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Loan Basics

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Title: Loan Basics


1
Loan Basics
  • Presented By
  • Mila Tappan, Associate Director of Financial Aid
  • University of Maine
  • October 5, 2007

2
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

3
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

4
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

5
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

6
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

7
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

8
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

9

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

10

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

11
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

12
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

13
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

14
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

15
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

16
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.

17
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

18
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

19
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

20
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)

21
Plus Loan - Amounts
  • Students cost of attendance
  • -Other aid student receives
  • Maximum loan amount
  • No aggregate maximum

22
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.

23
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

24
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

25
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

26
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

27
Alternative Loans Amounts
  • Students cost of attendance
  • -Other aid student receives
  • Maximum loan amount
  • Aggregate maximum varies by lender

28
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

29
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

30
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

31
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).

32
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.

33
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

34
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

35
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

36
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.

37
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

38
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

39
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

40
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?

41
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

42
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

43
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

44
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

45
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

46
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?

47
Optional Purchases
  • Car
  • Cable/Internet
  • Cell phones
  • Clothes
  • Vacations
  • Entertainment

48
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

49
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

50
Wrap-Up
  • Any questions?
  • Follow-up
  • Thank you!!
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