How families borrow for college is changing for the better in 2010.
Parents and students will now have increased access to information that will help them identify affordable college loans and avoid unsavory marketing tactics that lure borrowers into risky loans, due to new federal legislation.
As you shop around for college loans, look at federal student loan options first, especially the Federal Stafford Loan for students. However, for many families, federal student loans may not be enough to cover the entire college bill.
This year, borrowers will be better equipped to select the best loan option for their situation, thanks to the recent implementation of a new a federal law.
Borrow federal loans directly from colleges
All federal education loans will now come directly from the U.S. Department of Education, instead of from third-party private lenders. Under the new legislation coupled with the recent health care bill, parents and students may apply for the federal Perkins, Stafford and PLUS loans directly through their college financial aid offices.
The fixed interest rate Federal Stafford Loan for students is one of the lowest cost loans available. To borrow a Stafford loan, a student and his or her parent must file the Free Application for Federal Student Aid, or the FAFSA. Stafford loans are often included in the financial aid award package, and the maximum amount students may borrow increases as they progress through the academic program.
Access transparent loan information
The 2009 Truth In Lending Act requires private lenders to provide clear, complete information on loan terms and conditions before a borrower applies. Private lenders include any non-federal entity offering college loans, including banks and credit unions, but also state programs like the Massachusetts Educational Financing Authority (MEFA). Private loans are available to supplement federal loans, and the interest rates and terms vary.
Advertised interest rates and fees may only be available to borrowers with the best credit scores. Those with less-than-perfect credit records may receive higher interest rates.
The new Application and Solicitation Disclosure forms now require lenders to provide upfront disclosures to borrowers explaining the full potential range of interest rates and fees, not just the lowest advertised terms. The new disclosures will make it easier for consumers to compare interest rates, terms and conditions among lenders.
The disclosures will provide important information that every borrower should consider before taking out a loan:
Whether the loan has a fixed or variable interest rate.
The loan’s interest rate, and if variable, the range of the starting interest rate when the loan is first borrowed.
Whether there is a ceiling on how high a variable interest rate may climb during the life of the loan. Most lenders do not have a cap on the interest rate.
An example of the true cost of a loan that demonstrates how much the borrower will repay over the life of the loan.
The interest rates on the fixed interest rate federal loans and a reminder to borrowers that they may quality for federal education loans as an alternative to a private loan.
Another important change in the law is the "cooling off" period that gives borrowers 30 days to consider a loan offer from a private lender, during which time the lender is prohibited from changing the terms of the offer. A borrower also has three days to reconsider the loan after signing the promissory note.
Take advantage of state resources
Not only is Massachusetts home to excellent public and private colleges and universities, the state also offers a number of resources to help families pay for college. The Office of Student Financial Assistance provides scholarships and other financial aid, including the MassGrant and Adams Scholarship.
Any Massachusetts student who files the FAFSA is automatically eligible for consideration for Massachusetts financial aid programs. Visit www.osfa.mass.edu to learn more.
MEFA has helped families plan, save and pay for college for nearly 30 years. This month, it is hosting more than 20 After the Acceptance seminars for high school seniors and their parents about paying the college bill. Seminars are free and cover how to understand the financial aid you’ve been offered, how to pay the balance of your bill, and how to choose financing options for your situation.
MEFA also offers fixed interest rate college loans that benefit Massachusetts residents attending college here or out of state. You can find out about MEFA’s seminars and loan programs at www.mefa.org/ata.
Other considerations to keep costs down
Use a monthly payment plan: One of the best kept secrets in college financing is the monthly payment plan – a great tool to minimize college loan debt. Before borrowing a loan, ask your college financial aid office if they offer a monthly payment plan – most schools do.
Here’s how it works: The college or university will accept monthly payments throughout the academic year. Instead of writing a single check for, say, $5,000, you could make 10 monthly payments of $500. While monthly payment plans usually charge a small enrollment fee, most pay-as-you-go plans are interest-free.
Don’t defer payments: Choosing how you repay your loan can substantially impact your total cost of borrowing. If your finances allow it, choose an immediate repayment loan. You won’t build up interest on top of interest while the student is in school, and immediate repayment loans often come with a lower interest rate than deferred loans. Another middle-of-the-road option is the interest-only repayment option, where you pay the interest during the college years, and upon graduation repay principal and interest.
Avoid variable interest rates: Variable interest rate loans will likely increase as interest rates begin to rise in the economy. Before you borrow a variable interest rate loan, make sure you know the interest rate cap. A fixed interest rate loan will provide a stable monthly payment, regardless of changes in the credit markets.
Understand co-borrower responsibilities: A co-borrower is equally as responsible for a loan as the primary borrower, in most cases. Many traditional private education loans require a co-borrower. Make sure all borrowers on the loan understand how the loan will be repaid, and keep all addresses and contact information current.
As the state’s resource to help families afford a college education, MEFA is here to help. Call MEFA at 800-449-6332 or go online at www.mefa.org.