Student loan scandal: I'm so confused, how do kids not get ripped off?

Parent Cafe
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<p>Can anyone explain the student loan scandal to me in a nutshell? </p>

<p>My daughter is a sophomore with Subsidized Stafford loans. I think she will graduate with only Subsidized Stafford loans (God willing). </p>

<p>One of her loans says "variable" in the interest rate section, the other says 6.8%. The government pays all her interest until after she graduates.</p>

<p>When it comes to paying off these loans, I haven't read the fine print, and I really don't know what she's in for. What is she in for?</p>

<p>Her loans are administered by AES, American Education Services. Who are they? Are they better/worse than Sallie Mae? Can I choose who administers her loan? And if I can choose, what do I even want from a loan administrator?</p>

<p>I heard that Subsidized Staffords are the best loans to have. Is this true? 6.8% once she graduates isn't much better than what I can get on a home equity loan right now. I thought student loans, especially Government loans, were supposed to have exceptionally good interest rates.</p>

<p>What should we beware of in the next two years? Are the interest rates on Subsidized Stafford loans negotiable? </p>

<p>Can anyone explain this to me in SIMPLE words? I'm so confused!</p>

2

<p>The big advantage to subsidized Stafford loans is that the govt pays the interest while the student is in school, and that saves you $$. This is the cheapest money your child will ever borrow and it is a good deal, so rest assured with that.</p>

<p>I can't answer all your questions, cause I don't know that much about the whole student loan imbroglio, but a neighbor told me to look at the following site, which I recommend to you. <a href="http://www.efc.org%5B/url%5D"&gt;www.efc.org&lt;/a>. This is the site for the Education Finance Council, which is a Wash, DC based trade association of student loan lenders who are either not-for-profit or state-based. These are, for the most part, NOT the private alternative loan outfits who are getting in trouble with the current "scandal". EFC lenders' only purpose is to help make college affordable for your student, not rip you off.</p>

<p>Most EFC lenders offer various $$ benefits for the student and their family, things like loan forgiveness, interest rate reduction, etc. Usually these incentives do things like encourage the student to pay promptly on their loan after they graduate (after so many years, for ex, they might lower the rate or forgive some of the loan as a reward). Or they might offer lower rates to ex-military, etc. Some state-based lenders will do favors for teachers who stay in that state for so many years after they graduate ( lower rate, forgive a dollar amount, etc)</p>

<p>There is a section in the site for students and families that has a lot of info that might help with your other questions.</p>

<p>It is my impression that most if not all of the lenders involved in the "scandal" are the private alternative lenders. But even then, you need to realize that they are competing with the not-for-profits and state-based lenders and therefore need to match some of these monetary incentives to get your students business, so often even these private lenders are not ripping you off. In fact, the competition is so fierce that is why they've entered into these "deals" with the schools. The private lenders want a "preferred lender list" that the school provides you so you don't look at the npf's and state agencies. You look at the school's list and stop there (is their hope).</p>

<p>It seems snarky on the surface and maybe it is snarky, but it still doesn't necessarily mean you're being ripped off. Anyway, the EFC site will let you see if there is another lender in your state that could help you, or one in the state your kid's college is in.</p>

<p>Hope this helps.</p>

3

<p>First, there are two types of Stafford Loan programs. One is called the direct loan program, in which the student borrows from the college. The scandal does not involve those schools or students. </p>

<p>In the other program (FFEL), the student can borrow from other lenders -- nonprofits, banks, alternative lenders. The scandal is that the banks are allegedly bribing colleges to put them on their "preferred lender list" so students borrow money from them. Also, colleges are using employees from these lenders to discuss financial aid with students, instead of their own staff. </p>

<p>What you as a consumer should is make sure you get the best deal on a Stafford Loan that you can. Because there is competition in the FFEL program, lenders are canceling origination fees and offering repayment incentives (like, use automatic deposit and we'll deduct x% from your interest rate). All Staffords have the same rate, it's just that the lenders are offering discounts in the hope that you select them.</p>

<p>Schools that use the direct-loan program do not offer a choice, and so students are probably not getting these deals and incentives. My daughter will be attending one of these colleges next year. While I can be assured that no one there got bribed by a lender, we will be paying a higher price for the loan because of lack of competition.</p>

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<p>Thank you, sly_vt, for your additional explanation. I forgot about the direct loan program wrinkle. Unfortunately, there is a move afoot in Congress to get rid of all the lenders except the direct loan kind, and that would be very bad for the consumer imo. It would eliminate all the competition and the various discounts that go with that competition.</p>

<p>Yes, all Staffords have the same rate, but it is the discounts that are offered that lower that rate and provide $$ savings to the student and the family. Like you said, some of it is things like agreeing to automatic w/drawal of your payment to the lender from your checking account. This insures all your payments will be (a) on time, and (b) get paid. It protects the lender from possible default on your part and they reward you with a % deduction in your interest rate. With a direct loan monopoly, there is no incentive to give you a good deal because you have no choice of which lender to go to.</p>

<p>Some state-based lenders also offer discounts to students majoring in things like teacher education, to fill employment needs of the state. If you use the loan to get a degree in a field the state needs, and agree to and do work in the state for X amount of time, then they either discount the interest rate, or "forgive" a $ amount of the loan balance.</p>

<p>Another perk you lose with direct loan schools.</p>

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<p>My daughter's school was, unfortunately, involved with the scandal, and they settled. Her school issued this news release on the subject:</p>

<p><a href="http://www.upenn.edu/pennnews/article.php?id=1130%5B/url%5D"&gt;http://www.upenn.edu/pennnews/article.php?id=1130&lt;/a&gt;&lt;/p>

<p>Since my daughter's loans are all need based, her money isn't involved. </p>

<p>I still have questions about the Subsidized Stafford. This is the link to her school's page on Subsidized Staffords:</p>

<p><a href="http://www.sfs.upenn.edu/loans/ug-federal-stafford-loan-subsidized.htm%5B/url%5D"&gt;http://www.sfs.upenn.edu/loans/ug-federal-stafford-loan-subsidized.htm&lt;/a&gt;&lt;/p>

<p>On the bottom of the page it says: Federal Stafford Loans are available from many lenders. If you select another lender, be sure the fees and terms are equally favorable</p>

<p>Those terms look OK to me. I guess. I don't really know what can be had from another lender.</p>

<p>Do you know anyone who actually went with a different lender than one their school defaulted them to?</p>

<p>There's a fear & intimidation factor that keeps me, and maybe a lot of people, quiet. </p>

<p>Borrowing from another lender would probably generate unusual paperwork for the Financial Aid Office, which would draw attention to my daughter's account, & possibly raise eyebrows.</p>

<p>The school has been very generous with my daughter's need based scholarships, and I don't want to ruffle anyone's feathers in Financial Aid by dickering over the terms of her Subsidized Stafford loan.</p>

<p>Is this paranoid or prudent?</p>

<p>Oh, and on consolidation . . . My son consolidated his student loans last year just before the interest rate went up. I think you have to be careful about changing the character of a loan when you consolidate.</p>

<p>My son was told it would not be good to consolidate his Stafford and Perkins loans. He only consolidated his Staffords.</p>

<p>Someone please correct me if I'm wrong, but I think if you only consolidate Staffords your loan retains the characteristics of a Stafford, & you keep the benefits. Benefits include deferments & certain military, teaching & medical jobs that can reduce the principal.</p>

<p>If you consolidate your Stafford with any other student loan, you end up with a single private loan, and no government benefits. </p>

<p>Please let me know if that is not accurate.</p>

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<p>knc -</p>

<p>I looked at the parent resource part of <a href="http://www.efc.org%5B/url%5D"&gt;www.efc.org&lt;/a> (the site for the Education Finance Council i mentioned above) and found a member agency in Pennsylvania for you. It is:</p>

<p>Pennsylvania Higher Education Assistance Agency (PHEAA)
1200 North Seventh Street
Harrisburg, Pa. 17102
717-720-2867</p>

<p>If you call them, I will bet you money they will have a counselor who can help you sort out the answers to your questions. It may be that you are worrying for nothing, but the folks at PHEAA will help you. Good luck.</p>

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<p>Well, I decided to see if I could look up some of this stuff. I found the website for PHEAA, and it is (duh) <a href="http://www.pheaa.org%5B/url%5D"&gt;www.pheaa.org&lt;/a>. Interestingly, I found that PHEAA created American Education Services (AES) in Oct. 2001 as a division of PHEAA to expand their services nationwide. AES has a website and it is <a href="http://www.aesSuccess.org%5B/url%5D"&gt;www.aesSuccess.org&lt;/a&gt;.&lt;/p>

<p>If you go to the home page of AES and look at "Manage Your Loan" you can find out about loan consolidation, and it does say that if you consolidate your loans it is possible to lose your current loans forgiveness benefits +/or your current loan incentives. They outline the pros and cons of loan consolidation.</p>

<p>If you go to "Find Aid for School" and then to "Compare Loan Programs" it has a chart that says if you go to school in Pennsylvania, the best loan program is Keystone BEST Stafford, with rates starting at 4.55%, origination fees 0% to 1%, and 10 year payout. </p>

<p>There are other charts and all kinds of info. It looks like PHEAA, which I'm pretty sure is an issuer of loans, is also a servicer of loans through AES. So I doubt you are getting ripped off by Penn, and I still think if you call PHEAA you can talk to a customer service rep who can help you wade through all this stuff. Or you could just prowl around on these web sites for a few hours.</p>

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<p>OK, I checked the Penn site for their loan program and you are in the Keystone BEST Stafford! You have a really good deal here, what are you worried about? Look at all the great discounts you get:</p>

<p>1% principal reduction as a graduation credit;
0.5% credit of original balance after 24 consecutive ontime payments;
.25% reduction with ACH payments;
2% interest rate reduction after 36 monthly ontime payments;</p>

<p>I'm thinking maybe if you qualify for all the discounts this might lower you from the 6.8% to the 4.55%, but I can't do the math to figure that out. Anyway, this looks like a good deal for you. Don't let all the hoopla in the press scare you; like I said, this is just part of the move in congress to force everyone to go to direct loans, which would be terrible 'cause then all your discounts would dry up and you'd pay a lot more out of pocket on your loans. When have you ever known the federal goverment to run things efficiently?</p>

<p>Relax. If you're still confused, call PHEAA and get a customer service rep to walk you through it.</p>

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<p>btw - i checked the efc site for the lender in my state and read their faq's. it turns out the 6.8% is the current federally mandated rate for student loans. it is a fixed rate due to the terms of the recent Deficit Reduction Act. apparently the lenders used to be able to use variable rates but the feds stopped that in the recent Act. that is why your D's loans say different things.</p>

<p>as for AES being the loan administrator, or servicer, that just means they are the entity that handles the day to day billing, collection and payment processing for all the loans issued by that lender. it's like the lender outsourced their billing dept. </p>

<p>if you were paying your hospital bill and found out the hospital had outsourced their billing and collections dept, you wouldn't be able to choose that either. in any event, i don't think you're getting ripped off, so relax.</p>

<p>as for student loans having good interest rates, well the days of 3% loans for school are long gone i'm afraid. the advantage to gov't backed loans are that you can get them at all. an 18 year old with no credit, no job, no assets, etc is risky business. student loans are high risk loans and w/o gov't backing who in their right mind would lend money to these kids? so the current "advantage" is availability.</p>

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<p>Mercymom,</p>

<p>You are an angel! It must go with your name. Thank you for all your research on this. I was to the point where I didn't know what to believe, doubted everyone, and believed everyone had a hidden agenda.</p>

<p>The little voice inside me was also thinking that since Penn got caught, they'll be super careful with loans now, and not to worry.</p>

<p>I am 100% certain that my daughter does not understand what can happen with bad loans, and I feel it's my job as her mother to turn every rock & see that she gets the best deal she can. This may be one of my last jobs as "mother in charge." </p>

<p>Soon enough she'll just instruct me to write a check to some odd-named band she hires for her wedding! </p>

<p>But my energy is here now, and I have another rock to turn over. I'm sure there is a mathematical calculation for this, but I don't know how to figure it out: </p>

<p>If my daughter takes out $10,000 of Perkins Loans (her amount may be limited) during her last two years, at 5% interest that starts to accrue immediately, and she pays the money back over 20 years, does she pay more or less over 20 years than if she borrowed $10,000 with a Subsidized Stafford at 6.8%?</p>

<p>After I started this thread she decided to go to summer school, and that's a whole different set of loans!</p>

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<p>knc -</p>

<p>ok, i'm no cpa, but what i did was look at a straight loan calculator on the pheaa web site and plug in some numbers, assuming nothing more than loan amount, interest rate and # months payout. what i came up with is this:</p>

<p>$10,000 for 20 years at 5% interest has monthly note of $66 and after 20 years you've paid $15,840 (p+i).</p>

<p>$10,000 for 10 years at 6.8% interest has monthly note of $115.08 and after 10 years you've paid $13,809 (p+i).</p>

<p>So you pay $2,031 more if you do the 20 year note at 5%. The interest rate may be lower and the monthly note may be lower, but you're paying twice as long so you wind up paying more in the long run. Actually, you probably pay even more than the $2,031 because with the Subsidized Stafford, the gov't pays the interest for you while you are in school and you say the interest starts to accrue immediately with the Perkins, so all in all it looks like you pay more with the 20 years at 5%.</p>

<p>I guess if there is some reason why she just absolutely cannot pay the $115 monthly for the Stafford and wants the $66 monthly of the Perkins at 20 years (can you even do that? do Perkins have a longer payout time?), then maybe that's the way to go, but with the subsidized stafford it seems it's better to save more over time and get rid of the loan sooner.</p>

<p>Really, you should call the PHEAA number and talk to them. I know they have counselors who can answer your questions in detail. Good luck to you.</p>

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<p>Actually, the Stafford loan will probably have the payments get lower over time due to the discounts I mentioned above. They are giving you a reduction in principal (the amount you owe) and also a reduction in the interest rate for various things like (a) graduating, just getting the diploma, they reward her, (b) 24 ontime payments (the first 2 yrs she's out), (c) ACH payments (automatic w/drawal from her checking acct), and (d) 36 months ontime payments (after 3 yrs of ontime pay, they reduce things even more). So, while I can't do the math, that Stafford loan payment will go down after two years and then again the third year, if she (a) graduates and completes her degree, and (b) pays on time.</p>

<p>I don't know if the Perkins loan has the same incentives or not. Really, either call PHEAA or call Penn's financial aid office. I don't think Penn is a scoundrel no matter what. They have offered you a really good financial aid program, and all that Citibank thing was is another option for grad students. There really is no "scandal". These are good people and they will help you and answer your questions. </p>

<p>Relax.</p>

13

<p>New on this topic...please point me in the direction to learn more--fao of school selected for Fall 07? ---Stafford/Perkins loan--difference is term of payoff?...Can student take out a loan and then if parents can help, are they allowed to help?...not likely given the amount we are responsible for..but our income fluctuates..thank you for your thoughts and guidance.</p>

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<p>Does anyone have an opinion on the value of taking out a Stafford loan to build a credit rating. I've been offered the standard, unsubsidized loan at the 6.8% interest rate. Fortunately, I don't need this loan to meet my college expenses, but I'm considering accepting it to build a credit rating. Does anyone have an opinion on the trade off of paying the costs of the the interest on the loan verses the value of building a good credit rating? Would successfully paying off a Stafford Loan have much direct positive influence on my credit rating that it is worth it.</p>

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<p>Last year in your shoes, we decided NOT to take out the loan. One of D's schools offered a subsidized Stafford, which H said would be a good deal as that is "cheap" money when the interest is paid for you while you're in school, and we would have done that had she gone there. </p>

<p>The other schools only offered unsubsidized loans, and we didn't need the money at the school she chose to attend so we said no to the loan. My understanding is that if you don't pay the interest while in school on the unsubsidized loan, then it is capitalized and added to principal, so the loan amount you owe increases and then you have to pay interest on the interest, so to speak. All your costs go up.</p>

<p>That's not worth it, imo. If you want to start building credit, an easier way might be for your parents to see about a credit card in your name that they cosign with you to get the card. If you only use it to charge expenses that are going to be paid off as they come due anyway, like your books, airfare home, etc, then the prompt payments will help build up the credit. Mom and Dad might like the idea of your having the credit there for emergencies, if you promise not to abuse the privilege on what is an "emergency". Like suppose your flight home gets cancelled and you have to stay overnight at the airport hotel (usually the airline pays for that, but sometimes not). Travel emergencies, that sort of thing.</p>

<p>My feeling is that this student loan debt is hanging over you for 10 years and if you are late with those payments for any reason it could hurt your credit, so why bother if you don't actually need the money. otoh, a credit card to pay for your books and other necessities while away at school could be a good thing.</p>

<p>USAA sent us some stuff in the mail about college kid credit cards (not their prepaid card), but I can't find it on their website now. Anyway, that's my 2 cents.</p>

<p>ps - check to see if your credit does get built up if your parents cosign. it think the usaa thing was credit in your name only. it was a special deal for usaa members who are college students. we didn't do it, so i don't remember exactly how it works, but i'm sure other banks may have something similar.</p>