Friday, May 15, 2009
Ways to Find Cheap Student Loans
The recession has generated some unexpected silver linings in student loan
options
By Kim Clark
Posted April 30, 2009
The Wall Street collapse and the national recession have wiped out those cheap and easy $40,000
student loans that were advertised on late-night TV last year and have raised the real costs of many
remaining education loans But the financial storms also have created a couple of surprising silver
linings. Most students can still get enough reasonably priced loans to cover the bulk of tuition at local
public universities. And some students and parents actually will get better deals than ever before. The
government is cutting interest rates on the loans it makes to the neediest students, and lucky parents
who still have good credit and lots of home equity are able to pull college cash out of their homes at
record-low interest rates. What's more, a growing number of colleges are trying to fill the loan vacuum
by offering students comparatively low-cost supplemental loans.
Finding bargain educational loans can take a little work, though, discovered Gary Krist, the father of a
Bethesda, Md., high school senior. He was shocked when he saw the expensive loans packaged into
his daughter's financial aid offers this spring. After fees, some federal parent loans, such as the ones
Krist originally was offered, will cost more than 9 percent a year. "I was so trusting that they would
give us a good deal. It was disillusioning," Krist says.
So he started shopping around for cheaper alternatives. Krist, who bought his home in the
Washington suburbs long before the real estate bubble started, was able to get a home equity line of
credit starting at about 4 percent. Since that interest will be tax deductible, his real cost will be even
lower. Krist, an author who wrote a novel about financial bubbles, is betting economic troubles will
keep interest rates and his payments low for months if not years. "Just because a loan offer comes
with the imprimatur of the government or a respectable institution of higher education doesn't mean
you can't get a better deal elsewhere," Krist says.
Of course, students are better off if they can pay for college without borrowing at all, perhaps by
choosing lower-cost schools or raising lots of free grant and scholarship money, for example. But the
harsh reality is that while underclassmen can attend community college for, typically, about $2,500 a
year in tuition, upperclassmen typically have to pay an average of about $7,000 a year for tuition, plus
an additional $1,000 for books. Living away from home typically adds $10,000 or so in housing,
travel, and food expenses. And there simply isn't enough scholarship money to help every needy
student. So loans are often the only way to pay for a degree.
Nevertheless, the payoff of college is typically high enough to warrant at least a few thousand dollars
in debt each school year, experts say. And a few smart moves now can make those loans especially
affordable.
Start with the feds: The single biggest and best source of student loans for fall 2009 is the federal
government, says Edie Irons, spokesperson for the Project on Student Debt. The first step to getting
federal loans: Fill out the Free Application for Federal Student Aid.
All full-time students who complete a FAFSA can borrow at least $5,500 a year through the Stafford
student loan program. Students who are at least 24 years old or whose parents have bad credit can get
Stafford loans of up to $9,500 to $12,500, depending on their year in college. Staffords for the fall of
2009 will charge no more than 6.8 percent a year in interest plus a 1.5 percent upfront fee, for an
average annual rate of 7.1 percent. Students who qualify as needy may be able to get Staffords that
charge no interest at all while they are in school and just 5.6 percent after graduation.
About two thirds of colleges allow students to shop around for the best Stafford deal instead of
funneling loan applications directly to the federal government. The credit crunch has eliminated most
of the good deals common in previous years. But a few lenders are still offering small sweeteners.
Many nonprofit lenders, such as the College Foundation of North Carolina, and some for-profit
companies, such as Discover, waive most or all of the upfront fees and knock a fraction off the annual
rate for automatic payments. Those kinds of discounts typically save borrowers several hundred
dollars over the life of the loan.
At an effective rate of 7.1 percent, when the prime rate is just above 3 percent, Staffords might look
expensive. But they offer many unique benefits, such as new forgiveness programs for public servants
and an income-based repayment plan that will allow debtors to cap their payments below 15 percent
of their income.
Parents can tap education loans that cover the student's entire cost of college (less any other financial
aid) through the federal PLUS program. PLUS loans aren't cheap, unfortunately. They can cost as
much as 8.5 percent a year plus a fee of 4 percent of the loan amount, for a total annual rate of as
much as 9.4 percent. But shopping around can reap a few discounts. Those who borrow directly from
the federal government and make automatic electronic payments are charged just 7.65 percent in
interest, for example. (After fees, the APR totals 8.55 percent.) And there are other benefits: While
PLUS applications do require a credit check, the standard is comparatively forgiving, even OK'ing
parents who are a little behind on their mortgages. Also, PLUS loans allow parents to defer payments
until the student is out of school (though the interest does keep building up.)
Ask your school: Traci Smith was heartbroken last summer when she got turned down for a PLUS
loan, and it looked as if she wouldn't be able to send her daughter, Rhea, to the University of Redlands
in Southern California. When Traci called to alert the school's aid office, however, the officer told her
the school had just joined a growing number of colleges making loans to recession-strapped parents
like her. Redlands lent the Smiths the last $3,200 they needed to pay their bill. Now, Rhea is hard at
work studying to become a music teacher. "Without that loan, I would have had to change my aims
and profession" since her local community college doesn't have many music education courses, says
Rhea. "That loan saved me."
Many schools also offer Perkins loans, which are federally backed loans for needy students that charge
no interest while students are in school and just 5 percent after they leave. Unfortunately, colleges
have a limited amount of Perkins money and so can't always award these loans to everyone who
qualifies.
While many school loans are good deals, Lauren Asher, acting president of the Institute for College
Access and Success, warns that students shouldn't automatically accept all loans they are offered.
"Just because the loan has the school's name on it doesn't mean it is the best you can do," she says.
Alternatives: Some charities and new Web companies are giving students a chance to borrow at no
or low interest.
After suffering with $50,000 in private law school loans charging 7 percent a year, recent New York
Law School graduate Sarah Kelly found a way to save herself thousands of dollars. She and her
parents signed a Student Payback contract offered by Virgin Money. Her parents paid off her
expensive private loans. In return, Virgin Money withdraws from Sarah's checking account a monthly
payment that will eventually pay back her parents everything plus minimal interest. The lower
interest cuts the total she'll end up paying by thousands of dollars. Virgin Money makes the
transaction easy and unemotional by turning her family debt into the same kind of payment as a
utility bill. "I don't have to think about it," Kelly says. Other companies, such as GreenNote, offer
would-be borrowers the ability to send out electronic appeals for private student loans.
Private lenders: The credit crunch has wiped out most of the private, alternative (also sometimes
called "signature") educational loans. But students who can find a U.S. citizen with good credit (a
FICO score of at least 700 is generally required) to guarantee payments can usually find a bank willing
to lend them at least a little money. Financial experts suggest private loans be considered only as a
last-ditch alternative, however, as they can be onerous. "It used to be that anyone with a pulse could
get a loan," says Greg McBride, an analyst for Bankrate.com. "Now you've got to jump through more
hoops than a circus act."
Some private loans, such as Sallie Mae's new "Smart Option," require payments to start almost
immediately—while the student is in school.
Private loans can also be expensive. A few nonprofits, such as the Rhode Island Student Loan
Authority, are offering fixed rates below 8 percent. But most for-profit lenders were offering only
variable rates in late spring 2009. Their rates ranged from a tick below prime (which was about 3
percent) to 14 percentage points above the London interbank rate (Libor), which was hovering around
1 percent. Those with good credit will very likely be offered cheap-sounding rates as low as 4 percent,
but "the rates will only go up from here," warns Tim Ranzetta, president of Student Lending Analytics.
"When the economy gets back on its feet, the rates could be 3 to 4 percent higher than they are today,"
which could ratchet payments up by hundreds of dollars a year, Ranzetta says.
Ranzetta warns that shopping for an affordable private loan smartly requires a lot of work in a short
time. Lenders typically don't reveal the rate they'll charge you until you've completed a lengthy
application, so smart shoppers have to fill out several applications. Credit rating agencies will allow
borrowers only 30 days of shopping for a loan before dinging credit scores, he says. And borrowers
concerned about their jobs would be wise to read the fine print in each loan document about the fees
for deferring payments if they get into financial trouble, Ranzetta advises. Bankruptcy courts
generally refuse to discharge educational debts (unlike, say, credit card debts), so borrowers have
little choice but to pay all interest and fees on educational debts.
As troublesome and expensive as private loans are, however, they are not the most expensive way to
raise cash for college, says Bankrate's McBride. Many credit cards actually charge more than private
loans. And cashing out a retirement account can be even more expensive because of tax penalties.
If it's the only way to make it through college, borrowing a few thousand dollars a year at a reasonable
interest rate is generally rated a good investment. After all, the typical college graduate grossed almost
$4,000 a month last year. Those who didn't go to college earned about $2,400. That difference of
$1,600 a month won't make up for really big debts, though, and isn't guaranteed. Some college
graduates, especially those entering the job market during the current recession, might have to get by
on less and thus won't have much extra to divert to loan payments.