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Welcome to

The Basics of Borrowing

Presented by theNational Association for College Admission

CounselingTuesday, December 9, 2008

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Agenda

• Introduction– Applying for aid– Overview of student loans

• Types of loans• Loan availability

• Should students take out loans to pay for college?

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Agenda, cont.

• How much can students/families afford to borrow?

• How do you determine what type of loan is best in a given situation?

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Agenda, cont.

• How will a student repay the loan?

• What happens if a borrower can’t repay a student loan?

• Q & A

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Today’s Presenters

• Natala (Tally) Hart, Senior Advisor for Economic Access, The Ohio State University

• Edie Irons, Communications Director, The Institute for College Access & Success (TICAS)

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Today’s Presenters, cont.

• Karen E. Lanning, Vice President of Communications and Research, National Council of Higher Education Loan Programs (NCHELP)

• Tim Christensen, Consultant on College Access and Success (moderator)

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Applying for Aid

• Families need a foundation in basic financial literacy– May be unfamiliar with budgeting– May never have used credit

• Take-away: Financial literacy site for middle and high school students at http://www.gearup-moneyskills.org/

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Types of Aid• Grants and scholarships (gift aid)

– Do not have to be repaid– May be renewable or non-renewable

• Loans– Must be repaid

• Work-study– Subsidized wages in return for work during

semester

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Sources of Aid

• Federal

• State

• Institutional

• Private

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Loans Are Also 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)

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Federal Need-Based Loans

• Perkins

• Subsidized Stafford

• Features of federal need-based loans– Low interest rates– Delayed repayment– In-school interest subsidy

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Federal Non-Need-Based Loans

• Unsubsidized Stafford

• Parent PLUS

• Grad PLUS

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Federal Non-Need-Based Loans, cont.

• Higher interest rates– 6.8 percent fixed rate for unsubsidized

Stafford• Interest accrues during school and deferments• Payments on PLUS loans are due while the

student is in school

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Federal Loan Resources• Take-away: The financial aid chapter in

NACAC’s Guide to the College Admission Process at http://www.nacacnet.org/PublicationsResources/Marketplace/Pages/AdmissionGuide.aspx

• Take-away: The National Association of Student Financial Aid Administrators’ “Student Aid Program Summary” accessible from http://www.nasfaa.org/redesign/fanight.asp

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Private Loans

• Not really financial aid but a 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

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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)

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Applying for Financial Aid• Complete and submit the Free Application for

Federal Student Aid (FAFSA) at http://www.fafsa.ed.gov/ (avoid .coms!)

• Early estimates of aid eligibility– FAFSA4caster

• Read, understand, and follow instructions from each institution under consideration– When is a College Board Profile form needed?

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Applying for Financial Aid, cont.

• Getting help completing the FAFSA– Federal Student Aid Information Center (1-800-4-

FED-AID)– College Goal Sunday

• Understand changes in the 2009-10 FAFSA– Independent student definition

• Emancipated, foster, and homeless youth

• Using FAFSA on the Web– Obtaining a PIN in advance of deadlines

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Applying for Financial Aid, cont.

• Apply for as many scholarships as possible

• Keep careful records of all activities

• Read and respond to all follow-up correspondence

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Applying for Financial Aid, cont.

• Take-away: NACAC’s “Applying for Financial Aid in 7 Easy Steps at http://www.nacacnet.org/PublicationsResources/Marketplace/Pages/FA7EasySteps.aspx

• Take-away: NACAC’s Steps to College newsletter at http://www.nacacnet.org/PublicationsResources/steps/Pages/FinancialAid.aspx

• Take-away: U.S Department of Education’s (ED) FASFA4caster at http://www.fafsa4caster.ed.gov/index.htm

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Applying for Financial Aid, cont.

• Take-away: ED FAFSA Demonstration site, accessible from http://studentaid.ed.gov/PORTALSWebApp/students/english/fafsademo.jsp?tab=preparing

• Take-away: FAFSA completion assistance from College Goal Sunday at http://www.collegegoalsundayusa.org/

• Take-away: Changes in the independent student definition for 2009-10 at http://www.nasfaa.org/publications/2007/lndependency110807.html

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Applying for Financial Aid, cont.

• Take-away: Tips on How to Get Scholarships at http://www.nasfaa.org/publications/2008/anscholarships070208.html

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Warning Signs of Scholarship Scams

• “The scholarship is guaranteed or your money back." • "You can't get this information anywhere else." • "I just need your credit card or bank account number

to hold this scholarship." • "We'll do all the work." • "The scholarship will cost some money." • "You've been selected" by a "national foundation" to

receive a scholarship - or "You're a finalist" in a contest you never entered.

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Warning Signs of Scholarship Scams

• Take-away: “Scholarship Scams” at http://www.ftc.gov/bcp/conline/edcams/scholarship/index.shtml

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Spotting Deceptive Private Loan Practices

• Names, seals, logos, etc., that imitate the U.S. government’s look and feel

• Promotions and incentives (e.g., gift cards) meant to divert from assessment of loan terms and conditions

• Requests for personal information over the phone or Internet

• Check on suspicious lenders with state attorney general, local consumer protection agency, or Better Business Bureau

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Spotting Deceptive Private Loan Practices, cont.

• Take-away: “Student Loans: Avoiding Deceptive Offers” at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre43.shtm

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Should Students Take Out Loans to Pay for College?

• In many cases grant aid alone will not meet demonstrated need

• Federal student loans provide lower interest rates and more favorable terms than private loans

• Loan burden should be minimized– Average for an undergraduate is $20,000– More than that is a red flag

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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 over-commit

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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

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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

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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://www.mappingyourfuture.biz/paying/standardcalculator.htm

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What Type of Loan Is Best in a Given Situation?

• Perkins Loans have the most favorable interest rate (5%):– Availability varies by school– Perkins Loans are need-based

• Subsidized federal Stafford loans should be considered next, after Perkins– 6% interest rate for 2008-09; declines in the next

few years– Also need based

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What Type of Loan Is Best in a Given Situation? (cont.)

• Unsubsidized Stafford and PLUS loans for parents should be considered next

• Only consider private loans as a last resort after all other options have been exhausted

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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

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Considering Private Loans (cont.)

• Re-evaluate choice of college– If the only way to attend is with

considerable private loans on top of maximum federal limits, consider whether choice of college is really worth the risk, debt and expense

– There may be more affordable colleges that are comparable

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Considering Private Loans (cont.)

• Take-away: “Student Loan Options in a Tight Credit Market” at http://projectonstudentdebt.org/files/pub/market_options.pdf

• Take-away: “Questions to ask about private loans” at http://projectonstudentdebt.org/private_loan_questions.vp.html

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Considering Private Loans (cont.)

• Take-away: “Private Student Loans: A Guide to Responsible Borrowing” at http://www.nchelp.org/elibrary/ReferenceMaterials/PrivateLoanMaterials/PrivateLoansAwarenessBrochure.pdf

• Take-away: “Private Student Loans: Understanding the Cost of Borrowing” at http://www.nchelp.org/elibrary/ReferenceMaterials/PrivateLoanMaterials/CostofStudentLoanBrochure.pdf

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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

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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)

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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 loans from before

July 2006• Averages rates of all loans being consolidated

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How Will a Student Repay the Loan? (cont.)

• Deferment– Examples include graduate school,

Peace Corps or other public service, active military duty, unemployment, and economic hardship

– Period during which payments are not required

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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.

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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

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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

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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

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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

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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

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How Will a Student Repay the Loan? (cont.)

• Take-away: Income-based repayment and public service loan forgiveness site at www.IBRinfo.org

• Take-away: The U.S. Department of Education’s “Repaying Your Loans” at http://studentaid.ed.gov/PORTALSWebApp/students/english/repaying.jsp

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How Will a Student Repay the Loan? (cont.)

• Take-away: Nursing Education Loan Repayment Program at http://bhpr.hrsa.gov/nursing/loanrepay.htm

• Take-away: IRS Tax Topic 456: “Student Loan Interest Deduction” at http://www.irs.gov/taxtopics/tc456.html

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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

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What Happens If a Borrower Can’t Repay a Student Loan? (cont.)

• Default happens after nine months of non-payment– 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

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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/Guaranty%20Agencies%20List%2008.pdf

• Take-away: The Federal Student Aid Ombudsman’s Web page at http://ombudsman.ed.gov/start.html

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Q & A• Continue to submit questions via e-mail• We will select those questions with the

broadest applicability• An archive of today’s Webinar will be posted

on the NACAC Web site approximately one week from today.

• Thank you for participating in “The Basics of Borrowing”!