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by Agnes Jasinski

Despite some Republication opposition, The House of Representatives voted 253-171 to approve a bill Thursday that would stop lending from the bank-based Federal Family Education Loan Program in favor of the Department of Education-run Federal Direct Loans Program by July 2010. The bill, known as the Student Aid and Fiscal Responsibility Act of 2009, would also increase the current maximum Federal Pell Grant from $5,350 to $5,550 and provide for annual increases to the grant in the years to follow through a $40 billion pool of funding over the next decade.

The bill is expected to have more of a fight when it comes before the Senate, where even Democrats have voiced concerns about the potential for job losses in states that headquarter private loan agencies. Many Republican lawmakers argue that the student loan industry has served college students well, and oppose the government takeover.

Amendments to the bill that failed before its passage looked at ways to allow the private sector to continue student lending as a way to offer the college-bound more choice in financing their educations. Amendments that passed included strengthening support services to borrowers and making part-time students eligible for Year-Round Federal Pell Grants, according to the National Association of Student Financial Aid and Administrators.

The bill would also:

• use the projected $87 billion in savings from the move to direct lending to expand aid to students and colleges.
• provide $10 billion in grants to community colleges as part of the Obama administration's American Graduation Initiative, a project that aims to nearly double the number of two-year institutions across the country.
• overhaul the Perkins Loan program and expand its funding from $1 to $6 billion per year.
• provide $8 billion in grants targeting early-learning programs over the next 10 years.
• make interest rates on need-based federal student loans variable starting in 2012.
• simplify the financial aid application process.

The legislation has broad support from the Obama administration. The president called the bill a "historic set of reforms," adding in a statement that the bill "will end the billions upon billions of dollars in unwarranted subsidies that we hand out to banks and financial institutions." Currently, about one-forth of students' loans come through the government's direct loan program.

by Agnes Jasinski

While many students – and their parents – will say no amount of student loan debt is ideal, a new report has zeroed in on those at the top of the pile, those who borrow most and may be most at risk for defaulting on their loans and running the risk of hurting their credit scores.

The newest student debt story comes from a report released yesterday by the College Board Advocacy and Policy Center, which looked at data from 2007-2008 graduates who participated in the “National Postsecondary Student Aid Study.” It paid particular attention to the 17 percent of all bachelor’s degree recipients in that year who graduated with at least $30,500 in student loans. Of those, one in six had average student loan bills of $45,700, with much of those loans coming from private lenders who typically lend to students at higher interest rates.

An article in The Chronicle of Higher Education focused on one particular detail included in the report – that those who borrow more are disproportionately black. Although the sample size was small, and the report’s researchers were hesitant to place too much importance on any breakdowns based on race, the numbers did show some differences in that category. According to the study, 27 percent of black bachelor’s degree recipients borrowed $30,500 or more, compared to 16 percent of white graduates, 14 percent of Hispanic students, and 9 percent of Asian students. Those numbers have little to do with income, however. Middle-class students tended to borrow more than those coming from low-income households, perhaps suggesting that those are the students who are more likely to attend private colleges rather than public institutions.

How else did the report describe those students who borrowed most?

• The frequency of high debt is higher among independent students than among dependent students (24 percent graduated with at least $30,500 in debt).
• Students who graduated from for-profit institutions are much more likely to have high debt levels than other students.
• Private loans are most prevalent among students with family incomes of $100,000 or higher.
• Although black graduates have the highest debt totals, Asian students rely more on private loans. About 12 percent of Asian graduates had no federal loans, with 68 percent of their student loan debt coming from non-federal sources.
• Higher-income parents of bachelor’s degree recipients are more likely than those with incomes below $60,000 to take out PLUS Loans, and borrow more when they do. Thirty percent of the lowest-income parents borrowed an average of $22,400 in PLUS Loans, while 47 percent of those with incomes of $100,000 or higher borrowed an average of $41,500.

by Emily

Today we move on to the final part of our Understanding Your Financial Aid Award Letter series.  If you were lucky enough to have your entire tuition paid through free money for college, then you can stop reading now.  But the vast majority of students who apply for aid will be awarded at least one less ideal form of financial aid.  Sorting through the rest of your award letter is the tough part--this is where difficult choices may need to be made, including whether and how much to borrow.

Understanding Your Award Letter, Part III: Work-Study and Student Loans

While you probably would not want to decline any of the free money we discussed last week, you may want to turn down some of the aid covered today.  You are allowed to decline any assistance on your award letter if you feel you will not need it, and you can also elect to take a smaller amount than what is given.  Keep this in mind when budgeting for the year, and don't feel obligated to borrow more than you need.  If you change your mind and need this aid later, you can usually get it back.

Federal Work-Study

If you have remaining financial need after any grants and scholarships you've been awarded, you may see an award of federal work-study on your letter.  This is a federally subsidized program for students working certain jobs on, and occasionally off, campus.  Work-study is not money you will receive up front.  You need to get a job that is funded through the work-study program to receive this money, and it will be given to you as a paycheck, not as money off your bill.  Since many jobs on campus are reserved for work-study students, it can be a great option if you're planning to work while you're in college.

However, if you already have a job that is not funded through work-study or you do not plan to work, you may want to decline this award.  There's no penalty for failing to use your work-study, but if you've been funded to your full need or cost of attendance, canceling your work-study may free up space for more or better student loans than you would have otherwise received.

Student Loans

There are two main categories of student loans: federal loans and private loans.  Federal loans include subsidized and unsubsidized Stafford Loans, as well as Perkins Loans and PLUS Loans.  Private loans come from banks and typically carry higher interest rates, though some states offer their own low-interest student loan programs.  Depending on whether the school you attend participates in the Federal Direct Loans Program, or the bank-based Federal Family Education Loan Program, your federal Stafford Loans and PLUS Loans may be issued by a bank, but their terms are still set by the federal government.  We have more detailed breakdowns of the different forms of student loans on our site, but here's a quick refresher, in rough order of desirability.

Federal Perkins Loans

Currently, Perkins Loans have limited funding and are often reserved for students with higher financial need.  Schools award these at their discretion, but you apply for them through the FAFSA.  However, if you receive one, you may want to take it, as they currently carry the lowest interest rates and some of the most favorable repayment terms.  Perkins Loans have a fixed 5 percent interest rate and a 10 year repayment period.  They are subsidized loans, which means interest does not accrue while you are in school.  They also have a 9-month grace period before repayment begins.  The current Perkins Loan limits are $5,500 per year for undergraduates and $8,000 per year for graduate students.

Federal Stafford Loans

PLUS Loans

You may or may not see a PLUS Loan listed on your award letter.  This is a federal loan program that allows parents to borrow for their students, up to the student's full cost of attendance.  Some schools include these to fill the gap between your financial aid and your cost of attendance, as a way of letting you know the option exists.  While you are guaranteed to receive a Stafford Loan regardless of your credit, so long as you complete a few basic requirements, PLUS Loans, like private loans, require an application and a credit check (if your parents are denied a PLUS Loan, you can apply for additional Stafford Loans through the financial aid office).

Whether or not you see a PLUS Loan on your award letter, if you still need to borrow money to pay for school, this loan can be an option for many.  PLUS Loans currently carry a fixed interest rate of 7.9 percent for Direct Loans and 8.5 percent for FFEL.  Loans can be repaid immediately or starting six months after graduation, but interest will accrue while you're in school.  Research the relative merits of PLUS Loans and various private loans and discuss with your family which option will be best for you.

by Emily

The rise of the online auction service eBay has prompted people to attempt to sell just about anything they can affix a price to. So while it's not surprising to find some pretty out there listings from time to time, it's still not every day you see a student auctioning off a stake in his future.

A college student in Georgia attempted this week to fund the last 18 credits of his Master of Business Administration degree through an unusual source: selling a share of his potential earnings on eBay. The student, Terrance Wyatt of Clark Atlanta University, has been paying for college with financial aid for the last six years, but according to his eBay listing, he found himself $10,000 short of his funding needs this year.

So, being a business graduate student, he began looking for a way out of this financial quandary by marketing himself and seeking investors in his future. While his listing has been removed (eBay frowns on the selling of intangibles or the use of the site for fundraising), Maureen Downey's Get Schooled blog for the Atlanta Journal-Constitution has the partial text of the ad, as well as more information about the student.

While eBay may not have been the best venue for Wyatt's ad, his idea of seeking investors in his future is not so far-fetched. Recently, a number of peer-to-peer lending sites have launched, allowing students and individuals to arrange for anything from straightforward student loans to buying shares in a student's future success. These alternatives to alternative loans are still operating on a small scale and relatively unknown, but students like Wyatt may find the funding they need through such programs.

There are also scholarship opportunities for MBA students, and really anyone who has come up a bit short on financial aid.  Business school scholarships and scholarships for graduate students could easily bridge the gap for students who need more money and want to avoid student loan debt. Depending on your school and your program, you could even land a fellowship or assistantship that could fund your graduate education.

After New York Attorney General Andrew Cuomo brought to light questionable practices some college financial aid offices engaged in when creating preferred lender lists for private loans, the fallout was felt nationwide. While colleges and lenders have reformed their practices in the face of new regulations, lawsuits against colleges and lenders are still being addressed.

Yesterday, Emerson College in Boston, one of the schools accused of receiving kickbacks in exchange for making it difficult for student borrowers to take out private loans from lenders not featured on their preferred lender list, settled with the attorneys general bringing the case, and agreed to pay a total of $780,000 to students who had been forced into student loans with less favorable rates. Payments will range from $25 to $833 and will cover the extra interest students are paying on their loans, compared to loans they could have obtained.

These cases serve as a reminder to weigh your options carefully before agreeing to borrow a student loan. Apply for federal financial aid and do a scholarship search first, then compare multiple lenders to be sure you are getting the best rate.  Even in the face of a lingering credit crisis and a weak economy, not to mention President Obama's plan to change the face of the student lending industry, it still pays to do your research before taking out a loan.

by Emily

After legislative changes in 2007 made lending less profitable and credit markets constricted sharply in 2008, major banks began to exit the student loan market in droves, leaving relatively few participants in the Federal Family Education Loan Program and even fewer options for private student loans. In addition to federal aid and alternative programs like peer-to-peer lending, another source of funding has been on the rise in the wake of the credit crunch: credit union student loans.

Credit unions are not-for-profit financial cooperatives that are financed and owned by their members. Membership is usually based on a common industry, location, or employer and often eligibility extends out to the families of members. Students who belong to a credit union have already been able in many cases to select their credit union as a lender for a federal Stafford loan through the FFEL program. But now you may also be able to borrow a private loan from a credit union to pay for school.

Since credit unions for the most part didn’t participate in the risky lending practices that got banks into trouble in the last couple years, they’ve remained relatively stable and able to lend money. Seeing the major banks exiting student loan programs en masse, credit unions have begun to step in and offer loans to students, as well, seizing the opportunity to gain new members through offering an increasingly hard-to-find service. New websites have also come into existence to help connect students with credit unions that offer college loans.

Two of the most prominent organizations connecting credit unions with student borrowers are Credit Union Student Choice and Fynanz, which runs CUStudentLoans.org. Credit Union Student Choice allows students to find credit unions they are eligible to join that offer student loans. Fynanz also connects students with area credit unions and offers a central student loan application for the credit unions on its site. Other credit unions not listed on these two sites also may offer loans for student members.

In addition to increased availability compared to bank-based private student loans, credit union student loans often carry lower interest rates or more favorable repayment terms. Since the credit unions aren’t specifically in business to make a profit and since borrowers must be members of the credit unions, borrowers may find they have a better relationship with the credit union than they would with a large national bank.  However, credit union student loans may not be the most attractive option for everyone. National banks have a broader reach than credit unions and students may have an easier time finding national student loans than finding credit union loans. Bank-based loans also don’t require students to set up an account with the bank and may still carry lower rates and fees, especially for borrowers with the best credit.

It’s a good idea to weigh your options carefully when considering a private loan. Be sure to exhaust all your options for federal financial aid and scholarships before you apply. Private student loans can carry high interest rates and can’t be discharged in bankruptcy in most cases, so it’s wise to only borrow what you need and to avoid borrowing to the greatest extent possible.

Students who are interested in applying for private loans may soon see the process changing. The House of Representatives passed consumer protection legislation last week that would further regulate private student loans, ensuring that students interested in borrowing them are aware of rates, federal alternatives, and borrowing limits at their school.

The bill moves to further regulate Wall Street in the wake of the credit crisis and ensuing economic recession, and also creates a consumer financial protection agency that's responsible for overseeing consumer credit such as credit cards, mortgages, and other bank loans. An amendment introduced by Democratic Representative Jared Polis of Colorado ensures that private loans to students are also included under this umbrella, and sets up additional rules that lenders and colleges must follow in issuing and certifying private loans.

Under this legislation, all private loans will have to be certified by a student's college, verifying the student's enrollment and the amount he or she can borrow. Before a school can certify a private loan, it must also inform the borrower of the availability of federal student financial aid. This builds on rules that will go into effect in February that state that students must be informed of interest rates and repayment terms up front by banks, and must certify that they have been informed of federal student loan options.

Effectively, it puts an end to direct-to-student private loans, which students can borrow without even informing the financial aid office, and which can be taken out for more than the student's cost of attendance for the academic year. With rising student loan default rates, risky loans like these have increasingly come under fire. These loans can be a quick way for students to find themselves in excess debt, as they make it easy for students to borrow more than they need to pay for school without having to investigate alternatives first.

The bill still needs to pass the Senate and be signed by the President before it can be enacted. Whether the Senate introduces language similar to the Polis Amendment remains to be seen, as it's unlikely financial legislation will be debate until after they finish with healthcare.

by Suada Kolovic

With the typical six-month grace period on student loans right around the corner, recent college graduates across the country will start making monthly payments whether they’re ready to or not . If you’re one of those students, or just starting your college career, here are a few suggestions from the Project on Student Debt, an initiative of the Institute for College Access & Success, a nonprofit independent research and policy organization, on how to manage your loans.

• Know where you stand.

  A great way to get the exact amount you owe is to visit your lender – in some cases, lenders – or you can find details of your student loans, including balances, by visiting the National Student Loan Data System, the U.S. Department of Education’s central database for student aid. If you have non-federal loans, there is a possibility they won’t be listed so contact your institution for that information.

• When’s the first payment?

  The grace period for student loans is the time after graduation before having to make your first payment. But the length of grace periods can vary; for Federal Stafford loans it’s six months, nine months for Federal Perkins Loans and Federal Plus Loans depend of when they were issued. To find out the grace period attached to private loans contact your lender.

• Keep in touch with your lender.

  It’s important to remember to keep your contact information updated with your lender. Whether you’re moving or changing your phone number, an updated contact sheet could save you from unnecessary fees.

• Consider what repayment option works best for you.

  One option is the Income-Based Repayment Program (IBR), which is not available on private loans, that sets a reasonable monthly payment based on a borrower’s income and family size. Under IBR, after 25 years of qualifying payments, your remaining debt, including interest, will be forgiven.

• Prepare for life and the unexpected.

  Sometimes life doesn’t go according to plan. If you can’t make payments due to unemployment, health issues or other unexpected financial challenges, you have options for managing your federal student loans. There are options to temporarily postpone your payments, such as deferments and forbearance. Contact your lender for more information and the interest attached to those options.

• Never ignore your financial responsibilities.

  Ignoring your student loans – or any loan for that matter – can result in serious consequences that can last a lifetime. When you default, your total loan balance becomes due, your credit score is ruined and the total amount you owe increases dramatically. If you default on a federal loan, the government can garnish your wages and seize your tax refunds.

by Emily

Analyses of the data published last week by the National Center for Education Statistics are already starting to emerge.  The Project on Student Debt has announced that a significantly larger portion of students borrowed private loans in the 2007-2008 academic year than in 2003-2004, according to the NCES survey.

Private loan borrowing increased by 9 percentage points, with 14 percent of students now relying on private loans, as opposed to 5 percent in 2003-2004.  Not surprisingly, more expensive schools saw the biggest increase in private student loans.  At for-profit colleges, the percentage of students borrowing private loans increased from 14 percent to 43 percent, while private non-profit colleges also saw a substantial increase.  Overall, 32 percent of students at schools charging more than $10,000 per year in tuition wound up borrowing private loans in 2007-2008.

While the credit crunch may slow the rate of private borrowing in the near future, these student loans still are regarded as the best or only option by some students.  According to the Project on Student Debt's analysis, 26 percent of private loan borrowers did not take out any Stafford Loans first, and 14 percent did not even complete the FAFSA.

Private loans generally carry the highest interest rates and least flexible repayment terms out of all student loans and most experts encourage students to avoid them if possible.  Explore other options for financial aid first, especially grants and scholarships.  You will also want to consider your potential debt loand when choosing a college.  Since students at more expensive schools are more likely to have to borrow private loans, students with limited financial resources should think carefully about the relative merits of a private college as opposed to a state college or community college before committing themselves to private loan debt.

We've previously blogged about the increase in student borrowing shown by the latest data from the National Center for Education Statistics. As more think tanks and other groups begin to analyze this information, additional reports are emerging to provide more details on who is borrowing the most. The latest report comes from Education Sector and bears the title, "Drowning in Debt: The Emerging Student Loan Crisis." While the report has been criticized by some as alarmist in tone, it does provide insight into students' growing reliance on student loans.

In broad terms, the study showed that over half of undergraduate students (53 percent) borrowed money to attend college in 2007-2008, up from just under 50 percent in 2003-2004. Students also took out larger loans in 2007-2008. Adding to the report published earlier by The Project on Student Debt, this report also looked at the percentage of students borrowing private loans, showing a sharp rise in recent years.

The report also breaks down borrowing by type of institution and type of loan, as well as along other lines. Education Sector found that student loan borrowing is most prevalent among students at private, for-profit colleges, with nearly 92 percent taking out student loans in 2007-2008. For-profit colleges also had one of the highest average loan amounts in 2007-2008, with students borrowing $9,611. Private not-for-profit colleges actually had higher average loan amounts at $9,766, but the percentage of students borrowing was significantly lower, though still higher than at public two-year and four-year colleges.

Students at for-profit and not-for-profit private colleges also relied the most heavily on private loans, with 43 percent of students at for-profit and 27 percent of students at non-profit private schools turning to alternate loans. These schools tend to have the highest tuition, so the greater loan amounts and rates of borrowing are not entirely surprising. Rising tuition and a lack of sufficient need-based financial aid (including a shift in focus from need-based to merit-based scholarships at four-year schools) are cited as two of the main causes for high rates of student borrowing.

A more detailed breakdown, complete with charts, is available on the Education Sector website.