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Credit Cards and College Tuition... a Bad Mix

Monday, June 30, 2008

For many of you, student loans may seem scary, confusing, and a little overwhelming. You have to understand terms like grace period, deferment, and borrower benefits. You may need a co-signor to get a private loan and school certification to get a Stafford loan. By contrast, applying for a credit card may seem like a piece of cake. However, don't be fooled. Taking out a student loan to pay for college is almost always a better way to pay for college than charging tuition to a credit card.

Student Loans Have Better Interest Rates than Credit Cards

Any student can take out a Stafford loan, which has a fixed interest rate of 6.8%. Credit cards can often have annual interest rates that are as high as 18% or 19%. Even interest rates on private loans don't get close to that high.

Student Loans Typically Don't Capitalize Interest Until Graduation

It's not just the interest rates that can cause your debt to balloon. Credit card debt typically capitalizes every month. That means your interest rate is applied to your entire outstanding balance. Student loan debt typically capitalizes after graduation, meaning your interest rate is only applied on your original loan amount until graduation (not on the principal plus the monthly interest). Here's a simple example:

Let's assume you need $10,000 to pay for tuition and other fees freshman year. For simplicity, let's say that you can get a credit card with 8% annual interest (which is unlikely) or take out a loan with an 8% interest rate. The only difference is the interest on the credit card capitalizes monthly and the interest on the student loan doesn't capitalize until graduation. Let's say it takes you 4 years to complete college. After 4 years, you will owe $13,757 on the credit card and $13,200 on the student loan. You'll owe nearly $600 more with the credit card, and that's assuming the credit card and the student loan have the same interest rate.

Credit Cards May Hit You with Lots of Fees or Increased Interest Rates

Make sure you check out the fine print on credit cards. There may be late fees, over-the-limit fees just to name a couple. You may also start at a low interest rate, but then trigger a higher interest rate because of a missed payment or a large outstanding balance.

Again, you will almost always make out better taking out a student loan to pay for college than putting tuition on a credit card.

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FTC Releases Guide on How to Avoid Deceptive Student Loan Offers

Friday, June 27, 2008

Figuring out how to pay for college can be a highly stressful and sometimes highly confusing process. For many of you, these are the first major financial decisions you've had to make. It is a real challenge deciding which student loans make sense for you and which student lenders are a good fit. And to top it all off, we're talking big bucks when it comes to paying for college tuition, textbooks, housing, food, and more.

Unfortunately, this combination of money and first-time decision-makers can lead to deceptive marketing and scams. That's not to say that most of the organizations doing business in this space are trying to deceive you. You just may want to be on the lookout for "This is too good to be true" situations. The FTC just put out a guide that can help you avoid deceptive marketing tactics and keep your information safe. It not only provides some good tips, but also offers contact information for a number of organizations where you can get more information or file a complaint.

Don't be shy about asking questions if something doesn't make sense. And we always encourage you to do your homework when it comes to student loans. Feel free to use our Student Loan Marketplace to compare loans from our partners or to analyze student loans you've found in your own research.

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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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Don't forget about the Perkins Loan!

Tuesday, June 17, 2008

For low-income students, the Perkins Loan can be a major help when paying your college bill. It is likely the best student loan that you can get. In order to be eligible for a Perkins Loan, you must have completed a Free Application for Federal Student Aid (FAFSA).

Perkins Loan Overview

Money for the Perkins Loan program comes from both the federal government and the schools themselves. However, the program is administered by the schools, not the federal government. Each college or university determines the criteria for granting Perkins Loans at their institution... the one constant being that students with exceptional financial need must be given priority. Undergraduate students can receive up to $4,000 per year in Perkins Loans. Graduate students are capped at $6,000 per year.

Benefits of a Perkins Loan

In addition to the super-low interest rates of 5 percent, the Perkins Loan is subsidized, meaning you don't accrue interest on the loan while you're in school. You also don't pay any origination or default fees, and you get a 9-month grace period when you graduate before repayment begins.

Perkins Loan Forgiveness

For those of you who are considering a career in teaching, there's more good news. You may be able to have all or a portion of your Perkins Loan forgiven... that means, you don't have to pay it back! As an enticement to recruit teachers into low-income areas and into subjects with shortages, the government may cancel or defer your loan payments. You may also be eligible for forgiveness of your Perkins Loan if you work in nursing, law enforcement, for VISTA, the Peace Corps, the armed forces, or as social workers serving high-risk children.

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Borrower Benefits on the Way Out?

Friday, June 13, 2008

Student lenders use borrower benefits to differentiate themselves from competitors (they can be confusing, though!). How much do you save when you get a 0.25% interest rate reduction for auto-debiting your payments? What is it worth to get a 2% interest reduction after making your first 48 payments on time?* Well, one effect of the ongoing credit crisis is that some borrower benefits may be on the way out.

Because of the credit crunch, the Department of Education has stepped in as a lender-of-last-resort to buy loans from lenders, and they probably will accept only two types of borrower benefits. As a result, any lender that wants to resell their loan to the department can only offer the following benefits:**

  1. Up-front benefits like origination fee reductions that occur when the loan is disbursed
  2. Interest rate reductions for automatic payments of 0.25%

Hopefully, this means that education loans will be a little easier to understand in the future. If you need help understanding loans, including borrower benefits, you may want to try out our student loan marketplace.

Notes:
* The answer, as always, is that it depends. For a 10 year, $10,000 loan with 10% interest, the 0.25% would save you around $280 over the course of the loan, while the 2% reduction after 48 on-time payments would save you around $640.

** Reselling loans like this on the secondary market to private organizations has been common practice for years. The government is stepping in to make sure that this market keeps working so lenders can keep offering you loans.

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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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New GI Bill Could be Major Source of Financial Aid for Vets

Wednesday, June 4, 2008

As the war in Iraq continues, there has been renewed discussion about the U.S.'s obligations toward current troops and veterans. A major part of this discussion has been a new GI Bill that could be viewed as both a reward for military service and a program to help re-integrate veterans into civilian society.

The bill has been in the works for over a year. Senator Jim Webb (D-Va) has been one of the major proponents for an updated version of the GI Bill, which was first introduced by Franklin Roosevelt in 1941.

The main argument for a new GI Bill is that the existing GI Bill has not adequately kept up with the rising cost of tuition. Proponents argue that the existing GI Bill does not cover tuition and expenses at a number of public universities and that active duty veterans must pay $1,200 at the beginning of their enlistment to even be eligible. Strong educational benefits would also serve as a strong incentive for enlistment.

GIBill2008.org is a site dedicated to the new GI Bill. It provides a good overview of this initiative as well as a quick comparison between the new and old GI Bills.

The new GI Bill would essentially cover tuition up to the cost of the most expensive public university in the state. The tuition payments could be used at any public or private college or university. It would also include a $1,000 yearly stipend for books and supplies, and veterans would have up to 15 years to use the benefit.

The new GI Bill would cover members of the military who have served on active duty since September 11, 2001, including reservists and members of the National Guard.

The GI Bill has been a major component of financial aid for veterans over the last 60 years and has generally been viewed as a successful program.

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Blogger www.CollegeToolkit.com  
June 20, 2008 9:30 AM
New GI Bill likely to be enacted, which is great news for current armed forces personnel looking toward a college degree down the road.

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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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