Explain student loans to a twentysomething!
December 20, 2013 10:42 AM
I'm trying to figure out how federal student loans have changed in the past 5 years, including the Bipartisan Student Loan Certainty Act of 2013.
Help me understand that major ways student loans have changed in the past five years and what a student who has not taken out a loan since about 2006 needs to know.
For instance:
What does the Bipartisan Student Loan Certainty Act mean for borrowers and for paying back down the road?
What changes in laws or rates should a prospective borrower anticipate?
Do these laws affect existing loans or just new ones?
I know there are a lot of websites that talk about how high student debt is and how no one will ever be able to pay them back, but I'm hoping to get an unbiased top-level summary of the latest developments. Thanks!
Help me understand that major ways student loans have changed in the past five years and what a student who has not taken out a loan since about 2006 needs to know.
For instance:
What does the Bipartisan Student Loan Certainty Act mean for borrowers and for paying back down the road?
What changes in laws or rates should a prospective borrower anticipate?
Do these laws affect existing loans or just new ones?
I know there are a lot of websites that talk about how high student debt is and how no one will ever be able to pay them back, but I'm hoping to get an unbiased top-level summary of the latest developments. Thanks!
Well I'll do my best considering this is my field but keep in mind that regulations in financial aid and student loans can change any time. Also I have more direct knowledge of the current lending procedures and not necessarily repayment methods, though the previous poster summed it up briefly- if you google any of those phrases/acronyms (pay as you earn, public service forgiveness, IBR, etc) you're bound to get more and better info.
Sorry if this is way TMI but it gets me riled up.
1) Interest rates have and will continue to change (increase) due to the Bipartisan Student Loan Certainty Act (use of the word certainty is terrible). Everyone made a big deal about how they were practically "cut in half" recently but they're just going to go up again. They'll be re-evaluated every summer and adjusted based on some formula involving the treasury rate. Basically the better our economy gets the higher rates will go, though they can't go higher than 8.5% for regular undergrad/grad Stafford/Direct loans, and no higher than 9.25% I believe for grad and parent PLUS loans. This year the interest rate is 3.86% for Stafford/Direct, 6.41 % for Parent PLUS, and 5.41% for grad PLUS, all fixed. They are all most likely to increase as of July 1st, 2014.
2) Origination fees have also been affected, but I'm not certain it's directly because of this act. This is the fee that's taken off the loan before the money is even sent to the school. It just went up on Dec. 1st to 1.071% for Direct/Stafford loans, and is around 4% for PLUS loans. It will probably continue to be adjusted at random times to random amounts.
3) Subsidized loans have been hit the worst and it's a crime. This is the type of loan that interest is paid for (subsidized) by the government while the student is attending at least half time, so it's basically an interest-free loan while you're in school. Except that starting a couple of years ago, graduate students can no longer receive ANY subsidized loans, when they used to be allowed to receive up to $8500/year!
ALSO, the interst subsidy now goes away immediately after a student stops attending school, when they used to give a 6-month grace period (same as repayment grace period) before interest started accruing.
AND, the cherry on top is new rules limiting the amount of years a student can receive subsidized loans. It used to be just the total lifetime amount was limited, but now a student only has 150% of established program length to complete that program and keep getting subsidized loans. So if a student is doing a 2-year program and has a really crappy year for personal reasons and need to repeat coursework, they better not take any more than one extra year to finish. If they take longer, not only can they no longer receive any subsidized loans EVER, but if they decide to continue the program anyway their interest subsidy completely goes away and now interest will collect on those formerly "subsidized" loans!! OH and schools were given very little in the way of training/time/software to actually implement this new rule, so chances are good that students subsidized loan usage will be incorrectly reported (and horribly misunderstood) all to the students' disadvantage.
To sum up, subsidized loans are probably going away permanently, they're just trying to pull the band-aid slowly, making it all the more painful.
4) Loan servicing (management of student loans in repayment) has also changed. Starting in 2010 all Stafford/Direct/PLUS federal loans are managed through the government, instead of through some outside lenders like Sallie Mae. BUT the government farms out the actual loan servicing work (management, repayment, and customer service) to a wide variety of random companies, including Sallie Mae (confused yet?). Students have no idea who their loan servicer will be until after the school receives the loan money, then they'll only be notified directly by the servicer via whatever contact information they included on the FAFSA. Usually if a student only takes out loans from one school, they'll have one servicer, but loans from more than one school will likely result in multiple loans through multiple servicers, and more repayments to keep track of. Students can access their entire loan history and all servicer info on www.nslds.ed.gov but few know of this or how to use it. Consolidation can help limit the total amount of separate payments to separate servicers, but it's not always beneficial depending on how it impacts your overall interest rate. In addition to all this, loan servicers can go out of business and/or trade off their loans to other loan servicers, but the transition doesn't always go smoothly and if a student isn't completely on top of their payments and loan servicers, one payment can easily be missed. My own servicer was switched on me this summer and thank goodness I was paying attention and knew what was going on, because the one lame email I received to notify me of this could have easily been interpreted as spam. Plus I was on auto-pay that of course wasn't automatically switched over to the other servicer so my payment would have been late if I didn't bother checking all of my accounts at least twice a month if not more.
Well these are the basics that have been going on since 2006. Basically borrowing student loans is messy and please please please borrow only what you absolutely need to get by while you're in school!!!! And if you are a borrower stay on top of your s***!! For the most comprehensive info this website isn't all that bad: http://studentaid.ed.gov/repay-loans
posted by wannabecounselor at 2:43 PM on December 20, 2013
Sorry if this is way TMI but it gets me riled up.
1) Interest rates have and will continue to change (increase) due to the Bipartisan Student Loan Certainty Act (use of the word certainty is terrible). Everyone made a big deal about how they were practically "cut in half" recently but they're just going to go up again. They'll be re-evaluated every summer and adjusted based on some formula involving the treasury rate. Basically the better our economy gets the higher rates will go, though they can't go higher than 8.5% for regular undergrad/grad Stafford/Direct loans, and no higher than 9.25% I believe for grad and parent PLUS loans. This year the interest rate is 3.86% for Stafford/Direct, 6.41 % for Parent PLUS, and 5.41% for grad PLUS, all fixed. They are all most likely to increase as of July 1st, 2014.
2) Origination fees have also been affected, but I'm not certain it's directly because of this act. This is the fee that's taken off the loan before the money is even sent to the school. It just went up on Dec. 1st to 1.071% for Direct/Stafford loans, and is around 4% for PLUS loans. It will probably continue to be adjusted at random times to random amounts.
3) Subsidized loans have been hit the worst and it's a crime. This is the type of loan that interest is paid for (subsidized) by the government while the student is attending at least half time, so it's basically an interest-free loan while you're in school. Except that starting a couple of years ago, graduate students can no longer receive ANY subsidized loans, when they used to be allowed to receive up to $8500/year!
ALSO, the interst subsidy now goes away immediately after a student stops attending school, when they used to give a 6-month grace period (same as repayment grace period) before interest started accruing.
AND, the cherry on top is new rules limiting the amount of years a student can receive subsidized loans. It used to be just the total lifetime amount was limited, but now a student only has 150% of established program length to complete that program and keep getting subsidized loans. So if a student is doing a 2-year program and has a really crappy year for personal reasons and need to repeat coursework, they better not take any more than one extra year to finish. If they take longer, not only can they no longer receive any subsidized loans EVER, but if they decide to continue the program anyway their interest subsidy completely goes away and now interest will collect on those formerly "subsidized" loans!! OH and schools were given very little in the way of training/time/software to actually implement this new rule, so chances are good that students subsidized loan usage will be incorrectly reported (and horribly misunderstood) all to the students' disadvantage.
To sum up, subsidized loans are probably going away permanently, they're just trying to pull the band-aid slowly, making it all the more painful.
4) Loan servicing (management of student loans in repayment) has also changed. Starting in 2010 all Stafford/Direct/PLUS federal loans are managed through the government, instead of through some outside lenders like Sallie Mae. BUT the government farms out the actual loan servicing work (management, repayment, and customer service) to a wide variety of random companies, including Sallie Mae (confused yet?). Students have no idea who their loan servicer will be until after the school receives the loan money, then they'll only be notified directly by the servicer via whatever contact information they included on the FAFSA. Usually if a student only takes out loans from one school, they'll have one servicer, but loans from more than one school will likely result in multiple loans through multiple servicers, and more repayments to keep track of. Students can access their entire loan history and all servicer info on www.nslds.ed.gov but few know of this or how to use it. Consolidation can help limit the total amount of separate payments to separate servicers, but it's not always beneficial depending on how it impacts your overall interest rate. In addition to all this, loan servicers can go out of business and/or trade off their loans to other loan servicers, but the transition doesn't always go smoothly and if a student isn't completely on top of their payments and loan servicers, one payment can easily be missed. My own servicer was switched on me this summer and thank goodness I was paying attention and knew what was going on, because the one lame email I received to notify me of this could have easily been interpreted as spam. Plus I was on auto-pay that of course wasn't automatically switched over to the other servicer so my payment would have been late if I didn't bother checking all of my accounts at least twice a month if not more.
Well these are the basics that have been going on since 2006. Basically borrowing student loans is messy and please please please borrow only what you absolutely need to get by while you're in school!!!! And if you are a borrower stay on top of your s***!! For the most comprehensive info this website isn't all that bad: http://studentaid.ed.gov/repay-loans
posted by wannabecounselor at 2:43 PM on December 20, 2013
Thank you so much, wannabecounselor. This is so helpful. I'm grateful to you for taking the time to explain it in such detail.
posted by annabellee at 10:55 AM on December 26, 2013
posted by annabellee at 10:55 AM on December 26, 2013
This thread is closed to new comments.
You had to have taken out your first loans after October 2007 and have taken out at least one after October 2011 to qualify for PAYE. IBR started in 2010 but can apply to people who started school earlier, and applies to more stuff but is over 25 years instead of 20 and has a higher percentage of your income for payment. (Shorter time if you go to work in public service.) ICR/ISR are higher amounts but shorter time periods, but that's been around since well before 2006.
posted by Sequence at 12:06 PM on December 20, 2013