Last month's column discussed why clients with college-bound children should not only permit themselves to borrow money to pay for education expenses, but should even be encouraged by you to do so.
Since that time, dozens of education loan providers have either scaled back their lending operations, or announced a departure from the business altogether.
Although I think this development and the publication of the previous column are purely coincidental, it's apparent that powerful forces are coming together to make borrowing all the money needed for college costs prohibitive — or even impossible.
That's why your clients need to borrow as much money as they can, and as soon as they need it. Here's a rundown on the types of education loans available — for now.
Background: Stafford loans are available to undergraduate, graduate or professional-program students who are U.S. citizens, or eligible resident non-citizens. The loans can be obtained through financial institutions (i.e. banks and credit unions), as well as directly from the federal government via the student's school.
Borrowing Limits: Dependent undergraduate students are limited to borrowing between $3,500 and $5,500 in Stafford loans each year, and $23,000 in total. Independent students, and those in graduate or medical school programs, are eligible to borrow several times as much.
Special Features: Stafford loans come in two flavors. “Subsidized” means that there is no interest charged or payment due until after the student is out of school. “Unsubsidized” Stafford loans begin accumulating interest from day one, but repayment can also be deferred until after college.
Interest Rates: Starting in July of 2008, rates will be 6.0 percent for new subsidized Stafford loans for undergraduates. That already-low rate is scheduled to decline each year until 2012, down to as low as 3.4 percent. After that, the rate is scheduled to go back to 6.8 percent. The rate for unsubsidized Stafford loans (along with those obtained for post-graduate work) is, and will remain, at 6.8 percent indefinitely.
Other Features And Costs: The interest rates for Stafford loans can be reduced further by a steady repayment history, as well as by setting up payments to be automatically deducted from the borrower's bank account. The origination fee for a Stafford loan is currently 3 percent.
Notes: According to the website, finaid.org, most subsidized Stafford loan money goes to families with less than $100,000 in adjusted gross income. But the slightly less-attractive unsubsidized version is not subject to any income limits.
Background: When Stafford loans aren't enough to cover your clients' college costs, they should then consider PLUS loans. These are available to parents of dependent students, as well as independent post-graduate students.
Borrowing Limits: The only limit on the amount is that the total money borrowed can't exceed the entire incurred cost of college, minus any financial aid received.
Special Features: Borrowers aren't required to file a FAFSA financial aid form to get a PLUS loan, but they still must undergo a minimal check of their credit history before gaining approval.
Interest Rates: New PLUS loans have a fixed rate of 8.5 percent annual interest.
Other Features And Costs: There is a government-mandated 3 percent origination fee for the PLUS loan, but the borrower can reduce the total cost of the loan by such acts as making timely payments for the first year or two.
Notes: Although some families may be able to delay repayment of PLUS loans for several years, typically the first payment is due 60 days after the entire loan is disbursed. In other words, the family must begin repaying the loan while the student is still in school.
Background: These are unsecured loans obtained from the likes of Sallie Mae and Citibank. There is a wide variation in the terms of private loans, but this is the source of funding that has diminished the most in the last few months.
Borrowing Limits: Amount available depends on both the general credit climate, and the borrower's past and present credit.
Special Features: Some lenders in this arena also offer loans for K-12 private education costs.
Interest Rates: Rates are typically variable, and tied to the prime rate as published in the Wall Street Journal. The rate for a standard private loan made to a borrower with excellent credit might be in the 5.5-percent to 6.0-percent range, but riskier borrowers could pay double-digit interest rates.
Other Features And Costs: Disbursement/origination fees can be waived for borrowers with good credit ratings. Those with less-than-stellar ratings may still be able to get a loan, as long as they have a qualified co-signer.
Notes: The amount, interest rates, and terms of these loans are dependent on many factors, including the school and field of study chosen by the student, as well as the borrower's credit score (see below).
Both types of Stafford loans are usually preferable to the other forms of available loans. The first step to getting either kind is to complete the Free Application For Student Aid (FAFSA), available at www.fafsa.ed.gov.
The actual form should be completed in January of the year the student will begin attending school. But you and your clients may want to take a test-run now through the financial aid calculators found at www.finaid.org.
An important factor in getting PLUS and (especially) private loans for college lies in having a clean credit history. So rather than twiddling their respective thumbs waiting for next January, your clients should be reviewing their credit reports and scores right now.
Note: Finaid.org says that those with FICO scores of less than 650 are unlikely to qualify for a private loan, no matter how much money is available.
HELP, I NEED SOMEBODYbold
(And Some Money)
There are plenty of sources out there for families who need to borrow to pay for college. The financial aid office at the student's school is the best place to start, but here are a few online sites to study:
The federal government's financial aid site: www.fafsa.ed.gov.
A private source of information affiliated with Citibank: www.finaid.org.
A not-for-profit organization devoted to all things college: www.collegeboard.com.
The Department of Education's official site: www.studentaid.ed.gov.
Writer's BIO: Kevin McKinley CFP© is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid a Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. You can reach him at [email protected].