Graduate Financial Aid

If you haven’t heard, one of President Obama’s proposed changes for the Stafford loan program is to eliminate the FFEL program, which stands for the Federal Family Education Loan Program. This basically consists of private lenders who lend out Federal loans. Currently there are 2 types of programs that lend Federal loans, FFELP and Direct loans. Direct Loans are loans lent directly from the government. The President has proposed to eliminate the FFEL program and run all Stafford loans out of the Direct program. About $76 billion in loans has been lent out for this current school year, of which only $26 billion was lent by Direct Loans. Here is a recent article posted by the Wall Street Journal that details how politics are already playing a role in this fight between companies from the FFELP and the Direct Loan Program:

Private lenders Brace for Fight Over Student Loan Role
By ROBERT TOMSHO

With the Obama administration proposing to cut private lenders out of the federal student-loan business, financial companies are intensifying efforts preserve their role.

Private lenders in the so-called Federal Family Education Loan Program, or FFELP, have lent more than $56 billion in the current school year. The federal government has lent about $20 billion directly. In his budget, President Obama says the government, which pays billions of dollars of subsidies to FFELP lenders, would save money by eliminating the program using private companies.

The latest skirmish in the contentious political battle erupted Thursday when the U.S. Department of Education released preliminary data comparing FFELP loan-default rates with those in the federal direct loan program.

The data indicated a 5.3% default rate in the direct lending program for the fiscal year ended Sept. 30, 2007, compared with a 7.3% default rate for FFELP, which has been the primary source of college financial aid since it was launched in the Johnson administration during the 1960s.

Industry analysts attributed the difference to the mix of schools in the two programs, with the FFELP program lending more to students from for-profit schools. They tend to have higher default rates than other student borrowers.

Private lenders and their trade groups were caught off guard by the data’s release and portrayed it as a strategic maneuver designed to advance President Obama’s plan to eliminate FFELP.

Brett Lief, president of the National Council of Higher Education Loan Programs, a trade group representing FFELP lenders and loan guarantee agencies, said he could not recall the department ever releasing preliminary default rates or separate numbers for the two programs.

“We have never seen the rates broken down,” Mr. Lief said. “It’s unfortunate that the rates are being released before there is an analysis of them,” he added. “This is very serious stuff and I’m saddened that it has come out like this.”

Some outside observers agreed that politics played a roll. Default rates “become a critical issue as folks are talking about a new model for student lending,” said Tim Ranzetta, president of Student Lending Analytics, a research concern based in Palo Alto, Calif. “I’m sure that’s probably why the department put these numbers out.”

Department of Education officials said they released the loan-default data in response to a U.S. Freedom of Information Act request from The Wall Street Journal as well as inquiries from members of Congress.

In response to the release, SLM Corp., the mammoth student lender better known as Sallie Mae, issued a study of its own Thursday. It indicates that borrowers who took out FFELP loans through Sallie Mae were 30% less likely to default on them than borrowers who used the federal direct loan program. Sallie Mae attributed the difference to default prevention programs it uses in conjunction with state loan-guarantee agencies.

Robert Shireman, a senior advisor to Secretary of Education Arne Duncan, said he had not read the Sallie Mae study and could not comment on whether it is accurate.

On Thursday, the Consumer Banking Association, a trade group that represents many FFELP lenders, sent members of Congress a petition signed by 2,500 college financial aid administrators, parents, students and others. The petition urges Congress to reject the president’s proposal to eliminate FFELP.

The president himself is being lobbied by elected officials such as James B. Lewis, New Mexico’s state treasurer. In a letter Thursday to the president, Mr. Lewis, a Democrat, praised the personal service and debt counseling offered by FFELP providers in his state and said the program’s end “would be detrimental to the success of our college-bound students and to the health of the economy, with our state experiencing the loss of over 170 jobs.”

Industry observers say the debate over FFELP’s future is likely to be long and complex. The Congressional Budget Office recently estimated that ending the program will save the government nearly $100 billion over the next decade. President Obama — whose own estimate of the savings is about half that — has said he will use the savings to increase funding for federal Pell grants for low-income students.

The potential boost for Pell will make it difficult for members of Congress on both sides of the aisle to oppose the elimination of FFELP, said Terry Hartle, a senior vice president of the American Council of Education, a trade group representing colleges.

He added, however, that many of the state guarantee agencies that help service FFELP loans have strong political support in their home states and noted that, in a recent letter to colleges, Sallie Mae suggested that additional money for Pell might be found within the federal loan system while still maintaining elements of FFELP.

“It’s certainly possible Congress would eliminate the program,” Mr. Hartle said. “But it’s equally possible – and perhaps more so – to wring more savings out of the program and put the savings into Pell.”

So what do you guys think? An important note to make is that even though the Stafford loan has two different programs right now, the loan terms do not vary. Your interest rate with Direct loans is the same as your interest rate for a Stafford loan from a private lender. So sound off on this guys/girls…it is sure to be in the news more and more as this fight wages on.

Continuing with my game theme this week, I thought a little Fact or Fiction might be fun. Test your knowledge. See how much you know about the Grad world!

1. Grad Plus Loans take into account your credit history and not your credit score.

Answer: Fact, your FICO score is not a factor.

2. You need to take a qualifying test to get into Grad School.

Answer: Fact, and your program of study dictates which test you take. Check out my Knowing Your College Test (1 of 2) and Knowing Your College Test (2 of 2).

3. Although taking an exam to get into Grad school is required, it is not critical to your chances of getting into a Grad program

Answer: Fiction, tests such as the GMAT are critical to getting into a top flight business school. Your score must be in the 600’s as a bare minimum to even be considered.

4. Earning an M.B.A. does not equal a higher median salary over those with a BA.

Answer: Fiction, only a Doctoral or Professional degree holder have higher median earnings. My blog, Why You Should Invest In Education provides salary details.

5. The Graduate Stafford loan has a lower interest rate than the Grad Plus loan.

Answer: Fact, the Grad Stafford loan is at 6.8% while the Grad Plus is at 8.5%.

Lets play the Graduate student loan game!

Lets us assume you need to take out a loan for graduate school, which one of the following loan types would be best? Graduate Stafford, Graduate Plus, or Private Graduate Loan.

Answer, all of the above! It really depends on your criteria. Is your number one priority the interest rate? Is your primary concern the amount of money you can borrow? Are you looking for a loan that does not require stellar credit? Depending on how you answered those questions depends on which loan would be best for you.

The Graduate Stafford loan is a need-based loan which is tied to your FAFSA and holds a 6.8% fixed interest rate. The downside for many is that you are capped at borrowing just 20,500 per year.

The Graduate Plus loan has an 8.5% fixed interest rate, but allows you to borrower up to the cost of tuition less any financial aid you are receiving. This is generally viewed as a secondary option to the Graduate Stafford loan due in large part to the higher interest rate. The Grad Plus reviews your credit history for eligibility, and does not look at your FICO score. The eligibility criteria is one of the best selling points of the Grad Plus loan.

Private Graduate loans offer up the lowest interest rates in the market today for those with excellent credit. Of course the number of students and parents with excellent credit these days is very low. However, if you are in that exclusive club you may benefit. Many have secured loans in the 4% range.

In these uncertain times, with the unemployment rate rising steadily it is normal for people to head back to school to finish what they may have already started…or to just fulfill a goal that they never had time to accomplish. If you have always thought about going to graduate school, but you are on the fence about attending, I have compiled some basic information about graduate school that may help you choose one way or another.

The most influential argument is people who have their MBA make more money than people who have their Bachelors degree. Plain and simple…right? Well not necessarily, but in most cases you will make more money in the long run if you have your MBA than if you just have a Bachelors degree. A graduate degree can also advance and broaden the scope of your career and the opportunities that are available to you. A graduate degree gives you higher potential for future promotion. While obtaining a grad degree does not necessarily always lead to a high-paying job right away, it can open up opportunities for future promotions. In some cases a grad school might not only waive your tuition but will give you a stipend for living expenses, in return for taking on the work of a teaching assistant or research assistant. Your current employer may also pay your tuition or a portion of it, which could help out significant with student loan debt acquired during graduate school. There are also some graduate degrees that can be completed online, which makes it a lot easier to accomplish if you work full time.

While going to graduate school can improve your future career and enrich your life, there are also some drawbacks. Graduate school is expensive, and while in some cases you can get free tuition based on your field, most of the time graduate students have to pay for tuition with Federal student loans and private student loans. This can have a crippling effect on your finances when you graduate and don not find a job right away. Another drawback is that graduate school is a huge commitment. It can place strain on relationships in your life, and cause you added stress. There is also no guarantee that you will find a higher salary right away, and your return rate for what you put into the education might be slower than you anticipated.

My recommendations would be, if you are on the fence about graduate school, ask your self a few very important questions:

1. Am I 100% certain that this is the career for me?

2. Am I certain that I want to invest x amount of money for x amount of years without the guarantee that I will be able to find a job, and make more money than I was making before?

3. Will I be able to handle the emotional and financial strains that come with being a graduate student?

Don’t go back to school just because you got laid off and you don’t know what you want to do with your life. This is a full time commitment, and you should be sure about the field and the commitment before you even consider it.

Graduate students know better than anyone how hard it is to pay graduate tuition costs and afford general living expenses simultaneously. Often times a graduate student obtaining their MBA, or PHD have to rely on the Graduate Stafford loan, the Graduate Plus loan, and then borrow additional money utilizing private student loans for their living expenses. Private student loans have always mirrored federal loans in the sense that you don’t have to make principal or interest payments while you are in school. Recently Sallie Mae introduced a new loan product that will replace their “signature private loan”. The new loan has a few major differences from the typical private student loan we have all grown accustomed to. First, the loan will require interest payments while the student is in school. This does not mean $20 here and $20 there…on a 20,000 private loan with a rate of 8% and a ten year loan term, your monthly interest will be about $133. That can be a huge burden for a graduate student who is already having problems scraping by on tight monthly budget.

The upside of this new type of loan is that if you can afford those monthly interest payments, you will graduate with a manageable amount of debt. The problem a lot of students have now with private school loans is the unpaid interest is capitalized and added to their loan balance…so when they graduate they have a considerably larger debt than when they borrowed the loan. The amount they initially borrowed is now much larger and often times can have monthly payments that are out of reach for someone just entering with workforce.

This new type of student loan that Sallie Mae is rolling out will not appeal to everyone, but it does ultimately help the student in the long term when you compare it to the way existing private loans are now. It will also undoubtedly lower Sallie Mae’s default rate, which is currently hovering around 4.5%. (Default rate is the percentage of their student loans that are over 180 days delinquent). But let’s keep in mind that private loans in existence today ALL have the option for you to pay the interest while you are in school. The difference is that none of them make it mandatory for the interest to be paid while in school. Many students realize it does make sense financially to pay it while you are in school but as we all know, it isn’t always that easy to follow through with that. It will be interesting to see if other student loan lenders follow suit with this type of loan product.

Thoughts? Comments? Currently have the signature loan? Please share your experiences with Sallie Mae, and any other private student loan lender you have dealt with in the past.

Code: interest$$$

Students obtaining their Bachelor’s degree will see rate cuts each year through 2013 on their Subsidized Stafford loans. Graduate students will see no such cuts. The current rates for Graduate Stafford loans, unsubsidized and subsidized is 6.8% fixed. Graduate students can borrow up to $22,500 a year in the Stafford loan; $12,500 of that is unsubsidized. Unsubsidized loans accrue interest from the time they are disbursed to the school.

Let’s say you borrow the full $12,500 in the unsubsidized loan for your first year of Grad school. You also borrow the full $10,500 in subsidized Stafford loans. You are not working, and therefore cannot afford to pay the interest that accrues monthly on the unsubsidized loans. You decide to pay it all when you are finished. With a 6.8% rate, your loan will accrue an average of $70 per month in interest. Your lender will capitalize that interest every 3 months if you do not pay it first. This means that every 3 months you are adding $210 to your loan balance, and then you are paying interest on that new balance. Paying interest on interest…..FUN! The end result is your loan balance when you graduate will be significantly larger than when you first borrowed it, which means you will have to pay more and over a longer period of time. Graduating with subsidized loans at a lower rate would help significantly with the affordability of your monthly payments.

To me, it seems like if graduate students are not going to get a break on the unsubsidized loans (undergraduate students don’t get any relief here either), then WHY can’t they lower the rates for the Subsidized portion, so that when you graduate with your MBA you aren’t financially crippled by your student loan payment. It just seems so hypocritical that there is all this talk in Washington about how we need more students to go to college, get degrees, further their education, yet we don’t give an equal break to all students. Graduate students need the help just as much as undergraduate students do. Why the discrimination? The Subsidized loan for undergraduate students is dropping to 5.60% in the 2009-2010 school year. After that it drops to 4.50% in 2011 and 3.40% in 2012. The Subsidized loan for graduate students will remain at 6.80% indefinitely.

People are graduating $50,000 in debt with their MBA and still can’t find a job. I guess the only good news is…all federal loans come with an unemployment deferment option. I have a sneaking suspicion there will be an influx in those applications in our near future.

If you’re like the millions of American’s who have sub-par credit these days the Grad Plus loan is just what the doctor ordered.

Unlike eligibility for a private student loan, which typically depends on your debt-to-income ratio and FICO score, the PLUS Loan does not consider these factors. You can get a PLUS loan even if you have bad credit. It doesn’t matter if you have a 450, 550, or 750 credit score so long as you don’t have any adverse credit history (i.e., no more than 90 days late on any debt and no defaults, bankruptcies or other adverse action on any Title IV debt).

The Grad Plus loan also offers a fixed interest rate with nominal fees, while most private loans hold variable interest rates with high application fees. You can also consolidate your Grad Plus loan with any other federal loans, such as the Perkins and Stafford.

Students applying for a Grad Plus loan must first complete a FAFSA.

In the second of my two part blog series Knowing Your College Test we shall tackle pharmacy school, optometry, nursing, and English as a second language.

Pharmacy College Admission Test (PCAT): it is a specialized test that helps identify qualified applicants to pharmacy colleges. It measures general academic ability and scientific knowledge necessary for the commencement of pharmaceutical education. The PCAT is constructed specifically for colleges of pharmacy. Exam cost: $125 online or $160 by mail.

Optometry Admissions Testing (OAT): a standardized examination designed to measure general academic ability and comprehension of scientific information. The OAT is sponsored by the Association of Schools and Colleges of Optometry (ASCO) for applicants seeking admission to an optometry program. All schools and colleges of optometry in the United States, and the University of Waterloo, Canada require the OAT. Exam cost: $189.

Test of Essential Academic Skills (TEAS): Nursing schools and other post-secondary education programs use TEAS® test scores as a standardized measuring stick to determine who gets admitted and who benefits from the best scholarships they have to offer. While it may not be fair, a student’s entire academic career will get completely overshadowed by a single TEAS® test score. Exam cost: $45.

National Council Licenser Examination (NCLEX): this exam is designed to see your knowledge and critical thinking skills as a potential nurse. Your critical care nursing judgment is put to the test. The examination is purposefully difficult so only qualified applicants will pass. Health promotion and a safe care environment are examples of the types of topics covered in the NCLEX. There are multiple choice questions and alternative type items on the nursing exam. Exam cost: $200.

Test Of English as a Foreign Language (TOEFL): evaluates the potential success of an individual to use and understand standard American English at a college level. It is required for non-native applicants at many US and other English-speaking colleges and universities. The TOEFL is the product of the Educational Testing Service (ETS), which is contracted by the private, non-profit firm, the College Board to administer the test in institutions in the US; they also produce the SAT. Exam cost: $185.

Did you pass the test about tests? Were you aware of all the different types out there? Chances are you will only take one or two of these exams at most as they are in specialized fields or have a specialized focus.

Also, keep in mind, it is wise to take a prep course for these exams, as they are designed to be challenging. True, you can take the test multiple times should you fail, but the added cost of taking the exam again can add up quickly. Spend the money upfront by investing in a prep class would be my suggestion; it may save you valuable time and money later.

For more information on grad loans (click here).

For more information on private student loans (click here).

With so many programs and admissions tests out there it can be difficult to keep them all straight.

What test do I need to take if I want to get my MBA in business administration? Is there a certain test needed to get into a pharmacy college? What if I want to be a nurse?

In the first of my two part blog series entitled, Knowing Your College Test I will discuss the general management, dental, medical, law, and psychology admissions tests you need to be aware of.

Graduate Management Admission Test (GMAT): a 3-1/2 hour standardized exam designed to predict how test-takers will perform academically in MBA (Masters in Business Administration) programs. GMAT scores are used by graduate business schools to make admission decisions. You might also see the GMAT referred to as the “GMAT CAT”; the acronym CAT stands for “Computer Adaptive Test.” The GMAT is administered only by computer now, except in certain locations outside North America, where the test is referred to as the “paper-based.” Exam cost: $250

Law School Admissions Test (LSAT): half-day, standardized test administered four times each year at designated testing centers throughout the world. Most law schools throughout the US and Canada use the LSAT results as part of their admission process. All ABA-approved law schools, most Canadian law schools, and many non-ABA-approved law schools require applicants to take the LSAT. Exam cost: $123.

Medical College Admission Test (MCAT): The Medical College Admission Test is required by all medical schools. The evaluation of grades alone is not helpful in selecting students. Thus, the MCAT is designed to help the admissions committee determine who is best suited for medical school. The American Association of Medical Colleges administers the test once in April and once in August. A whole day is spent at the testing center with an average of 9 ½ hours. Exam cost: $225

Graduate Records Examination (GRE): consists of two separate tests: the General Test and the Subject Test in psychology. The General Test is composed of three parts–verbal, quantitative, and analytical writing. It is similar to the well-known SAT test except that the GRE is used for acceptance to graduate instead of undergraduate schools. The GRE is a computerized test that can be taken at authorized testing centers at virtually any time during the year. Exam cost: $140.

Dental Admission Test (DAT): is a multiple-choice standardized exam taken by potential dental school students in the U.S. and Canada (although there is a separate Canadian version with differing sections). Both American and Canadian versions are usually interchangeably accepted in both countries dental schools. The DAT is a computer based test that can be administered almost any day of the year. Each applicant may only take the test a total of three times before having to ask special permission to take the exam again. After taking the exam you must wait 90 days before repeating it. Exam cost $205.

For more information on grad loans (click here).

For more information on private student loans (click here).

A recent article in the Hatchet, a student newspaper at GW University touches on the substantial amount of debt a graduate student finishes school with, and how it is sometimes impossible to get ahead in life with this kind of debt. The amount of debt a graduate student has can sometimes be much larger than their current income can support:

Panel Tackles Graduate Student Debt
by Steve Stoddard

Dannenberg argued that the uninformed and irrational decision-making is being exploited by what he dubbed “an unholy trinity of states, colleges, and loan companies,” which has no incentives to lower tuition rates.