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July 1 Is a Big Day for Student Loans

Tuesday, June 24, 2008

There are a few important dates when it comes to student loans and financial aid. The FAFSA becomes available on January 1. Many colleges and universities require a response to admissions letters and financial award packages by May 1. And on July 1 every year, new loan limits and interest rates kick in for federal loans. This year brings with it a number of significant updates that you and your parents should be aware of:

Interest Rates on Subsidized Stafford Loans Will Be Decreased

For those of you who received subsidized Stafford loans in your financial aid package, you benefit from a 0.8% reduction in Stafford interest rates. Interest rates will fall from 6.8 percent to 6.0% for subsidized Stafford loans made on or after July 1, 2008. For unsubsidized Stafford loans, the interest rate remains at 6.8%.

Loan Limits for Unsubsidized Stafford Loans Will Increase

As a result of recent legislation, undergraduate students can now borrow $2,000 more through the Stafford Loan program. You can read more about the loan limit increase in a previous post.

Variable Rates on Federal Loans Disbursed Prior to July 1, 2006 Will Change

If you took out a Stafford loan or your parents took out a PLUS loan prior to July 1, 2006, there is great news for you. Your interest rates for this year have dropped significantly. For Stafford loans in repayment, the variable interest rate drops to 4.21%. For Parent PLUS loans, the new interest rate will be 5.01%. Again, this only applies to loans disbursed prior to July 1, 2006.

Don't forget that our Student Loan Marketplace can help you find and compare student loans to help you find the best loan deal.

If you're looking for some additional resources about the July 1 changes, The Project on Student Debt offers their own Borrower's Guide to July 1, 2008.

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Congress Mulls Telling Student Lenders It's All or Nothing for Stafford Loans

Thursday, June 19, 2008

In response to the news that several major student lenders have ceased offering Stafford Loans at many two-year and some four-year colleges, two Democratic senators have introduced legislation which would essentially make Stafford Loans an all-or-nothing deal.

Proposed Legislation Would Eliminate Discrimination Based on School for Stafford Loans

Recent changes in student loan legislation and the U.S. credit crunch have made the student loan business much less profitable for banks and driven many to scale back their operations or withdraw completely from the business. The proposed legislation by Senators Patty Murray (D-WA) and Chris Dodd (D-CT) would not allow student lenders participating in the FFELP program to discriminate based on the school a student attends, the length of the academic program, or the income level of the student. As Senator Murray put it in a statement, "Lenders offering loans backed by taxpayer dollars shouldn't be able to discriminate against certain schools or students."

How Will Student Lenders React

It's unclear what impact this legislation might have on the student loan market, if it were to pass. Stafford loans are subsidized by the federal government and are guaranteed against default for up to 95 percent of their value.

Several major lenders have already left the market completely including Bank of America and Student Loan Xpress. Would the requirement to lend to all eligible schools drive other student lenders out of the Stafford Loan business? Or could the legislation reverse the trend at many 2-year colleges where lender lists have been shrinking this year?

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Stafford Loan Limits Increased for 2008

Tuesday, June 10, 2008

In recent years tuition has been rising faster than federal financial aid. In order to address this, Congress passed a law this year which boosts federal funding for students. One aspect of this law was to increase the annual limits for Unsubsidized Stafford Loans by $2,000 for undergraduate students.

For example, last year a dependent freshman could only take out $3,500 in Subsidized and Unsubsidized Stafford Loans, this year he will be able to borrow $5,500, up to $3,500 of which may be subsidized. This is important because Stafford Loans offer much better terms and are generally lower cost than other types of loans, including PLUS and private loans. You can compare Stafford Loans to private loans using our student loan marketplace.

Annual Stafford Loan Limits

Year in School 2007 2008
Subsidized Total Subsidized Total
Freshman Dependent $3,500 $3,500 $3,500 $5,500
Independent $3,500 $7,500 $3,500 $9,500
Sophomore Dependent $4,500 $4,500 $4,500 $6,500
Independent $4,500 $8,500 $4,500 $10,500
Junior Dependent $5,500 $5,500 $5,500 $7,500
Independent $5,500 $10,500 $5,500 $12,500
Senior Dependent $5,500 $5,500 $5,500 $7,500
Independent $5,500 $10,500 $5,500 $12,500

Note: Dependent students whose parents do not have access to PLUS Loans qualify for the independent student Stafford Loan limits

The law also increased the total amount a student could take out in Subsidized and Unsubsidized Stafford Loans.

Total Stafford Loans (Subsidized and Unsubsidized)

2007 2008
Undergraduate (Dependent) $23,000 $31,000 ($23,000)
Undergraduate (Independent) $46,000 $57,500 ($23,000)

Note: Subsidized Stafford Loan limit in parenthesis

You can also use our Student Loan Marketplace to find Stafford Loans


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Student Lender Options Dwindling... Especially at 2-year Colleges

Monday, June 2, 2008

The New York Times recently ran a piece about a number of student lenders closing their doors to students at 2-year colleges. Several major lenders are paring down the list of colleges to which they offer loans. The lenders cited in the article are household names, including Citibank, JPMorgan Chase, PNC, and SunTrust.

In its simplest form, lending money is all about risks and returns. When banks evaluate loans, they are basically determining an expected return on the money borrowed, which factors in the interest rate, fees, costs of customer acquisition, and an assessment of the risk of default.

Risk and Student Loans

Determining the risk of a borrower is the main unknown for the bank and a key to profitability. In many cases, a borrower's credit history is the primary indicator of this risk. A better credit score indicates a lower risk. This is why you often need a parent to co-sign on a private student loan. They will usually have a better credit score than you.

Cost of Customer Acquisition

However, that's not the only factor that drives profitability for lenders. The cost of customer acquisition is key as well. That is, how much does it cost to get a borrower to select your bank as their student lender. This is basically advertising and marketing that a student lender spends to attract your attention and get you to their application form.

Why Student Lenders Might Choose Not to Loan to Students at 2-year Colleges

The combination of risk and cost of acquisition are probably two of the main drivers behind these banks' decisions. Graduates of 2-year colleges will typically earn less money than graduates of 4-year colleges. A lower income likely translates into a higher default rate.

On top of that, 2-year colleges also cost less than 4-year colleges. That means that these students will be taking out smaller loans. Let's assume that a lender's cost of customer acquisition is $100. If a 2-year college student typically takes out $2,000 in loans, the acquisition cost is 5 percent of the loan ($100 acquisition cost / $2000 loan). If a 4-year college student typically takes out $10,000 in loans, the acquisition cost is 1 percent of the loan ($100 / $10,000). This means that a 4-year college student is likely going to be more profitable, assuming the same cost of customer acquisition.

For those of you attending 2-year colleges, you may notice that you and your parents have fewer options this fall for your Stafford, PLUS, and Private loans.

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