Posted on 12 May 2010.
Today’s article comes from Marc R. Hill, founder of Reduce My College Costs, LLC. He is a Certified College Planning Specialist (CCPS), a Registered Financial Consultant (RFC®) and a charter member of the National College Advocacy Group (NCAG). Marc assists American families to afford college by offering objective college planning services. For more information, please visit Marc at www.reducemycollegecosts.com We are pleased to have Marc as a Contributor on CheapScholar.org
While the financial aid process can be riddled with bad news, part of the good news is that the federal government provides financial assistance to eligible students who attend eligible institutions. Federal funds are provided to help students cover costs such as tuition and fees, room and board, books and supplies, and transportation. This money can be dispersed in three different forms:
1) Grants – money that does not have to be repaid unless you withdraw from school and owe a refund.
2) Work-Study – money the student earns through part-time employment to pay for educational costs.
3) Loans – money borrowed, in this case from the federal government via the school, which must be repaid with interest.
As of this writing (May 12th, 2010), the government offers four types of loans:
1) Federal Perkins Loan – is a need-based loan (FAFSA application required) and is awarded on a first-come, first-served basis. Each eligible institution receives a set amount of money to be distributed through the Perkins Loan program. If qualifying parameters are met (those who qualify for the Perkins loan additionally generally also meet Pell Grant qualifications), the money is distributed to eligible students. Once this money has been awarded for the academic year, additional funding is not available until the next financial aid application period.
2) Stafford Loans – this type of loan is taken out in the student’s name only and is the responsibility of the student. In order to be considered for this loan the FAFSA application must be submitted. Be sure to meet your school’s application deadline for consideration!
3) Federal Parent Loan for Undergraduate Students or PLUS Loans – is a loan taken out by the parent to assist an eligible student with higher education costs. The parent (borrower) must pass a credit check and have no adverse credit history.
4) Consolidation Loans – combines eligible federal loans into one convenient payment.
I think it’s safe to say that our government is on a dizzying pace with the remaking of America. From controlling banks and car companies to establishing eco-friendly policies and instituting an antiquated European style of health care, change is being served up on all of our plates.
The Department of Education (DOE) is no exception to the rule. From simplifying the FAFSA, to eliminating the FFEL program, the DOE has a new menu filled with feel-good, down-home cookin barbecued in change.
This article’s intention is to give you a taste of the Stafford Loan Program – soon being served exclusively (July 1st, 2010) through the Federal Direct Loan program via the DOE. The article is an appetizing look at the ins and outs of fees, interest rates and potential deductions, eligibility, how the money is disbursed, rebates, forgiveness and loan limits that just might have you seeing more green.
And this menu doesn’t just appeal to undergraduate appetites; graduate students are invited to the BBQ too! So be sure to fill up by reading this educational article.
Subsidized or Unsubsidized
While the federal government doesn’t serve up as many varieties as your favorite ice cream shop, the Stafford Loan is awarded in two different flavors for your financial aid pleasure:
- Subsidized – if your child is awarded a subsidized Stafford Loan, the cherry on top of this option is that the Department of Education cheerfully pays your interest while your child is in school, during the deferment period and through any grace period. Payment on these loans begins six months after the student has graduated or left school. A subsidized Stafford is awarded based upon financial need. FAFSA application is required in order for potential participation.
- Unsubsidized – a Stafford awarded in this manner places the responsibility of interest payments directly on the borrower from day one, which certainly makes this the less sweet federal financial aid loan flavor. While the student is in school, interest payments may be waived and added on to the principle of the loan. This is referred to as “Interest Capitalization” and ultimately increases the size and cost of the loan. An unsubsidized Stafford in not based upon financial need and can be considered an entitlement available to all students. However, the FAFSA application still must be submitted in order to receive this loan.
Remember back at the beginning of this article when we referred to federal loans as part of the good news of the financial aid process? While that may be true, it’s also true that even good things have a bad side. So, what’s the bad news when it comes to Stafford loans? Both the subsidized and unsubsidized Stafford carry fees that reduce the loan amount received and the dollars applied to appropriate educational expenses. Although somewhat limited in nature, the fees are as follows:
- Insurance Premium Fee – this fee is levied at 1% of the loan amount for the corresponding disbursement period and is used to assist with “writing off” bad loans.
- Origination Fee – the origination fee for the 2009-2010 is ½%. Fortunately, the origination fee will be eliminated starting in the 2010-2011 academic year.
Therefore, using the fee structure above and assuming your child is awarded a $5,500 Stafford loan after June 30th, 2010, the actual amount available for your use would be somewhere in the neighborhood of $5,445.00.
You know by now that, just like your mom told you, money doesn’t grow on trees. And that’s true whether the tree is owned by you or by the federal government. And, yes, that means there are limits associated with Stafford Loans. The total Stafford Loan limit for undergraduate dependent students cannot exceed the lifetime limit of $31,000; however, in certain circumstances, additional unsubsidized funds may be awarded. With this in mind, the maximum borrowing limits for both types of loans vary for each year of school and currently (as of this May 2010 writing) are as follows:
Undergraduate-Dependent Student *Possible Additional Loan
1st year $5,500 $4,000
2nd year 6,500 4,000
3rd & 4th year 7,500 per year 5,000 per year
5th year 4,000 5,000
*If parents are unable to qualify for a PLUS Loan and your child is a dependent/independent student in her undergraduate years, she may be eligible for these additional unsubsidized student loans.
Subsidized Amount Unsubsidized Amount Total Loan
1st year $3,500 $2,000 $5,500
2nd year 4,500 2,000 6,500
3rd & 4th year 5,500 2,000 7,500
5th year 4,000 4,000
Undergraduate students who are deemed “independent” by the federal financial aid system and the applicable institution have a larger pool of potential federal funds that they can apply for. This amount may not exceed the lifetime limit of $57,500 and is awarded in the following fashion:
Subsidized Amount Unsubsidized Amount Total Loan
1st year $3,500 $ 6,000 $ 9,500
2nd year 4,500 6,000 10,500
3rd & 4th year 5,500 7,000 12,500
5th year 12,500 12,500
Bear in mind that independent students, depending on applicable circumstances, may automatically be eligible or considered for the additional loan money associated with dependent students whose parents do not qualify for the PLUS loan.
Although the financial aid process can feel like a huge guessing game, there are a few things that you can count on. And interest rates are one of those things. Current and scheduled interest rates are as follows:
Loan Disbursement Subsidized Unsubsidized
After 7/1/09, prior to 7/1/10 5.6% 6.8%
After 7/1/10, prior to 7/1/11 4.5% 6.8%
After 7/1/11, prior to 7/1/12 3.4% 6.8%
The subsidized rate is currently scheduled to increase to 6.8% after 7/1/12.
If the student meets qualifying income parameters established by the IRS, interest paid by the student on these loans should qualify for the Student Loan Interest Deduction. Keep in mind that this loan is between the DOE and the student, therefore, the student is only eligible to take this deduction. So be sure to consult with your qualified tax advisor to discuss how this applies to your specific situation.
How the Money is Disbursed
Money from a Stafford Loan may never even end up in your hands. That’s because Stafford Loans are disbursed by the Department of Education directly to your school generally in the beginning of the fall and winter semesters. The school uses the money to pay tuition, fees and related expenses on your behalf. If money is left over, they may either credit your account or send you a refund.
The following entities track and collect the loans on behalf of the Dept. of Education:
- Sallie Mae Corporation
- Nelnet Inc.
- Great Lakes Education Loan Services
In order to be considered for the Stafford Loan program, your college must participate in the federal financial aid system via the Direct Loan program. If your school uses the FAFSA, then your school is an eligible institution.
Additionally, since different loan amounts and potentially different interest rates are available based upon your child’s school year, you must submit the FAFSA every year that consideration is desired.
Finally, your student must also meet the following requirements:
- Must be a half-time student working towards a degree or certificate.
- Be a U.S. citizen or an eligible noncitizen (check with your institution) with a valid Social Security number.
- Maintain satisfactory academic progress. Be sure to check with your financial aid office on a yearly basis to determine what constitutes “satisfactory progress” to ensure that you maintain your Stafford funding.
- If you are a male between the ages of 18 and 25, you must be registered with the Selective Service (this can be done automatically using the FAFSA).
- Meet other requirements set by the individual state and approved by the Dept. of Education.
As with all loans, there comes a time when you must repay a Stafford Loan. Fortunately, the federal government offers several repayment options. Generally, the loan term is 10 years, depending on the option chosen, with no pre-payment penalty.
There are several repayment plans available depending on the student’s situation and whether the loan is eligible for consolidation. Since the repayment formulas were developed by the government which, as I am sure you know by now, throws simplicity out the window, explanation of these repayment options is beyond the scope of this article.
Therefore, we recommend consultation with your qualified advisor to determine which repayment schedule is in your best interest.
Did Someone Say “Rebate”?
For parents of college-bound students or those already enrolled, the word “rebate” is one of the most magical in the English language. Currently, the Direct Loan Program adds a little more magic to your financial aid experience by offering two repayment incentive programs aimed at lowering your out-of-pocket expenses:
- Automatic Payment Discount – Based upon the repayment plan you select and whether you decide to have your payments automatically debited from your bank account, your servicing agent may offer a .25 percent discount for these automatic payments. Make sure you check with your agent to see if you qualify for this benefit.
- Up Front Interest Rebate – This incentive takes a certain percentage of the loan amount borrowed and adds this figure back into the net loan amount received when the loan is disbursed. At this point, you might be saying “Huh?” Well, let’s see if we can clarify the net effect of this interest rebate of 0.5% for subsidized/unsubsidized loans disbursed after 7/1/10 when it is taken into consideration with the insurance premium fee that will be charged for this loan (as discussed earlier):
Stafford Loan Amount $5,500.00
Minus Ins. Premium Fee (1%) 55.00
Plus Interest Rebate (0.5%) 27.50
Net Loan Amount $5,472.50
It’s a classic case of the government giveth and the government taketh away, right? Well, hold on, because they aren’t quite done with the potential take away just yet. In order to maintain an interest rebate, the borrower must make the first twelve months worth of payments on time. If the first twelve payments are not received on time, the interest rebate is added back into the original loan, thus increasing your total overall costs. Sheesh! So much for rebates being magical! When the government’s involved, rebates might be best described as “mystifying.”
Both Stafford Loans (subsidized and unsubsidized) are eligible for consolidation. The consolidation rate is fixed and based on the weighted average of the loans being consolidated.
WARNING: If your loan is eligible for forgiveness, discharge, cancellation or interest subsidies, you may lose these benefits by consolidating. I’m not trying to sound like a broken record, but be sure to consult with your team of qualified advisors.
Read All About It: Your Current Loans
Having a hard time keeping track of all those federal loans and grants? Well, the Department of Education has a treat for you! The DOE’s central database for all loans and grants disbursed via Title IV can be found by visiting the National Student Loan Data System or NSLDS. The NSLDS tracks your loans/grants from aid approval, disbursement (either by semester or yearly), balances and status (reflects grace, deferment or payment status). Keep in mind that the although the various agencies who authorized the aid award are responsible for reporting this information to the NSLDS, the balances reflected in your report may be as old as 120 days. If more current information is sought, contacting the loan service agent is recommended. Check out the NSLDS by visiting www.nslds.ed.gov.
Student Loan Discharge or Forgiveness
In certain circumstances, you may be eligible for either loan discharge or loan forgiveness. Sign you up, right? Not so fast, though. Forgiveness and discharge aren’t as easy as signing on a dotted line.
Loan discharge refers to a loan that is cancelled based on unpleasant situations such as death, total and permanent disability, or school closure prior to degree completion.
Loan forgiveness usually refers to a set amount being forgiven after completion of certain types of community service, such as teaching for a specified time period in a designated elementary or secondary school that serves low income families.
Additionally, if you are employed in the public service sector (such as law enforcement and public safety, public healthcare, or if you are in the military), your loan may be forgiven after a specified number of payments. Individuals generally have to make 120 payments and not be in default. The amount forgiven is generally the remaining loan balance and interest charges.
Stafford Loans for Graduate Students
Undergrads don’t get to have all of the Stafford Loan fun. Graduate students can also take advantage of the Stafford Loan program by applying for federal financial aid using the FAFSA. However, although the undergraduate and graduate loan programs share many things in common, there are some significant differences. So let’s take a brief look at each for loans issued via the Direct Loan Program, for loans disbursed after 7/1/09 but prior to 7/1/10.
- Both require FAFSA application
- Both are in the name of the student and are the responsibility of the student
- Both share the ½% origination fee that will be eliminated starting in the 2010/11 academic period
- Both have the 1% insurance premium fee
- Both fees are deducted from the loan proceeds
- The loans can either be subsidized or unsubsidized
- Both are paid directly to the school, usually in two installments
- Similar to the unsubsidized undergraduate loan, the graduate unsubsidized is available to all students as long as the FAFSA application is sent in
- Subsidized and unsubsidized payments begin 6 months after the student has left school
- Both loans qualify for the Federal Loan Consolidation Program and the repayment incentives discussed earlier
- Interest paid by the student may qualify for the student loan interest deduction if the student’s MAGI is within the parameters set by the IRS
- Forgiveness and discharge may also apply based upon qualifying guidelines
- Both the subsidized and unsubsidized graduate Stafford loans have fixed rates at 6.8% for loans disbursed after 7/1/09 thru 2013
- Graduate students can borrow a maximum of $20,500 per year with a yearly limit of $8,500 being unsubsidized
- Maximum Stafford total debt, graduate and undergraduate combined, is limited to $138,500 with no more than $65,500 being unsubsidized loans
- If you are enrolled in approved health profession programs, your maximum Stafford loan limit may be $224,000
Sheesh! Enough is enough, already! While the Stafford Loan program can certainly be beneficial if loans figure in to your college funding plan, with it comes a fair amount of rules and the federal government’s idea of “simplicity” – yikes! Consider this article your guide to Stafford Loans in a nutshell, albeit a big nutshell (a Brazil nut, perhaps?). But, as always, consult with your financial advisors for the best ways to put Stafford Loans and all of their pros, cons, rebates and restrictions to work for you.