In the current economic environment, one impact of the credit crunch is that it’s getting harder than ever to obtain student loans. And unfortunately, millions of families rely on loans to pay for their kids’ college education. Although the need for college aid of all kind is greater than ever, many private lenders have imposed tougher credit guidelines for loans. Some have hiked their interest rates. And still other lenders have stopped making federal student loans altogether.
If you are getting loans to pay for your education – or your child’s – you need to arm yourself with information to be a smart borrower. Here are eights facts you should know in order to do just that. For more tips about managing student loan debt, be sure to read a copy of my book: Zero Debt for College Grads: From Student Loans to Financial Freedom.
Fact #1: You can squeeze more free financial aid out of your school
Slash your need for student loans by getting your college to give you a better financial aid package – especially scholarships, grants or work-study awards. You may be able to do this if your family situation has changed substantially since you applied for aid (i.e. a divorce among the parents, a death of the family’s main breadwinner, serious illness, etc.). At your request, a helpful financial aid counselor may also reconsider your initial financial aid award if you can demonstrate that the package offered is significantly less (at least $2,000 or so) than the cost of attending the school.
Tip: If you are accepted to multiple schools and receive several packages, don’t hesitate to ask the school of your choice to match your best financial aid offer. Some experts suggest that “playing” one school against another doesn’t work because school officials are reluctant to get into “bidding wars.” Still, Ivy League campuses and top research schools want to recruit top talent – so they may be willing to do what it takes to win over coveted students.
Fact #2: Student loan rates and terms are negotiable
Every July 1st, Congress adjusts the interest rate caps charged on federal student loans. However, contrary to popular belief, Congress doesn’t “set” the rates for federal student loans. Instead, the feds impose a “maximum” interest rate that lenders can charge, then lenders set their own rates based on what the market will bear. Therefore, if you’re willing to negotiate and ask for more favorable rates and loan terms, you can find many lenders that will agree to charge a lower rate than the federal maximum interest rate.
Tip: Ask for lower interest rates based on:
a) having payments automatically deducted from your checking/savings account
b) making a set number of ‘on time’ payments (24 to 48 months of on time payments often qualifies you for a rate cut, and a few lenders will give you break even sooner. Example: at www.MyRichUncle.com borrowers get an upfront interest rate cut of 1.25% as soon as they begin repaying their loans – not years later.
c) earning good grades, or qualifying for any other incentive programs a lender offers
Fact #3: If you have to borrow, always seek federal loans first – not private loans
Federal student loans have better loan forgiveness, forbearance and deferment options than do private loans. They’re also much cheaper loans – and they’ll be even less costly in the near future. Right now, the federal cap on Stafford Loans, the most common type of federal student loan, is fixed at 6.8% for undergraduates. It’s 8.5% for PLUS Loans – loans awarded to graduate students or parents to pay for their kids’ education. The good news is that effective July 1, 2008, any student taking out new, subsidized Stafford loans will have lower interest rates, thanks to the College Cost Reduction and Access Act of 2007. (Subsidized loans are the ones where the government pays the interest on the loans while the student is in school.) So for the 2008-09 school year, the interest rate on subsidized Stafford Loans gets cut to 6.0%. In 2009-2010 it drops to 5.6%. In 2010-2011, the rate falls to 4.5%. And then in 2011-12, it drops again to just 3.4%. By comparison, right now, private loans have variable interest rates and they average about 10-11% interest.
Bottom line: borrowing money for college through the federal loan system is and will be much more affordable in the coming years.
Fact #4: Your employer can help eliminate your student loans
A little-known way to get rid of college debt is to have your boss pay it off. Many employers will do so if you sign an employment incentive contract. This means that as a “bonus” or “perk” to you, your job pays your student loans. In turn, you agree to be a loyal employee and remain with the company for a given time period, say at least 2 to 3 years.
Tip: The next time you’re up for a raise or performance appraisal, raise this subject with your boss. Follow this advice, and you may not have to pay your student loans at all – your employer will!
Fact #5: The federal government will pay up to $60,000 of your college debt
The government’s Federal Student Loan Repayment Program can be a huge windfall to anyone with federal student loans. Administered by the Office of Personnel Management, this program allows any federal agency that you work for to pay off up to $10,000 annually of your student loans, up to a maximum of $60,000. For more info, call the OPM at 202-606-1800 or visit www.opm.gov.
Fact #6: Practically anyone with an economic hardship can qualify for a loan deferment or forbearance
Most people think only students who are enrolled in school can get deferments. Nothing could be further than the truth. Sallie Mae, the nation’s biggest student lender, offers deferments for nearly 20 different scenarios. You can have your loans payment postponements for the unemployed, for new mothers re-entering the workforce, for volunteers at non-profit agencies, for military enlistees, etc. Even having excessive credit card debt or unusually high personal expenses can get your monthly student loan payment drastically lowered.
Tip: To claim an economic hardship and ask for greatly reduced student loan repayments, fill out a simple 2-page form called a Statement of Financial Status. Find it online at the Department of Education: www.ed.gov/offices/OSFAP/DCS/forms/fs.pic.pdf.
Fact# 7: Certain work or volunteer activities qualify you for loan forgiveness or cancellation
A host of working professionals can have their loans forgiven or outright cancelled. These include police officers, lawyers, teachers, nurses, doctors and many in the healthcare field. People who volunteer at organizations like Vista or the Peace Corps or who help impoverished people and those in under-served communities can also have their student loans written off. These loan cancellation programs are available for the asking.
Tip: More than two dozen loan cancellation and loan forgiveness programs are detailed in Zero Debt for College Grads.
Fact# 8: Got a dispute with your lender? Get help from a national Ombudsman: www.ombudsman.ed.gov
This is the website for the Federal Student Aid Office of the Ombudsman. This agency’s role is to help you resolve difficulties you may have with you lender or loan servicing company. If you have complaints about your lender or disputes you haven’t been able to settle, the Ombudsman will listen to your grievances, and if they’re justified, contact the lender on your behalf. To reach the Ombudsman’s office, call: 877-557-2575.
Most people pursue a college degree to enhance their career prospects, create a better quality of life for themselves and their family, or simply for the love of learning something new. Any of these are valid reasons for achieving a college education. But in your desire to pursue a higher education, make sure you know the facts about financing that degree – especially if college loans are involved.
Lynnette Khalfani-Cox, The Money Coach, is a personal finance expert, television and radio personality, and the author of numerous books, including the New York Times bestseller Zero Debt: The Ultimate Guide to Financial Freedom. Lynnette once had $100,000 in credit card debt, before paying it all off in three years and turning her financial life around. Since then, she has appeared on such national TV programs as The Oprah Winfrey Show, Dr. Phil, The Tyra Banks Show and Good Morning America sharing her success story and teaching millions about proper money management. Lynnette, a former Wall Street Journal reporter for CNBC, has also been featured in top newspapers including the Washington Post, USA Today, and the New York Times, as well as magazines ranging from Essence and Redbook to Black Enterprise and Smart Money. Lynnette is currently developing her own primetime TV series, called “For Love or Money,” which focuses on relationships and money – especially the financial issues facing couples. For more information about Lynnette, or to sign up for her free personal finance newsletter, visit her website at:
http://www.TheMoneyCoach.net.
