New Government Rules Give Students Break on Loan Payments

Millions of college students around the world graduated this year and they have more on their minds than finding a job. Most college students graduated with a mountain of debt and no means to pay it. Even if these graduates find a job right out of college, depending on the amount of debt, payments can range anywhere from $100 a month to more than $1,000 a month.

According to a recent news article, one student loan servicing center suggested that a recent graduate, working in an entry-level position for a Web company, pay $900 a month towards his $82,000 federal student loan balance. Of course, this is nearly impossible to manage on an entry-level salary – or even a mid-level salary for that matter, so what can borrowers do to delay or minimize payments? According to author and personal finance columnist Gail MarksJarvis, if you have federal loans, you can make use of new government rules that give people a break on student loan payments they cannot afford.

If you owe more on your loans than you earn annually, you are likely a candidate for some relief. Under the relatively new “income-based repayment plan,” you get relief if the regular payments you would have to make over 10 years will exceed about 15 percent of your discretionary income. That’s calculated based on a formula related to the U.S. poverty line. Besides income, the calculation involves the size of your family. Simply put, most borrowers will pay less than 10 percent of their adjusted gross income.

To find out if you qualify for the income-based repayment plan and to calculate your payment, visit the official Federal Student Aid website at: http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp.

  

New Rules are out for for-profit colleges

We’ve been highlighting some of the troubling news stories about for-profit college scams, and we’ve welcomed the notion of new rules governing the industry.

The new rules from the Obama administration are out, but they’ve been scaled back a bit from the initial proposed rules.

The Obama administration on Thursday issued a series of highly anticipated regulations aimed at cracking down on for-profit colleges and other career training programs that leave students saddled with unmanageable debts and contribute to an unequal share of federal student loan defaults.

The final rules issued by the Department of Education, however, are significantly less stringent than a draft version released last year, giving college programs an additional three years to come in line before possibly losing access to lucrative federal student aid dollars. The changes come after an unprecedented lobbying and campaign finance offensive over the past year by the for-profit college industry, which derives a vast majority of revenues from federal student loan and grant programs and has sought to protect that income by gaining influence in Washington.

Education Secretary Arne Duncan said the changes came after discussion with “lots and lots of different folks,” not just the industry, and he pointed out that the colleges were not unanimous in their suggestions for changes.

“What we really wanted to do was give people a chance to reform … this was not about ‘gotcha,'” Duncan said. “We tried to be very thoughtful, very reasonable and give people every opportunity to succeed, but be very clear where we wouldn’t permit ongoing failure.”

The intense lobbying campaign helped the industry, as the rules are weaker. You can check the article for the details. Lobbyist hacks like Lanny Davis did their job.

That said, this is a decent first step. It’s appropriate that the schools have a time frame to remedy problems, and this should help weed out the worst abuses.

Meanwhile, 10 states have opened a joint probe to look into the marketing practices of for-profit colleges, so we might yet see some interesting developments in this area.

The key here is you have to do your research before enrolling in one of these schools and taking on a mound of student debt.

  

A Guide to Student Loan Consolidation

Graduate

The federal government offers many options for financing your education from Federal Pell Grants and the Monetary Award Program (MAP) to PLUS Loans, Stafford Loans, and Federal Perkins Loans. Pell Grants and MAP awards do not have to be repaid, but student loans do.

Stafford Loans are low-interest student loans guaranteed by the government. Perkins Loans are campus-based loans with a fixed 5% interest rate, and a nine month grace period. Perkins loans are also guaranteed by the federal government. PLUS Loans (Parent Loans for Undergraduate Student) are granted to students based on the parents creditworthiness.

To cover the costs of tuition and education related expenses, most students will have to take out a number of loans from multiple lenders. The amounts, repayment terms, and repayment schedules will vary. Students may find that repaying several different lenders is not only taxing, but the payments may be too high after graduation and beyond. Fortunately, relief is possible through student loan consolidation.

Student loan consolidation is the refinancing of multiple student loans guaranteed by the federal government. The Higher Education Act (HEA) provides for a loan consolidation program under the Direct Loan Program and the Federal Family Education Loan (FFEL) Program. Under these programs, the student’s loans are paid off and a new consolidated loan is created. The loan consolidation program is a good option because:

-It simplifies the loan repayment process by combining all of the student’s Federal student loans into one loan, meaning there’s only one place to pay each month
-The interest rate will be lower than one or all of the original loans
-The monthly payments are typically lower, possibly 50% lower than the original monthly payments
-The amount of time to repay the loan will be extended beyond the original time period
-Consolidation may act as a safeguard against default

Applying for student loan consolidation is easy. Before applying, use an online calculator to estimate what your new monthly payments would be under one of four repayment plans including:

-Standard Repayment Plan
-Graduated Repayment Plan
-Extended Repayment Plan
-Income Contingent Repayment Plan (ICR)

Under the Standard Repayment Plan, you will pay a fixed amount each month and your payments will be no less than $50 a month for 10-30 years, based on total debt. Under the Graduated Repayment Plan, your minimum payment amount will equal the amount of interest accrued monthly. Payments will start out on the low end, then gradually increase every two years for 10-30 years.

The Extended Repayment Plan is for students with student loan debt that exceeds $30,000. Under this plan, you will have a maximum of 25 years to repay the loan and you can choose a fixed rate payment option (same amount each month) or a graduated monthly payment option, as discussed above. Under the Income Contingent Repayment Plan (ICR), monthly payments are based on several factors including yearly income, Direct Loan Balance, and family size. Payments will be spread out over a time period not to exceed 25 years.

To apply for student loan consolidation, gather the following documents:

-Your monthly billing statement
-Your annual statement or quarterly interest statement
-Your coupon book
-Website of your lender or servicer
-Your school’s financial aid office information (if you are currently in school)

Once you have all of the information listed here, visit the Federal Student Aid Programs Student Loan Consolidation Website to apply.

  

Both parties shill for the for-profit college industry

Some Democrats and Republicans are trying to scuttle attempts by the Obama administration to impose new rules on for-profit colleges to prevent abuses against students to rack up huge debt for dubious degrees.

The Department of Education is tired of federally subsidized student loans going to shady for-profit colleges that have poor track records of getting the students who do graduates good work — often leaving them stuck with mountains of debt. To curb this phenomenon, the agency has been moving along with a new regulation they call the “Gainful Employment” rule.

Under “Gainful Employment” rules, for profit schools would have to show that their students can find work without getting stuck with unreasonable debt in order to qualify for federal loans.

But behind the scenes, a bipartisan bloc of House members see things differently. They say the rule would reach too far and clamp down on institutions that do a decent job of educating and preparing students. But they want to tie the Department of Education’s hands completely, and block the funds they’d need to implement the rules at all.

Fortunately, many members of Congress are with the administration on this, and Obama could veto any bill with this language.

  

Yes, Colleges Still Have Money to Loan

Financial Aid_College

Even during tough economic times, colleges and universities have the means to tap into funds that have been reserved for a “rainy day.” Take Ohio State University, for example. Faced with the possibility of decreased enrollment due to lack of financial aid to many students, Ohio State University tapped into the school’s emergency fund back in 2008 to move roughly $1 million into a program that provides students with emergency short-term loans. The loan amounts ranged from $100 up to $1,000. OSU took it’s mission to help young people pursue their dreams and earn a degree a step further by guaranteeing that tuition would not be raised midway through the 2008-2009 school year. The university went on to promise that if tuition rose for the 2009-2010 school year, financial aid would increase in lockstep.

Ohio State University is not alone in its quest to provide financially strapped students with emergency University backed loans. Universities currently loan more than $1.5 billion out of the $66 billion in new federal student loans, to students. As of 2006, more than 157 participated in School as Lender (SAL) programs. Among the more than 157 participating SAL schools are:

  • Akron University
  • Bowling Green State University
  • Chicago School of Professional Psychology
  • Des Moines University
  • DeVry University
  • Emory University
  • Loyola University of Chicago
  • New York Institute of Technology
  • Nova Southeastern University
  • Palmer College of Chiropractic
  • Parker College of Chiropractic
  • Southern Methodist University
  • St. Louis University
  • Touro College
  • Tufts University
  • University of Arizona
  • University of Illinois
  • University of Nebraska
  • University of Phoenix
  • Walden University
  • Widener University in Pennsylvania

Wellesley_College_campus

While roughly a third of schools use institutional funds to finance student loans, other schools partner with a commercial or nonprofit lending institution to establish a line of credit. Once the line of credit is established, the schools offer loans directly to graduate, law, and medical students, often placing themselves on the list of lenders the school recommends. The schools hold the loans for a certain period of time, typically two to three months after the money has been fully disbursed to the students/borrowers. During that time, the school collects interest, plus the government subsidies provided to lenders in the federally guaranteed student-loan program. The schools then sell the portfolio back to the banks for the agreed-upon premium.

 Status of the School as Lender Program

While many universities have money for loans from funds taken directly from their own savings, universities that have partnered with a commercial or nonprofit lending institution to establish a line of credit might be in trouble. For starters, schools acting as lenders are constantly being scrutinized in order to help protect students and borrowers against unscrupulous practices. And although $1.5 billion is a small slice of the more than $66 billion in new federal student loans, the federal government doesn’t want the SAL program to undercut federal student loan programs. Schools operating as lenders in the Federal Family Education Loan Program (FFELP) should keep in mind that current federal regulations require guarantors to conduct reviews of certain schools that act as lenders. According to federal regulations 34CFR 682.401(c), guarantors must conduct program reviews of lenders that meet at least one of the following criteria:

  • The volume of FFELP loans made or held by the lender and guaranteed by the guarantor equaled at least 2 percent of the total loans guaranteed by that guarantor in the preceding year.
  • The lender is one of the 10-largest lenders of loans guaranteed by that guarantor in that year.
  • The lender’s FFELP volume was at least $10 million in the most-recent fiscal year.

Currently, SAL programs are still in place, but according to Part B, Section 436 of the Federal Family Education Loan Program (FFELP), the Senate amendment terminates authority for the school as lender program, effective June 30, 2012.

  

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