Posts tagged ‘PLUS Loan’

August 5, 2013

Compromise reached on student loan interest rates

by Grace

After a compromise was finally reached last week, a new student loan bill was sent to President Obama for signature.

Under the old federal student loan program, borrowers were offered a fixed rate. Under the new rate structure, which still drew opposition from nearly one-third of Senate Democrats when it passed last week, loans to undergraduates and graduate students, along with parents in the PLUS program, would be subject to a fixed rate plus the yield on the 10-year Treasury note.

Rates for loans taken out after July 1 of this year would be 3.9 percent for undergraduates, 5.4 percent for graduate students and 6.4 percent for those receiving PLUS loans. The rates are fixed over the life of the loan but would change for new borrowers each year.

In a compromise that pleased many Democrats who had initially been wary of using a rate that was subject to inflation and fluctuated with the markets, Congress set a cap on all loans: 8.25 percent for undergraduates, 9.5 for graduate students and 10.5 for PLUS recipients.

Perkins loan rates were unchanged.

20130801.COCLoanInterestRates2

* Interest is paid by the federal government during the in-school period.

Related:

May 28, 2013

Parent PLUS loans are similar to no-doc mortgage loans

by Grace

Parent PLUS loans, which are “both remarkably easy to get and nearly impossible to get out from under“, can be a trap for uninformed borrowers.

Remember no-doc mortgage loans?  Parent PLUS loans, federally sponsored and available for parents of college students, are eerily similar.

The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached. When a parent applies for a PLUS loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt—like a mortgage or other student loans—the borrower is already on the hook for.

Designed for families who may not qualify for other types of debt, PLUS loans “sometimes hurt the very families they are intended to help”.

Of course, Parent PLUS can be an important financial lifeline—especially for those who can’t qualify for loans in the private market. An iffy credit score, high debt-to-income ratio, or lack of a credit history won’t necessarily disqualify anyone for a PLUS loan. Applicants are approved so long as they don’t have an “adverse credit history,” such as a recent foreclosure, defaulted loan, or bankruptcy discharge.

No cap on loan amount

Unlike other federal student loans, PLUS loans don’t have a cap on borrowing. Parents can take out as much as they need to cover the gap between other financial aid and the full cost of attendance. Colleges, eager to raise enrollment and help families find financing, often steer parents toward the loans, recommending that they take out thousands of dollars with no consideration as to whether they can afford it.

Harsh treatment for debtors who run into trouble

When it comes to paying the money back, the government takes a hard line. PLUS loans, like all student loans, are all-but-impossible to discharge in bankruptcy. If a borrower is in default, the government can seize tax refunds and garnish wages or Social Security. What is more, repayment options are actually more limited for Parent PLUS borrowers compared with other federal loans. Struggling borrowers can put their loans in deferment or forbearance, but except under certain conditions Parent PLUS loans aren’t eligible for either of the two main income-based repayment programs to help borrowers with federal loans get more-affordable monthly payments.

Parent PLUS spending has shot up over the last decade.

20130525.COCParentPlusGrowth2

Last year the government disbursed $10.6-billion in Parent PLUS loans to just under a million families. Even adjusted for inflation, that’s $6.3-billion more than it disbursed back in 2000, and to nearly twice as many borrowers.

An interactive list of schools with accompanying Parent PLUS data shows that many of the institutions with the highest average loans are art and music colleges.  New York University is ranked 11th, with an average loan balance of $27,305.

Related:

October 11, 2012

‘Shadow debt’ – unreported student loan borrowing

by Grace

“Shadow debt” consisting of loans not captured in traditional reporting should be taken into account when the impact of rising college costs on families is considered.  A comment on CollegeConfidential explained it this way.

There’s several different ways to borrow for college which won’t show up with the current data mining techniques.
– Borrow from home’s equity
– Borrow against 401K
– Charge on credit cards
– Borrow from relatives

Given parent plus loans are fairly expensive (relative to this low rate environment) parents might be finding cheaper ways to borrow.

Interest rates on unsubsidized Stafford loans are 6.8% and Parent Plus loans are 7.9%.  By comparison, home equity rates averaged 4.58% this week.  Anecdotally, I can think of at least three families that have tapped into their home equity to help pay college tuition.  I borrowed from a relative when I was in college.

How much student debt goes unreported?

The question arises, then, of how much shadow student debt goes unreported.  Andrew Gillen did a back of the envelope calculation, based on Sallie Mae’s reporting of how families pay for college.  He concluded that the official student loan figures should be bumped up by about 31%.  I did a similar calculation and came up with a factor of 28%.

Official student debt figure has been reported to be more than $1 trillion.  Although it’s unclear whether it should be bumped up by 10%, 30%, or 100%, I’m convinced that a substantial amount of college debt is going unreported.

Related:

February 17, 2012

Qualifying for a parent Direct PLUS loan

by Grace

How can a parent qualify for a Direct Plus Loan?  While some conditions must be met, the government does not impose stringent credit requirements.

From the Federal Student Aid government website:

The parent borrower must not have an adverse credit history (a credit check will be done). If the parent does not pass the credit check, the parent may still receive a loan if someone (such as a relative or friend who is able to pass the credit check) agrees to endorse the loan. The endorser promises to repay the loan if the parent fails to do so. The parent may also still receive a loan if he or she can demonstrate extenuating circumstances.

More details from FinAid:

An adverse credit history is defined as being 90 or more days late on any debt or having any Title IV debt (including a debt due to grant overpayment) within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.

Unlike most private lenders, the government does not use FICO scores in determining eligibility for federal student loans.

Other information

Related articles

February 6, 2012

Overview of student loan options

by Grace

This useful summary of the most common student loan options comes from The College Helper

1. Federal Student Loans

A. Perkins Loans – Students can only qualify for this loan if they display exceptional financial need.  These loans are available to both graduate and undergraduate students.  Perkins loans are given through the college or university you will be attending.  Unlike other types of student loans, they will be repaid directly to the university.

B. Subsidized Student Loans – Students qualify for these types of loans based on financial need.  The requirements aren’t as stringent as the Perkins loans process, but you still must qualify. The interest on these loans is deferred (or postponed) until after you graduate.  What this means is that even though you are responsible for repaying this loan 6 months after graduation, the interest attached on these loans does not begin to accrue (or accumulate) until after that 6 month point.

C. Unsubsidized Student Loans – Any student can qualify for these types of loans.  The only requirements are that you must be a student and enrolled at least part-time.  The interest on these loans accrues (or accumulates) immediately, which means that the total loan value could really add up over time.

2. Federal PLUS Loans

Federal PLUS loans are loans that are taken out by parents to cover their child’s educational expenses.  The maximum amount that any parent can borrow is the cost of attendance, minus any financial aid that the student has already received.  The repayment period for these loans starts 60 days after the funds have been dispersed to the school and the repayment period can be up to 10 years.

3. Private Student Loans

Some students opt to go with private loans, rather than Federal student loans.  Your qualification for these types of loans is based on your credit score.  These loans must also be used for educational purposes only.  If you do decide to go with private loans, please READ THE FINE PRINT…every company has different loan terms and conditions.  Take your time to evaluate a lot of different companies and compare prices before taking out a private loan.  These types of loans should only be done as a LAST RESORT.

MORE:  For maximum borrowing amounts and interest rates on federal loans check out FinAid Student Loans.

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