July, 2008: It’s been a nervous time for students about to start their first year in college this fall, whether they’re attending a “brick and mortar” school or getting their degrees online. That’s because the credit crunch, which has caused havoc in the mortgage, credit card and auto loan markets, has definitely reared its ugly head in the market for college education loans.
In spite of government programs that make is relatively easy for banks and credit card companies to give Stafford Loans and other so-called FFELP (federal family education lending program) loans to college and university students, the press has lately been filled with stories of lenders who are so spooked by general economic conditions that they have stopped lending for education. Some educational lenders have simply gone out of business entirely.
Good News For Online Students
But while Congress has been hesitant to save home buyers in distress, it’s now stepped up to the plate in a big way to keep loan money flowing to college and university students. Some key measures have also been taken to help the parents of those students.
One important step is a set of proposed rules that would prevent lenders from helping only students at high-prestige colleges and universities. If these rules become law, they’ll go a long way in preventing online degree students from being discriminated against in any way by lenders.
What New Rules Mean To You
But a very concrete set of rules that lower the cost and availability of loans to students has already gone into effect as of this July 1st. Here’s how the new rules can help you fund your online degree program more easily.
It may seem as though the options for student loans are extremely complex. But you can make things a bit simpler by understanding that you need to start by making two decisions. First: do you want to borrow in your own name or in the name of your parents or other relatives? Second: do you want to borrow through the government or from a private lender?
Go With Uncle Sam
If possible, it’s almost always more cost-effective to borrow through the government. I emphasize “through” and not “from,” because the government doesn’t actually lend money directly to anyone for education. It simply guarantees the Stafford Loans made by private lenders, taking away all the lenders’ risk by saying that if any student can’t repay a loan, Uncle Sam will come in and cover the payment.
But with credit markets as bad as they are, even that hasn’t been enough to keep lenders giving money to students. Here’s how Congress has now upped the ante to keep the college loans flowing:
Freshman can now borrow up to $5,500 per year, sophomores can borrow up to $6,500 and juniors and seniors can get education loans as high as $7,500 per year. That’s a considerable increase from just last year.
Interest rates on Stafford loans have also come down. You can now get a subsidized Stafford Loan, which requires proof of financial need, at a rate of just 6%. The unsubsidized version, which is offered to everyone no matter what their family income is, carries an interest rate of 6.8% – still very low by any standard. On the subsidized version, the government will pay your interest for as long as you stay in school. If your have an unsubsidized Stafford, you need to start paying the interest from the day you start your classes or your online degree program.
Keep in mind that you have to fill out the online FAFSA form to qualify for any Stafford Loan. The form is a gigantic pain in the neck, but with loan rates like these it can save you a ton of money.
The new rules offer students two other sweeteners. Virtually every student that fills out the FAFSA will now qualify for at least some type of loan, even if they do so at the last minute before starting college. And students who take public service jobs after they graduate may have some of their school loans forgiven.
Private College/PLUS Loans
PLUS loans, which are often used to cover the difference between what the student gets in a Stafford Loan and the total cost of school, are more popular with younger, on-campus students than with online learners. But if your family wants to help you get your online degree, they may still be worth a look.
PLUS loans are now easier to get, even for families with poor credit ratings (the credit check you must go through for a PLUS loan isn’t very tough). But PLUS loans are expensive – as high as 11 per cent in some cases. (Keep in mind that if you’re refused a PLUS loan because of bad credit, you’ll immediately qualify to borrow an additional $7,000. per year through your Stafford Loan.)
Unlike the Stafford Loan program, the government does actually make some PLUS loans to students directly. If your school works with the government’s direct lending system, you can get a loan at a current rate of less than 8%. You’ll pay about 8.5% if your school is working through third party lenders. Repayment terms have also been eased somewhat under the new rules. Your parents now don’t have to start paying back a PLUS loan until after you graduate.
Going Totally Private
At rates like that, you may do better by simply shopping around on the private loan market, or having your family borrow against their home equity. Just be aware that on most home equity loans and many other types of private loans – your loan rate will go up as the Federal Bank raises interest rates – which seems like a virtually sure thing over the next few years.