents?
Mark_Kantrowitz: The Parent PLUS loan is available only to parents of dependent undergraduate students. The undergraduate student cannot borrow the Parent PLUS loan himself or herself. (If the parents are denied the Parent PLUS loan because of an adverse credit history, the student becomes eligible for increased unsubsidized Stafford loan limits.)
Mark_Kantrowitz: Since July 1, 2006, graduate and professional students have been eligible to borrow from the Grad PLUS loan. This is just like the Parent PLUS loan, but the student is the borrower as opposed to the parent. But this is only available to graduate and professional students, not undergraduate students.
smothra__Guest_: Although you don’t recommend any particular lender, do you have any advice on navigating that space. I am an entering graduate student qualifying only for unsubsidized Stafford and GPlus loans. The myraid of programs, false incentives, fees, and “rebate” options is very hard to analyze. Many lenders are less than forthcoming about their programs and it’s a lot of work to research. Are there any apples to apples comparison sites?
Mark_Kantrowitz: There are a variety of loan comparison sites. See
Mark_Kantrowitz: www.finaid.org/loans/loancomparisonsites.phtml for a list. Most have problems. Some only give you the best advertised rate, which is rarely the actual rate you will receive. Others are startups that aim to give you the actual rate, but none of them are yet live.
Mark_Kantrowitz: FinAid has comprehensive lists of education lenders and their loan discounts. Most discounts, however, are more apparent than real. For example, less than 20% of borrowers make the first 36 payments on time, so most borrowers will not benefit from a prompt payment discount. Focus on discounts that are immediate (such as an unconditional reduction in the interest rate) and which have as short a delayed onset as possible. FinAid has a loan discount calculator that you can use to analyze the discounts. (It is, however, complicated because the discounts are complicated.)
worried__Guest_: Hi Mark, if you depend on private loans for school and you think you might be affected by all the turmoil in the loan market, what should you do now? Do the banks typically contact the borrowers?
Mark_Kantrowitz: Apply for private student loans with a creditworthy cosigner. Not only does this increase your chances of getting the loan, but it usually results in a lower cost loan, as the lenders use the higher of the two credit scores to determine the interest rates and fees.
Mark_Kantrowitz: Also try to improve your credit score: make sure that all of your debts are current and being paid as per the agreement. In addition to using credit score cutoffs, many lenders use binary criteria (yes/no questions) to determine eligibility. This can range from “did you have a bankruptcy or foreclosure” to “are you more than 60 days late on any debt”.
Mark_Kantrowitz: Generally, lenders are raising the FICO score cutoffs from 620 to at least 650 and in some cases 680 or 700. (Anything under 650 is considered subprime.)
Peter_2__Guest_: Mark, thanks for answering questions,. Do you think that the current legislation to make PLUS loans deferrable will become a reality soon?
Mark_Kantrowitz: The legislation has passed the House and is pending in the Senate. I think it is likely to pass the Senate, but to my knowledge it has not yet been placed on the calendar in the Senate. (The White House has also said that it will support the House bill, so if passed by the Senate it will likely be signed into law. There are, however, a few differences between the Senate and House legislation which will need to be resolved.)
ebs1218: Is it best to have the loan in the students name and when do they have to start paying back
Mark_Kantrowitz: I recommend focusing on cost first. The Perkins loan is cheapest at 5.0% fixed rate. Then the subsidized Stafford at 6.0% fixed for undergraduate students and 6.8% fixed for graduate students. Then the unsubsidized Stafford at 6.8% fixed. Then the PLUS loan at 7.9% or 8.5% fixed. Fixed rate home equity loans may be in the same ballpark as the PLUS loan for some families. Then private student loans, which average around 10% to 11% (borrowers with excellent credit will have rates as low as the Prime lending rate). Then credit cards.
Mark_Kantrowitz: In most cases the Parent PLUS loan is better than private student loans. The PLUS loan is fixed rate and a parent obligation. The private student loans are variable rate with the student obligated, but usually the parents are also obligated as cosigners. If the parents want the student to repay the PLUS loan, I suggest entering into a formal written agreement with the student to have the student make payments on the loan after he/she graduates. At least that way the student is getting the benefit of the lower interest rate.
Mark_Kantrowitz: The Stafford loan enters repayment 6 months after the student graduates or falls below half time enrollment. The PLUS loan enters repayment 60 days after full disbursement. In some cases the families can have repayment of the PLUS loan deferred through an “administrative forebearance”, although this is not widely available. But ask the lender about it. (It does result in increased costs, as the interest is added to the principal balance through capitalization.)
popmac__Guest_: my son has a Stafford of $3500 for next year (freshman) is that the max? Is the next step private loans to fill the gap?
Mark_Kantrowitz: Stafford loan limits for dependent undergraduate students are $3,500 freshman, $4,500 sophomore and $5,500 per year junior and senior. There are higher loan limits for independent students and students whose parents were denied a PLUS loan: an additional $4,000 per year freshman and sophomore and an additional $5,000 per year junior and senior.
Mark_Kantrowitz: The next step would be the PLUS loan. Always consider federal loans before resorting to private student loans.
Eric__Guest_: A lot of lenders are going out of business. Should I just assume that the best offer I am going to get is the standard interest rate, with no incentive? I am worried that they may offer me an incentive, but take the incentive back before issuing me my money in September.
Mark_Kantrowitz: Some banks, who are more insultaned from the turmoil in the capital markets since they can rely on customer deposits as a source of funds, are still offering discounts. We keep track of the current discounts offered on FinAid, based on communications from the lenders and information from the lender web sites. But some lenders have not been updating their web sites with their latest discounts.
Mark_Kantrowitz: So far only one lender has reneged on discounts retroactively (NorthStar Guarantee). But it is possible that a lender will terminate its discounts before the loan is funded (or worse, exit the federally-guaranteed student loan program entirely). I suggest maintaining a list of lenders so that if your current lender exits you have a fallback position. Also keep in contact with the school’s financial aid office so that they are aware of lenders leaving the loan programs and can help you find replacement lender(s).
CK689__Guest_: Hi Mark, How willing are schools willing to consider “extraordinary” expenses, i.e. excessive medical bills, due to an illness when awarding financial aid?
Mark_Kantrowitz: You are referring to “professional judgment”, sometimes considered a “special circumstances review”, in which the school will make adjustments to the inputs to the need analysis formula in response to unusual circumstances. Unusually high unreimbursed medical and dental expenses is one of the examples explicitly mentioned in the Higher Education Act. Most schools will consider such an adjustment, especially when it is non-discretionary in nature (beyond the family’s control). The amount of the adjustment will be tied to the financial impact of the unusual circumstance. For example, the school will consider only the amounts that were unreimbursed and will subtract 11% of the income protection allowance (which is for medical costs in the formula) from the medical expense before making an adjustment. Provide the school with third party documentation of the expense, such as copies of the medical bills.
Peter_2__Guest_: Mark, you mentioned that unsubsidized stafford loans are available for parents. Is the basis for receiveing these loans tied to creditworthiness and income abd assets or what specifiacally? Thanks for your answer
Mark_Kantrowitz: The unsubsidized Stafford loan is available for students, not parents. The PLUS loan (which is also unsubsidized) is available for parents.
Mark_Kantrowitz: The Stafford loan does not depend on your credit history.
Mark_Kantrowitz: The PLUS loan does depend on your credit history, but does not look at credit scores. Instead it looks for the absence of an “adverse credit history” which is defined in the regulations as having had a foreclosure, repossession, tax lien, writeoff, discharge, etc. in the last 5 years, or being 90 days or more late on any debt.
Mark_Kantrowitz: The PLUS loan and the unsubsidized Stafford loan are available without regard to financial need. Even wealthy families can get them. The subsidized Stafford loan and the Perkins loan, on the other hand, are based on financial need.
smothra__Guest_: Thanks. I did see the finaid calculator and the studies on students taking advantage of discount programs based on repayment. I think I am a little unique in that I am an older student with a good understanding of economics. Because I plan on paying off the loans very quickly I know exactly what I want (zero fees, largest immediate rate reduction that is immediately available). In other words, I have the calculator part down, but what I do not have is *all* of the details from *all* of the lenders.
Mark_Kantrowitz: Go to www.finaid.org/loans/studentloandiscounts.phtml (or type ‘discounts’ in the search box on the FinAid front door). This is an overview of discounts. At the bottom of the page are links to FinAid’s pages devoted to the current discounts offered by lenders on Stafford, PLUS and consolidation loans. I’m expecting that many lenders will reduce these discounts effective for loans first disbursed on or after July 1, 2008, however.
Mark_Kantrowitz: The student loan credit crunch will impact families in a few ways: (1) Families with a recent foreclosure will be ineligible for the PLUS loan. (2) Lenders are tightening the credit underwriting criteria on private student loans, making it more difficult for families with bad or marginal credit to qualify. (3) Lenders have been leaving the federally-guaranteed student loan programs, meaning that families will have to hunt around a bit more to find a lender who is still making loans. To date 61 lenders have left the federal loans and 21 have left the private loans.
Mark_Kantrowitz: Students who need a consolidation loan may need to go to loanconsolidation.ed.gov to get a Federal Direct Consolidation Loan. Your school does not need to be a Direct Loan participant for you to obtain a consolidation loan directly from the US Department of Education.
Mike__Guest_: Mark, what do you think of some banks telling certain schools that they won’t do business with them?
Mark_Kantrowitz: It is unfortunately legal for a lender to discriminate based on the borrower’s choice of educational institution. You can see the current rules at www.finaid.org/loans/discrimination.phtml. Only Sallie Mae and a few other lenders are currently prohibited from discriminating in this fashion. (Nothing prevents any lender from discriminating in its marketing.) So some lenders have been telling schools with high default rates or low aggregate debt per borrower that they will no longer make loans to students at the schools. This presents the possibility of access problems, where students will not be able to find the education financing they need in order to pay for college costs.
Peter_2__Guest_: I filed a Chapter 13 over 10 years ago. Could that still come up to bite me in terms of getting rejected for a parent loan?
Mark_Kantrowitz: No, the PLUS loan looks only five years back. (Private student loans typically look only seven to ten years back.)
smothra__Guest_: Thanks again. New topic - how much flexibility do schools have in presenting their loan awards? Do they stick to a precise FAFSA formula for expected family contribution or is it worth contacting them to present special circumstances not quite captured in the Federal form?
Mark_Kantrowitz: If you have unusual circumstances, always bring this to the school’s attention. The worst they can do is say no.
Mark_Kantrowitz: Schools cannot increase the loan limits on the federal education loans. However, if the school believes that the parent will be denied a PLUS loan (and can document the basis for their reasoning) they can grant the student the increased unsubsidized Stafford loan limits without requiring the family to apply for and be denied a PLUS loan first.)
Mark_Kantrowitz: Everything is rather forumulaic. When there is an unusual circumstance the school uses the financial impact of the circumstance to adjust the inputs into the formula to generate a new EFC. They do not have the ability to change the formula. This new EFC then drives a new financial aid package, which will usually be more favorable.
Mark_Kantrowitz: Schools do have some flexibility in their packaging philosophies — how they assemble a package of different types of aid to meet the demonstrated financial need. Usually the school will first allocate all federal aid to which the family is entitled before adding aid based on the school’s funds. The Pell Grant comes first, then the Perkins loan and federal work study, then the subsidized Stafford loan.
C__Guest_: I graduated a number of years ago and I am having trouble paying my private student loans. I am thinking I may have to declare Bankrupcy because the lender is no longer working with me. Do I have any other options?
Mark_Kantrowitz: Getting a private student loan discharged in bankruptcy is very difficult. You will have to file an undue hardship petition, which generally requires that you not be able to maintain a minimal standard of living and also repay the debt, that you have made a good faith effort to repay the debt, and that the circumstances that prevent you from repaying the debt will likely persist for most of the normal repayment term of the loan. This is the three-prong test of Brunner v NY HESC. See
Mark_Kantrowitz: www.finaid.org/questions/bankruptcy.phtml
Mark_Kantrowitz: for additional details.
Mark_Kantrowitz: Ask the lender about forebearances, in which you would suspend or reduce payments for a period of time. Interest continues to accrue, so you are still digging yourself into a deep hole, but it can help if your current financial situation is temporary in nature.
Teach4Life__Guest_: Hi Mark. I am looking for any loan forgiveness opportunities or scholarship l loans. I am looking to be a teacher and you know those salaries aren’t exactly up there!
Mark_Kantrowitz: Congress recently established a new public service loan forgiveness program as part of the College Cost Reduction and Access Act of 2007. It includes teachers. Also, the Taxpayer Teacher Protection Act of 2004 established up to $17,500 in loan forgiveness for teachers who teach in national need areas.
skowt36__Guest_: hi, a quick question. is it possible to divide in half the amount a parent takes for a plus loan and a private loan? My daughter needs $28,000 and a PLUS loan would cost me $300 a month which I cannot afford - can I divide it in half and have a private loan for say $14,000 and a PLUS loan for the rest to try to cut the cost?
Mark_Kantrowitz: You don’t have to accept a PLUS loan for the full costs. You can accept a smaller loan. Likewise for private student loans (the minimum loan is typically $1,000). But first talk to the PLUS loan lender to see if they’ll grant an administrative forebearance, which will suspend or reduce payments on the PLUS loan during the in-school period. (Or if legislation currently pending in Congress passes, you won’t need to use an administrative forebearance.)
Mark_Kantrowitz: Note that while the strategy you’re consider will cut the monthly payments during the in-school period, it will cost you more over the life of the loan.
Mark_Kantrowitz: Another strategy worth considering is to get the PLUS loan for the full amount, but then consolidate it after it is fully disbursed. This will then let you repay it under extended repayment. Extended repayment increases the loan term from 10 years to up to 30 years depending on the amount borrowed (20 years for $28,000). This will reduce the size of the monthly payment by about a third (but will more than double the interest paid over the life of the loan). That might provide you with some relief. FinAid has some calculators that may help with this.
Mark_Kantrowitz: The amount you are proposing to borrow, $28,000, also strikes me as being high. I recommend borrowing no more than the student’s expected starting salary for the entire undergraduate education. If you borrow more than that, you’ll need to go with extended repayment to repay the debt. If you borrow more than double, you’ll be at high risk of default.
marc__Guest_: Hi, Mark. My dad told me that all student loans are discharged when the debtor reaches a particular age? Is that true, because I did a 30-year consolidation when I was 37 … so I’ll be retired and still paying for law school. Thanks.
Mark_Kantrowitz: It’s not based on the borrower’s age. The federal government, for example, can attach Social Security Benefits (up to 15%) if you fail to repay the debt.
Mark_Kantrowitz: He’s probably thinking of income-contingent and income-based repayment, which forgive the remaining balance after 25 years in repayment. (If you work in public service and your loans are in the Direct Loan program — you can use consolidation to switch them into Direct Loans even if you’ve already consolidated — the forgiveness occurs after 120 payments (10 years).)
gregsox__Guest_: Mark. My financial situation has changed since January. Can I change my information in FAFSA on the web, so my son’s school can reconsider his financial aid packeage? I looked online, but the FAFSA site said I couldn’t change financial info, since it is based on last year.
Mark_Kantrowitz: You need to call the school and ask for a professional judgment review. They can then adjust for the change. A common example is when one of the family’s primary wage-earners was laid off or switched to a lower paying job after the end of the tax year. Emphasize that your old financial circumstances are no longer reflective of your ability to pay during the award year and provide independent third party documentation of the change in circumstances (e.g., a copy of the termination letter in the event of job loss).
skowt36__Guest_: Hi Mark, thanks. It is high only because according to the FAFSA, I have a high EFC even though I am a single parent and really do not make that much money, she is not getting as much as I had hoped for. I want her to go to the college of her choice, but it just seems so much. I am having a hard time with this and am lost with really no where to go.
Mark_Kantrowitz: Talk to the school about whether there’s anything that is artificially causing a high EFC, such as one-time events (e.g., capital gains).
Mark_Kantrowitz: But with that kind of debt, it may be better for her to attend a less expensive school. If you have to borrow that amount for each year, she’ll end up with six figure debt, which will be difficult to repay. That kind of debt can cause a lot of stress.
Mark_Kantrowitz: I will answer one or two more questions before signing off.
Mark_Kantrowitz: There don’t seem to be any more questions, so I am signing off now.
Student Loan Watcher @ April 23, 2008