Student Loans 101: Taming The Educational Loan Monster

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a result of the subprime real estate mortgage debacle, it became clear that bank lenders could nolonger generate any profits from this line of business (www.money.cnn.com, April 2008). In fact,many who considered staying in the business found that they would lose money on eacheducational loan they made.2. The 2007-2009 credit crunch that hit Wall Street. Changes in the real estate mortgage market thatstarted in 2007 caused interest rates to go up as a result of the reduced amount of availablecapital. Millions of borrowers with adjustable rate mortgages (ARMS) saw their variable rateinterest loans rise by as much as several percentage points. This has brought about the default inpayments on such loans by up to 2% of homeowners across the USA, much higher than that insome hard hit regions of the U.S.A. As a result of this change in the market, large financialinstitutions such as Citigroup, Merrill Lynch, Lehman Bros., Countrywide Financial, and Bank ofAmerica lost hundreds of billions of dollars. One of the five biggest, Bear Stearns, was savedfrom bankruptcy in the fall of 2008 only by action of the Federal Reserve Banking System and abuyout by JP Morgan Chase. Lehman Brothers had already gone bankrupt in the spring of 2008.To avoid a bank failure, Wachovia was purchased in the fall of 2008 by Wells Fargo, one of thewiser banks that had not been devastated by the subprime mortgage mess.The result has been private investors demanding higher interest rates for their securities.Historically, this has been the source of the money lenders have used for their educational loans.This resulted in less (or in many cases no) money available for educational loans in 2008; and,when coupled with a slowing economy and higher risks of default by debt burdened recentgraduates, the educational loan industry was thrown into a spring 2008 turmoil(www.bloomberg.com).The bottom line: lower subsidies from the government and increased borrowing costs for banks in theeducational lending industry made the federally guaranteed student loan market an unprofitable venturefor the banks that previously served as a major source of funds for student loans.THE FUTURE OF STUDENT LENDING AND EDUCATIONAL DEBTGovernment In May of 2008, the Federal government passed a bill (H.R. 5715) allowing the U.S.Department of Education to buy the remaining 2007-08 federally guaranteed loans that had not beenpurchased by private banks. Without government intervention, it was expected that demand for loans tofulfill the needs of students headed to school in the fall of 2008 would have vastly exceeded supply. This,in turn, would have prevented many students from attending school and many universities from balancingtheir budgets. A June 11, 2008, report estimated that students would be borrowing about $93 billion fortheir 2008-2009 academic year, $70 billion of which would come from federally guaranteed loans(www.bloomberg.com).LOAN CONSOLIDATION – MAJOR CHANGES IN RECENT YEARS1. Prior to July 1, 2006, Stafford loans were variable rate loans that changed each July 1 st asadjusted by the rate on the 90-Day Treasury Bill. The Federal Consolidation Loan Programallowed students to lock-in these variable rate loans, which is why consolidation became popularduring the period of low interest rates commencing in the early 2000s. A regulatory changeannounced in 2005 adjusted Stafford Loan interest rates to a fixed rate of 6.8% for all newgraduate student loans disbursed after July 1, 2006. This interest rate has remained fixed at 6.8%6
for graduate students since that time. The interest rate for undergraduate loans gradually dropsto 3.4% by 2011 (on subsidized Stafford only). More information, including updated rates, canbe found at www.studentaid.ed.gov.2. Prior to the 2006 legislation on this subject, students could consolidate their loans while inschool. Even better, as interest rates dropped, they could consolidate (i.e. fixing the interest ratedownward) more than once. This was big business for all of the bank lenders from 2003 to 2006.During that time students were consolidating their loans at less than 3% and in some cases withthe aid of various incentives, achieving interest rates as low as 1.2%. Unfortunately, those daysare long gone for today’s students.DEFERMENTS AND FORBEARANCEUpon graduation, loans typically have a six-month Grace Period during which students do not have tomake any payments. After this grace period there are two different ways to delay payment, each of whichwill generate even more interest in most cases! Graduates who feel they will be unable to make theirmonthly payments should not waste any time before contacting their loan providers. Fees andpenalties are high for missing payments and will adversely affect credit scores. That, in turn, leads tohigher interest rates for credit card and other debts incurred for costs of living or auto loans.If you are concerned about making payments or would like assistance in determining the best strategy,Graduate Leverage’s Advisory Service is a great resource to ensure you are well informed and aremaking the best decisions regarding your debt or any of the options described below. For moreinformation and a personalized assessment of how they may be able to assist you can go towww.glAdvisor.com.The section below outlines options available for postponing loan payments on Federal loans.1. Deferments. This is a temporary suspension of loan payments where interest does not accrue tothe borrower on subsidized loans but does on unsubsidized ones. Graduates must meet certainqualifications to receive a deferment. The most common qualifications for federal loans are listedbelow. The entire list can be found athttps://www.dl.ed.gov/borrower/QctrHelpIndex.do?SectionId=FAQU&APageID=QctrFaquA011.a. In-school deferments are for students who are enrolled in school at least half time andfulfill the qualifications for this valuable aid.b. Education related deferments are for students with these types of loans who are seekingpost-graduate training at institutions of higher education or at other named institutions ororganizations during their graduate fellowships, internships, and residencies. This isalmost always limited to situations where students are obtaining another or an advanceddegree, yet still considered a student.Interest is deferred on subsidized loans but cumulates on unsubsidized ones, althoughborrowers have the option of paying the unsubsidized interest as they go – if they can.c. Economic hardship deferments (EHD). Historically, borrowers qualify for this type ofdeferment for up to three years post-graduation and qualification is based on a number offactors. Many borrowers who qualified for EHD in the past did so through a debt to7
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Student Loans 101: Taming The Educational Loan Monster

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