Tag: unsubsidized Stafford loans

Federal Loans

A quick review of federal loans:

-you will need to fill out a FAFSA

-Two federal loan programs.

1. The first is the Federal Family Education Loan Program (FFEL) which was created by the Higher Education Act of 1965.  A bank or Sallie Mae is the usual lender.  The lender is insured by a guaranty agency, which is usually a state agency .  In New Jersey, the NJ Higher Education Student Assistance Authority acts as a guaranty agency for FFEL loans.  If a borrower defaults on a FFEL loan, the lender is paid by and transfers the loan to the guaranty agency.  The guaranty agency attempts to collect the loan.  If the guaranty agency does not collect, it is paid by and transfers the loan to the US Department of Education (ED).  The FFEL program was  discontinued as of July, 2010.  Note, however, that there are still many FFEL loans outstanding.

2. The second program is the William D. Ford Federal Direct Loan Program (commonly known as the Direct Loan Program) which was created by the Student Loan Reform Act of 1993.  With Direct Loans, the lender is ED.  If you received a federal loan after June 30, 2010, it is a Direct Loan.

-Types of loans: Stafford, Perkins, Parent Plus, Graduate Plus

1. Stafford

For undergraduate students, Stafford loans are either subsidized or unsubsidized.  With a subsidized loan, no interest accrues until six months after graduation or six months after you leave school.  A subsidized loan is based on need.  With an unsubsidized loan, interest begins to accrue once the funds are disbursed.  With either type of loan, payments are deferred until six months after graduation or six months after you leave school.  With unsubsidized loans, the accrued interest is capitalized into the principal, so you are paying interest on interest.  Therefore, it is wise to pay down the interest portion of the unsubsidized Stafford loan each year while you are in school.  For graduate students, the unsubsidized loan program has ended; therefore, all new Stafford loans are unsubsidized.

The maximum amount of Stafford loans for dependent undergraduates is $31,000 (with maximum of $23,000 subsidized); for independent undergraduates, $57,500 (with maximum of $23,000 subsidized).  For graduate students, the maximum amount of Stafford loans is $138,000; for medical students, $224,000.

2. Perkins

Perkins loans are based on exceptional need.  The limit per year for undergraduate students is $5,000 with a cumulative limit of $27,500; for graduate students the yearly limit is $8,000 with a $60,000 cumulative limit which applies to both undergrad and graduate loans.  The interest on Perkins loans is subsidized and the deferment period is 9 months after graduation or 9 months after leaving school.

3.  Parent Plus

In this case, it is the parent or step parent of a dependent student who borrows the money.  The parent and student must not be in default of any federal student loan.  The parent must pass a credit check. Moreover, the parent or step parent must be a US citizen or an eligible non-citizen.  The annual loan limit is the cost of attendance less any other financial assistance received.  Beginning on or after October 1, 2016, a 4.276% origination fee is withheld by ED at the time of the disbursement and the remainder is disbursed into the student’s account.  Interest accrues upon disbursement and payments begin 60 days after disbursement (unless the parent specifically requests and receives a deferment).

4.  Grad Plus

The graduate student must be enrolled at least half time in a degree granting program.  The student must pass a credit check  The annual loan limit is the cost of attendance less any other financial assistance received.  Beginning July 1, 2013, the interest rates on Grad Plus loans is variable with a maximum of 10.5% (ouch).  Interest accrues from date of disbursement.  Payments begin six months after graduation or six months after you leave school, and the accrued interest capitalizes into the loan so you are paying interest on interest.  The origination fee is 4.276% and the balance is disbursed to the student’s account.






Federal Student Loan Advice For New Grads

Kelsey Gee wrote an article which appeared in the May 13-14 edition of the Wall Street Journal entitled “Outlook is Rosier for Class of ’17”.  Good news for a change.  According to the executive search firm, Korn/Ferry International, salaries, adjusted for inflation, are expected to be up 14% from 2007 for undergrads.  The overall average is expected to be a tad under $50,000; however, the average for software development is $65,232; engineers, $63,036; actuaries, $59,212; and scientists and researchers, $58,773.  A survey conducted at Adelphi University indicates that 2/3 of those responding had at least one job offer.  But, the executive director of career services at Adelphi warned that only about 30% of the class responded to the survey.  He also warned that the average student could expect a 6 month search before landing a job.

A good many of these graduates have federal student loans.  If so, then the student has a six month grace period before payments begin for Stafford loans, and a 9 month grace period for Perkins loans.  There is no grace period for Parent Plus loans.

If you have a subsidized Stafford loan, the government is paying the interest until the end of the grace period.  However, if you have an unsubsidized Stafford loan, you are being charged interest from the time you draw down the money.  The unpaid interest in capitalized onto the principal, so you are paying interest on interest.  Not a good situation (especially if you are a graduate student and are accumulating loans over 5-7 years).  My advice to the undergrad is to contact your servicer upon graduation (or the start of your job) and make arrangements to pay down the interest that is accruing.  It will save you a few bucks.

Also, if you are working in the public sector or a non-profit, look into the Public Service Loan Forgiveness (PSLF) program.  If you are qualified and make 120 payments, you can be eligible to have the remainder of your student loan debt forgiven tax free.  Be careful, though, because you have to have the right type of employer and the right type of payoff plan for this program to kick in.  If you need help in this area, contact a qualified student loan lawyer

And for those students who do not find a job, my advice is, DO NOT let the servicer talk you into applying for a forbearance.  There are better ways to deal with this situation.