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.
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.
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)
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.
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
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.
For-profit colleges graduated an average of 22 percent of their students in 2008, according to a new report from Education Trust.
That average palls in comparison to bachelor’s-seeking graduation rates at public and private non-profit colleges and universities for the same year, which averaged 55 percent and 65 percent, respectively.
The report, titled “Supbrime Opportunity” (PDF) also reveals that for-profit colleges increased their enrollment by 236 percent from 1998 to 2009.
The median debt of for-profit college graduates — $31,190 — far outpaces that of private non-profit college graduates, which stands at $17,040, and is more than triple the median debt for those from public colleges, which is $7,960.
The government has helped to create this monster with easy access to student loans for these institutions, who now have the incentive to accept as many students as possible. Then they make money regardless of whether they provide value to their students.
Fortunately, the Obama administration has proposed new rules to make it more difficult for many of these for-profit colleges to waste taxpayer dollars.
BusinessWeek has a recent profile on for-profit college EDMC and the involvement of Goldman Sachs. The article is balanced, as they gave EDMC the opportunity to present success stories, but many of the stories are unfortunately similar to others we’ve heard regarding for-profit colleges – too many students paying huge tuition costs, racking up huge student loans, and then not being able to get high-paying jobs they expected (or were sold on by recruiters). One student profiled in the article got a bachelor’s degree in game art and design at EDMC for a cost $70,000 in tuition and fees. After she graduating she got a job that paid $12 an hour recruiting employees for video game companies. She eventually lost that job and now she’s stripping.
We’re seeing more and more lawsuits in this area, and the article points out some lawsuits against EDMC. Changes are also coming from the Obama administration.
On July 23, the Obama Administration proposed restricting—and in extreme cases, cutting off entirely—programs whose graduates end up with the highest debts relative to their salaries and have the most trouble repaying their student loans. EDMC will be affected more than most other for-profit companies because of its focus on “passion” fields, such as art and cooking, rather than more practical accounting or business degrees, says Jeffrey M. Silber, an analyst with BMO Capital Markets in New York. Cooking, fashion, and arts jobs tend to have low starting salaries: A beginning cook, for example, earns an average of $18,000 a year, according to U.S. Bureau of Labor Statistics data, while a two-year culinary degree can cost $40,000 to $50,000. EDMC spokeswoman Jacquelyn P. Muller says Art Institute students tend to earn more, with those holding culinary degrees starting at $28,000.
You have to do your research if you’re thinking of attending one of these schools, and don’t fall for high-pressure sales tactics!
Ads for online schools are all over the Internet, plastered on billboards in subway cars and on television. The University of Phoenix, with nearly 500,000 students, is the biggest for-profit college. But some former students said they were duped into paying big bucks and going deeply in debt by slick and misleading recruiters.
“I don’t want anyone else to be sucked in,” said Melissa Dalmier, 30, of Noble, Ill.
The mother of three had big dreams to be an elementary school teacher, so when she saw ads for the University of Phoenix pop-up on her computer, she e-mailed them for more information. A few minutes later, Dalmier said she got a call from one of the school’s recruiters, who she said told her that enrolling in the associate’s degree in education program at the University of Phoenix would put her on the fast-track to reaching her dream.
“[The recruiter said] they had an agreement with Illinois State Board of Education and that as soon as I finished their program I’d be ready to start working,” she recalled.
Within 15 minutes, Dalmier was enrolled. Since she didn’t have enough money to pay for tuition, she said the recruiter helped her get federal student aid. In total, she took out about $8,000 in federally-guaranteed student loans.
But just a few months after Dalmier started, she said she learned the horrible truth: the degree program she was enrolled in would not qualify her to become a public school teacher upon graduation in Illinois.
“It was an outright lie. A bold faced lie,” she said.
ABC News did its own undercover investigation, and found the same despicable practices. Recruiters also push prospective students to load up on the student loans. Read the rest of the story and check out this video.
You need to read this article from The New York Times if you’re considering going to a trade school or for-profit college.
One fast-growing American industry has become a conspicuous beneficiary of the recession: for-profit colleges and trade schools.
At institutions that train students for careers in areas like health care, computers and food service, enrollments are soaring as people anxious about weak job prospects borrow aggressively to pay tuition exceeding $30,000 a year.
But the profits have come at substantial taxpayer expense while often delivering dubious benefits to students, according to academics and advocates for greater oversight of financial aid. Critics say many schools exaggerate the value of their degree programs, selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty. And the schools are harvesting growing federal student aid dollars, including Pell grants awarded to low-income students.
The article goes on to quote a woman who left her job with one of these schools as she became concerned with deceptive recruiting tactics.
It’s stunning to me that these schools are charging $20,000 to $30,000 per year. Unfortunately, it’s another example of good intentions gone bad and the fact that Congress is bought and sold every day. We want to help kids and adults pay for school to improve themselves and find a career, but with all that money comes a new industry that preys on people looking for a new option in life.
Be careful so you don’t end up in a situation where you’re loaded up with debt that you can’t pay back.
One option we should consider is limiting financial aid from the government to public colleges, non-profit schools and accredited private schools.
