Loan Basics

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Loan Basics

• Presented By
• Mila Tappan, Associate Director of Financial Aid
• University of Maine
• October 5, 2007

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Todays Session.

• We will be covering two major areas
• Types of Federal and Private Loans
• Terms, borrowing process, funding sources,
  repayment, etc.
• Responsible Borrowing
• What is responsible borrowing?
• Ways to reduce borrowing

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Types of Loans

• 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

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Federal Perkins Loan Overview

• 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

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Federal Perkins Loans Overview (cont.)

• 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

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Perkins Loan Amounts

• Undergraduate up to 4,000 a year
• 20,000 aggregate as an undergraduate
• Graduate up to 6,000 a year
• 40,000 aggregate, including undergraduate loans
• Amount actually received depends on financial
  need, amount of other aid and availability of
  funds at school

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Perkins Loan Interest Rate, Fees and Repayment

• 5 fixed interest rate
• No fees
• No interest accrues while in school
• Up to 10 years to repay depending on amount owed
• Numerous deferment and cancellation provisions
  exist

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Perkins Loans Application Process and
Promissory Note

• 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

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Federal Stafford Loan OverviewDirect or FFEL

• 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

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Federal Stafford Loans OverviewDirect or FFEL
(cont.)

• 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, Ill refer to them
  simply as Stafford Loans

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Federal Stafford Loans Overview (cont.)

• 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
  students eligibility and level of need

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Stafford Loans - Amounts

• Dependent Undergrad
• 1st year - 3,500
• 2nd year - 4,500
• 3rd and 4th year - 5,500
• Aggregate - 23,000
• Dependent students whose parents are denied a
  Plus Loan can also borrow at these levels

• Independent Undergrad
• 1st year - 7,500 of which no more than 3,500
  may be sub
• 2nd year - 8,500 of which no more than 4,500
  may be sub
• 3rd and 4th year - 10,500 of which no more than
  5,500 may be subsidized
• Aggregate - 46,000 of which no more than 23,000
  can be subsidized

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Stafford Loan Amounts (cont.)

• 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

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Stafford Loan Interest Rates

• The interest rate on Stafford loans first
  disbursed between July 1, 2006 and June 30, 2008
  is fixed at 6.8.
• The interest rate on Stafford loan will decrease
  as follows for loans with first disbursements
  made after
• July 1, 2008 but before July 1, 2009 to 6.0
• July 1, 2009 but before July 1, 2010 to 5.6
• July 1, 2010 but before July 1, 2011 to 4.5
• July 1, 2011 but before July 1, 2012 to 3.4

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Stafford Loan Interest Rates Cont

• Many lenders had been reducing the interest rate
  under certain circumstances and advertised it as
  a borrower benefit.
• This will not be happening to the same extent in
  the future.
• While in deferment, federal government pays the
  interest on subsidized loans

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Stafford Loan - Fees

• Up to 1.5 origination fee deducted
  pro-portionately from each disbursement
• 1 default fee
• The origination fee will drop by .5 each July
  until it is phased out completely
• Many lenders had been covering fees for
  borrowers, but this will probably not be the case
  for much longer.

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Stafford Loan - Repayment

• Student has between 10 and 25 years (up to 30
  yrs. for direct loans) to repay, depending on the
  amount owed and the type of repayment plan
  selected
• Numerous deferment provisions as well as some
  cancellation provisions exist

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Stafford Loans Application Process and
Promissory Note

• 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

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Federal PLUS Loans OverviewDirect and FFEL

• Borrower is the parent of a dependent
  undergraduate student
• 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

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Federal PLUS Loans Overview

• 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)

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Plus Loan - Amounts

• Students cost of attendance
• -Other aid student receives
• Maximum loan amount
• No aggregate maximum

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Plus Loans Interest Rate

• 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.
• Many lenders had been reducing the interest rate
  under certain circumstances and advertised it as
  a borrower benefit, but dont expect this will
  continue.

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Plus Loans Interest Rate and Fees

• PLUS Loan charges loan fees of up to 4, deducted
  evenly from each disbursement
• While in deferment interest accrues

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Plus Loans - Repayment

• Repayment begins 60 days after the funds are
  fully disbursed
• The repayment term is up to 10 years
• There is no grace period as there is with the
  Stafford Loan program
• Some lenders allow parents to defer payment on
  the PLUS Loan while the student is enrolled in
  school by capitalizing the interest
• Other deferments are the same as for Stafford

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Plus Loans Application Process and Promissory
Note

• 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

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Alternative Loans Overview

• Student is the borrower
• Often require co-signer with good credit history
  and debt to income ratio
• Do not need to complete the FAFSA
• Funded through private lenders
• Not federally regulated

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Alternative Loans Amounts

• Students cost of attendance
• -Other aid student receives
• Maximum loan amount
• Aggregate maximum varies by lender

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Alternative Loans Interest Rate and Fees

• 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
• Some lenders will reduce the interest rate after
  on-time payment or when using automatic payments

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Alternative Loans-Repayment

• 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 period varies depending on lender and
  amount borrowed

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Alternative Loans Application Process and
Promissory Note

• 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

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Lender Lists

• In the past, many schools had provided borrowers
  with a lender list.
• Schools would review lenders and select the
  best lenders for their students.
• List would typically list lenders who offered
  good benefits and customer service and whose
  process worked well for the school (which is good
  for the student).

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Lender Lists Cont

• Schools may not continue to provide lender lists.
• Schools have to certify a loan for any lender
  that a student wants.
• Schools are concerned about direct to consumer
  marketing and loans with lenders who dont have a
  long history.
• Hopefully things will settle down in the next
  year or so.

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Institutional/University Loans

• 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

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Responsible Borrowing

• Borrowing some loan funds is a given for most
  students
• The average amount borrowed in Maine from the
  schools that responded to the request for
  information is 17,066
• 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

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Limiting Borrowing

• Well 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

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School Selection

• Great website to visit is Petersons
  (www.petersons.com)
• Give you a general idea of what the various
  averages are at different schools
• Examples.

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Examples from Massachusetts

• Harvard University
• 29.2B endowment
• Avg loan debt 9,717
• Avg need based gift aid 30,803
• Cost 45,620
• 100 of need met

• MIT
• 8.4B endowment
• Avg loan debt 19,748
• Avg need based gift aid 24,244
• Cost 45,386
• 100 of need is met

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Examples from Massachusetts (cont.)

• Wellesley College
• 1.4B endowment
• Avg loan debt 10,206
• Avg need based gift aid 27,508
• Cost 45,820
• 100 of need met

• Simmons College
• 169.0M endowment
• Avg loan debt 26,300
• Avg need based gift aid 10,829
• Cost 39,440
• 58 of need met

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Comparing State Public Schools

• UMass Amherst
• 91.2M endowment
• Avg loan debt 14,094
• Avg need based gift aid 7,164
• Cost 9,601 in-state and 17,824 out-of-state
  tuition and 7,274 room/board
• 87 of need met

• University of New Hampshire
• 211.6M endowment
• Avg loan debt 21,459
• Avg need based gift aid 2,293
• Cost 11,070 in-state and 24,030 out-of-state
  tuition and 8,168 room/board
• 78 of need met

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School Selection (cont)

• 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?

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School Selection (cont)

• What is the schools 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

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Choice of Major

• 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

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Enrollment Levels

• 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

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Amount of Hours Worked

• Working more may result in borrowing less
• However, need to be sure it doesnt negatively
  impact studies
• Working during the summer can be very beneficial
  depending on the other choices student makes
  during the summer

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Housing Options

• 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

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Housing Options (cont.)

• 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?

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Optional Purchases

• Car
• Cable/Internet
• Cell phones
• Clothes
• Vacations
• Entertainment

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Credit Cards

• 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

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In closing

• 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

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Wrap-Up

• Any questions?
• Follow-up
• Thank you!!