What Happens Next? Understanding Award Letters and Loan Basics Spring 2010

What Happens Next?Understanding Award Letters and Loan BasicsSpring 2010

Today’s Session…. What Happens Next? We will be covering three major areas: • Understanding and Comparing Award Letters • Types of Federal and Private Loans Terms, borrowing process, funding sources, repayment, etc. • Responsible Borrowing Borrowing responsibly and keep debt down!

Key Concepts What Happens Next? • Cost of attending school • Award types and amounts • Comparing cost to aid • Filing in the pieces • Questions to ask of the school • Things to keep in mind

Cost of Attending School What Happens Next? • Cost of Attendance • Schools include tuition, fees, room, board, books, travel and miscellaneous expenses when determining eligibility • Some of these costs are actual and some are simply estimates or averages and can be very “underestimated” (such as travel) • When looking at costs, try to compare “apples to apples”

Cost of Attending School What Happens Next? • I recommend comparing “direct” cost or costs billed by the school: • Tuition and Fees • Room and Board • Be sure you know what assumptions are being made by the school: • Enrollment status - full time vs. part time • Housing – on campus, off campus or living at home

Example of Costs What Happens Next? Fall Spring Total Tuition and Fees $4,750 $4,750 $ 9,500 Room and Board $4,000 $4,000 $ 8,000 Books and Supplies $ 500 $ 500 $ 1,000 Transportation $ 1,000 $1,000 $ 2,000 Miscellaneous $ 1,000$1,000$ 2,000 Total $11,250 $11,250 $22,500 Direct Costs $17,500 Total Costs $22,500

Award Types and Amounts What Happens Next? • Look at the various types of aid and total by the award type: • Grants and Scholarships (don’t have to be repaid) • Federal Loans (Perkins & Stafford) • Federal Work Study or other Work Programs • Other Loans

Example of an Award What Happens Next? Fall Spring Total Federal Pell Grant $ 2,775 $ 2,775 $ 5,550 Federal Supplemental Grant $ 500 $ 500 $ 1,000 Federal Stafford Loan $ 1,750 $ 1,750 $ 3,500 Federal Work Study $ 1,500 $ 1,500 $ 3,000 Federal Perkins Loan $ 1,000 $ 1,000 $ 2,000 Maine State Grant $ 1,000 $ 1,000 $ 2,000 College Grant $ 750$ 750$ 1,500 Total $ 9,275 $ 9,275 $18,550 Total Grants $10,050 Total Perkins/Stafford Loans $5,500 Total Work Study $3,000

Compare Cost to Aid What Happens Next? Direct Costs $17,500 Total Grants - $10,050 Total Perkins/Stafford - $ 5,500 Total Remaining Balance $ 1,950 • Focus on grants and federal loans • Don’t include Work Study as it is not applied directly to the bill • Don’t be fooled by schools who include large loans to fill need – all schools can offer PLUS and Alternative Loans

Filling in the Pieces What Happens Next? • Be sure to read the materials that accompany the Award Letter – will provide many more details • If other loans are listed on the Award Letter, learn more about them (we’ll talk more about all of this in a minute): • Interest rate/fees • Deferment options • Repayment options • Approval criteria - credit based? • Contact school to discuss remaining options

Questions to Ask…. What Happens Next? • Are the scholarships renewable? • If scholarships are renewable, what is the criteria? • What happens if the student receives outside scholarships, for example, from graduation? • Will the financial aid award stay the same from year to year?

Things to Keep in Mind What Happens Next? • Many schools will ask you to accept or reject aid…. I recommend that aid is not rejected unless the student is absolutely sure they don’t want the aid: • may not be able to get it back once rejected • can always return loans during the year, even if already processed • If circumstances have changed from what is on the FAFSA, the student should contact school to discuss appeal.

All About Loans….. What Happens Next? • Three categories of loans: • Federal Loans • Private/Alternative Educational Loans • Institutional/University Loan

Types of Loans What Happens Next? • Federal Perkins Loan • Federal Stafford Loan (Direct or FFEL) • Subsidized and Unsubsidized • Federal PLUS Loans (Direct or FFEL) • Regular PLUS and Grad PLUS • Alternative Loans • University/Institutional Loans

Federal Perkins Loan Overview What Happens Next? • The current Perkins Loan Program is subject to change…your schools will keep you updated. • Federally regulated • Student is the borrower • Student must be enrolled at least half-time • Money comes from the federal government and previously repaid Perkins Loans

Federal Perkins Loans Overview What Happens Next? • Must complete the FAFSA and meet eligibility requirements • Need-based loan • Student repays the school the loan funds • Not all schools have Perkins Loan Funds (1,800 out of 4,400 institutions have Perkins)

Federal Perkins Loans – Amounts What Happens Next? • Undergraduate – up to $5,500 a year • $27,500 aggregate as an undergraduate • Graduate – up to $8,000 a year • $60,000 aggregate, including undergraduate loans Amount actually received depends on financial need, amount of other aid and availability of funds at school

Perkins Loans – Terms What Happens Next? • 5% fixed interest rate • No fees • No interest accrues while in school • 9 month grace period • Up to 10 years to repay depending on amount owed • Numerous deferment and cancellation provisions exist

Perkins Loans – Application Process What Happens Next? • No separate application – simply complete the FAFSA and the school will award Perkins if student is eligible and funds are available • Student signs a Master Promissory Note the first time they borrow – good for 10 years • Disclosure must be completed each year • Exit Interview needs to be completed when student no longer enrolled at least half-time

Federal Stafford Loans Overview What Happens Next? • Typically schools either participate in the Direct Loan program or the Federal Family Education Loan Program (FFELP) – although some schools do both. • Direct Loans funded through the federal government – student repays the feds • FFEL Loans funded through private lending institutions – student repays private lender

Federal Stafford Loans Overview What Happens Next? • Federally regulated • Student is the borrower • Student must be enrolled at least half-time • Direct and FFEL are virtually identical except for the funding source. • From this point forward, I’ll refer to them simply as Stafford Loans

Federal Stafford Loans Overview What Happens Next? • Virtually all schools participate in the Stafford Loan program • Two types of Stafford Loans • Subsidized – Need based • Unsubsidized – Can replace EFC or fill need Students must complete the FAFSA to determine student’s eligibility and level of need

Stafford Loans - Amounts What Happens Next? • Dependent Undergrad • 1st year - $5,500 of which no more than $3,500 may be sub • 2nd year - $6,500 of which no more than $4,500 may be sub • 3rd and 4th year - $7,500 of which no more than $5,500 may be subsidized Aggregate - $31,000 of which no more than $23,000 can be subsidized • Independent Undergrad* • 1st year - $9,500 of which no more than $3,500 may be sub • 2nd year - $10,500 of which no more than $4,500 may be sub • 3rd and 4th year - $12,500 of which no more than $5,500 may be subsidized Aggregate - $57,500 of which no more than $23,000 can be subsidized *Dependent students whose parents are denied a Plus Loan can also borrow at these levels

Stafford Loan – Amounts (cont.) What Happens Next? • Graduate Student • $20,500 of which no more than $8,500 may be subsidized Aggregate - $138,500 of which no more than $65,500 can be subsidized The graduate debt limit include Stafford Loans received for undergraduate study

Stafford Loan – Interest Rates and Fees What Happens Next? • The interest rate on Stafford loans first disbursed after July 1, 2010 is fixed at 4.5% for subsidized Stafford Loans and 6.8% for unsubsidized Stafford Loans • During any deferment periods the federal government pays the interest on subsidized loans • Default fee is 1% • The default fee is deducted proportionately from each disbursement of the loan

Stafford Loan - Repayment What Happens Next? • 6 month grace period • Student has between 10 and 25 years to repay, depending on the amount owed and the type of repayment plan selected – this is where federal loans are much better than private loans. • Numerous deferment provisions as well as some cancellation provisions exist

Stafford Loans – Application Process What Happens Next? • Check with individual schools to determine application process • Student signs a Master Promissory Note the first time they borrow – good for 10 years • Entrance interview must be completed the first time a student borrows prior to receiving any funds • Exit interview must be completed when student is no longer enrolled at least half-time

Federal PLUS Loans Overview – Direct & FFEL What Happens Next? • Borrower is the parent of a dependent undergraduate student (graduate students are potentially eligible, but I’m going to focus on it as a parent loan for this presentation) • As with Stafford, the Direct and FFEL versions of the PLUS Loan are virtually identical except for the funding source. • Direct PLUS Loan funded through the federal government – parent repays the feds • FFEL PLUS Loan is funded through private lending institutions – parent repays private lender

Federal PLUS Loans Overview What Happens Next? • PLUS Loans can fill need and/or replace EFC • Students do not have to file a FAFSA in order for the parents to borrow a PLUS Loan (although recommended) • Parents must: • pass a credit check • be citizens or eligible non citizens • not in default on federal student loan • not owe a refund on any federal student aid program (nor can the student)

PLUS Loan - Amounts What Happens Next? Student’s cost of attendance - Other aid student receives = Maximum loan amount No aggregate maximum

PLUS Loans – Interest Rate What Happens Next? • The interest rate on FFELP PLUS Loans first disbursed after July 1, 2006 is fixed at 8.5%; for Direct PLUS Loans the rate is fixed at 7.9%. • PLUS Loan charges loan fees of up to 4%, deducted from each disbursement • While in deferment interest accrues

PLUS Loans - Repayment What Happens Next? • Typically repayment begins 60 days after the funds are fully disbursed, but parents can request a deferment while the student is enrolled in school at least half-time • There is no grace period as there is with the Stafford Loan program • Other deferments similar to Stafford • The repayment term is up to 10 years

PLUS Loans – Application Process What Happens Next? • Check with individual schools to determine application process • After credit check, parent will be notified of approval or denial • Parent borrower signs a Master Promissory Note the first time they borrow – good for 10 years – tied to individual student

Alternative Loans Overview What Happens Next? • Student is the borrower • Often require co-signer with good credit history and debt to income ratio • Do not need to complete the FAFSA but student should so they can borrow federal loans first • Funded through private lenders • Not federally regulated

Alternative Loans - Amounts What Happens Next? Student’s cost of attendance - Other aid student receives = Maximum loan amount Aggregate maximum – varies by lender

Alternative Loans – Interest Rate and Fees What Happens Next? • Interest rates and fees vary by lender • Most interest rates are variable and set based on the Wall Street Journal prime rate or the LIBOR rate • Often interest rates and fees are structured so that they are less for those with better credit and debt to income ratio

Alternative Loans - Repayment What Happens Next? • Repayment varies from one lender to another • Typically principal is deferred while student is in school, but interest accrues • Many loans do have a grace period • Repayment is not based on income but is set based on repayment term and interest rate • Alternative/Private Loans cannot be consolidated with Federal Loans

Alternative Loans – Application Process What Happens Next? • Contact the school to see what is recommended • Often, next step will be to contact the lender directly (either by phone or website) to apply • If approved, lender will have student sign promissory note (typically cover only that loan) and then send information to the school so that the school can “certify” the loan • Some schools will require loan counseling

Institutional/University Loans What Happens Next? • Amounts, interest rates, fees, repayment terms and application process will vary by school and even by loan fund • Not all schools have institutional or university loans available

Responsible Borrowing What Happens Next? • Borrowing some loan funds is a given for most students • The average amount borrowed in Maine from the schools that responded to recent survey was over $17,000 • Varies tremendously from one school to the next… not necessarily tied to the cost of the school • Individual choices have a huge impact on the amount eventually borrowed

Limiting Borrowing What Happens Next? • We’ll discuss the following items that impact on the amounts students borrow: • School selection • Choice of major • Enrollment levels • Amount of hours worked • Housing options • Optional purchases including owning a car • Credit Cards

School Selection What Happens Next? • Great website to visit is Peterson’s (www.petersons.com) • Give you a general idea of what the various averages are at different schools • Examples….

Examples from Massachusetts What Happens Next? • Harvard University • $36.9B endowment • Avg loan debt = $10,813 • Avg need based gift aid = $36,850 • Cost = $52,000 • 100% of need met • Boston College • $1.6B endowment • Avg loan debt = $19,358 • Avg need based gift aid = $25,547 • Cost = $52,039 • 100% of need is met

Examples from Massachusetts (con’t) What Happens Next? • Simmons College • $182.2M endowment • Avg loan debt = $42,174 • Avg need based gift aid = $13,781 • Cost = $43,500 • 64% of need met

School Selection (con’t) What Happens Next? • Important that students compare award packages when selecting a school • Key to apply on time to get the best package possible • How “loan heavy” is the package? • What types of loan are included in the package?

School Selection (con’t) What Happens Next? • What is the school’s packaging policy – will loan amounts increase? • Consider attending a community college (lower tuition) for the first two years and then transfer to a four year school for the remainder of the program • State schools often cost less (if you are from that state)

Choice of Major What Happens Next? • Choice of major will impact the number and types of schools available to student • Also need to consider earning potential once out of school • Major can also impact whether or not student can receive loan forgiveness

Enrollment Levels What Happens Next? • Is tuition charged based on “per credit hour” basis or based on enrollment level (ie. full time)? • Reducing credit load may save money at that time, but trade off is length of time needed to complete school • Impact of attending school year round

Amount of Hours Worked What Happens Next? • Working more may result in borrowing less • However, need to be sure it doesn’t negatively impact studies • Working during the summer can be very beneficial depending on the other choices student makes during the summer • Even saving $1,000 per summer to put toward college will reduce loan debt by $4,000 (which translates to about $5,200 when repaid w/ interest)

Housing Options What Happens Next? • On campus vs. off campus– in the area where the student is attending school, is one option cheaper than the other? • Need to consider cost of rent, transportation and food • If on campus, type of room can impact cost – singles typically cost more than doubles and “suites” tend to cost more than standard rooms

What Happens Next? Understanding Award Letters and Loan Basics Spring 2010