Financial Aid

Parents, we at SKoolAide totally understand the pressures that college costs place upon families and even the decision to pursue higher education.  Over the next few weeks, we’re going to be posting segments from a question/answer session with Mark Kantrowitz, (an expert on paying for college and the founder of FinAid.org,) which were originally published in the Education section of The New York Times.  The questions are taken from real students and parents and will speak to situations and challenges faced my many of us as we seek the best help and guidance to overcome the Financial Aid debt dragon.

Q. I have borrowed for the first two years for my twins to attend college. I’m frightened that I will not be able to borrow more, and there are two years left. Is there any real practical source for students to borrow enough to attend college? If not the banks with their high interest rates, then where? Pell grants, etc., if they continue, are insufficient for tuition and other expenses. What are families to do? – Lorene
A. Always borrow federal first, as federal student loans are cheaper, more available and have better repayment terms than private student loans.

Federal Stafford loans do not depend on the borrower’s credit history, so they should remain available. The loan limits are also higher during the junior and senior years in college.

Federal Parent PLUS loans require the borrower to not have an adverse credit history. An adverse credit history occurs when the borrower has had a bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or default determination in the last five years, or a current delinquency of 90 or more days on any debt. So long as you remain current on all your debts and don’t get one of these derogatory events on your credit history, you should remain eligible for the Parent PLUS loan.

If you were to lose eligibility for the Parent PLUS loan and are unable to find a creditworthy endorser, your children would be eligible for the increased Stafford loan limits available to independent students. These loan limits are $5,000 higher than the loan limits for dependent students during the junior and senior year in college.

Private student loans, which are not government guaranteed, consider the credit history and credit scores of the borrower and co-signer. These credit scores typically decrease with each year in school as the amount of debt increases. Most lenders, however, will continue to lend to a student who is very close to graduating. State loan programs, credit unions, small home-town banks and peer-to-peer lending sites also tend to be more forgiving of minor credit problems.

If the federal education loan programs are not enough, it may be a sign that you are over-borrowing. Consider ways to economize on college costs, like buying used textbooks and/or selling the textbooks back to the bookstore at the end of the semester, minimizing trips home from school and reducing personal expenses. Eating out once a week may seem innocuous, but a pizza a week can cost a total of $2,000 or more by the time you graduate. Also consider transferring to a lower-cost college or one with a more generous financial aid policy.

It is a good idea to review your credit history before applying for private student loans or the Parent PLUS loan. You can get a free copy of your credit reports from Equifax, Experian and Transunion from annualcreditreport.com or by calling 1-877-322-8228, as mandated by the Fair Credit Reporting Act. (Beware of lookalike sites that charge a fee for your credit reports.)

Q. Is there anything in the works to help students (and their co-signer parents) with private college loans? We thought borrowing the money for college at low rates through Sallie Mae was a good idea, until our catastrophe with Madoff showed us that it wasn’t such a good idea after all. Now we are saddled with more than $100,000 in debt, which our son is now paying interest only, as that is all he/we can afford now. In looking over the president’s proposals, private loans have not been mentioned, except to apply for forbearance, which he has already done. In about 18 months, they will expect regular, amortizing payments. – Mark F.
A.  The income-based repayment plan announced by President Obama is restricted to federal student loans. It does not apply to parent or private education loans.

There are very few options for financial relief on private student loans. A forbearance is only a temporary solution, which often digs the borrower into a deeper hole. A partial forbearance, in which the borrower pays at least the interest as it accrues, prevents the loan from getting bigger, but doesn’t provide a real solution for a borrower who graduated with too much debt.

Ask the lender about other options, like increasing the term of the loan. Increasing the term of the loan may reduce the size of the monthly payment, but it will also increase the total amount of interest paid over the life of the loan. For example, increasing the term on a $100,000 loan with 10 percent interest from 10 years to 20 years cuts the monthly payment by about a quarter, from $1,322 to $965, but more than doubles the total interest paid from $58,581 to $131,606.

The only other solutions are to try to find a way to increase income or reduce expenses so that more money can be devoted to repaying the debt. For example, your son could move back home to save on living expenses, sell extraneous belongings to pay down the debt or get a second job in the evenings and weekends.

SKoolAide: Hopefully you found these real world examples helpful.  We plan on bringing a lot more to you in the days to come.  Let us know your thoughts.  And feel free to ask your own questions.  We’ll do our best to get an answer to you as quickly as possible.

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