Tips on Borrowing a College Loan
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Need to borrow a loan to pay for college? Follow these tips to learn loan terminology, how to select the best loan, and what you should do to borrow wisely.
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Tips on Borrowing a College Loan
- 1. TIPS ON BORROWING A COLLEGE LOAN MASSACHUSETTS EDUCATIONAL FINANCING AUTHORITY
- 3. Application and Solicitation Disclosures •Found on lender websites and loan comparison tools •Explain a loan’s general cost •Provide info on: –Interest rates –Fees –Total loan cost
- 4. Annual Percentage Rate (APR) •Reflects the total cost of the loan, including fees, repayment term, etc. •Quick way to compare loans
- 5. Co-Borrower(s) •Signs the loan agreement with the student borrower •Has equal responsibility for repayment •Adding one may increase chances for approval •Those with good credit may help decrease the interest rate •Some loans have co-borrower release options
- 6. Repayment Term •Specifies the length of time to repay the loan •Has a direct impact on the total cost •Often different options are offered
- 7. Tiered Pricing •Used by some lenders •Interest rate based on credit score and credit criteria •Pricing based on credit risk to the lender •Advertised interest rate may not be the rate you receive!
- 8. Interest Rate •Understand fixed vs. variable – Fixed interest rate: monthly payment will remain the same – Variable interest rate: monthly payment will adjust with the market •Find out: Is there a cap on variable interest rates? •Are the lender’s interest rates listed right up front? •The interest rate may be tied to your chosen repayment option
- 9. Your Next Step Be a wise borrower
- 10. 1. Borrow Federal Student Loans First •Submit the FAFSA to receive federal student loans •Student is the borrower and there’s no credit check •Annual limits: $5,500 for freshman year •The fixed interest rate changes annually: 5.05% for 2018-19 •Two types: –Subsidized: Interest accrues after graduation –Unsubsidized: Interest accrues immediately •A 1.066% fee is deducted from the loan amount •Loans require two actions by the student: • Sign the Master Promissory Note • Complete Entrance Counseling •No payments are due while the student is in school •Federal loans have several repayment options
- 11. 2. Minimize Borrowing: Utilize Savings & Present Income Balance Due $20,000 Past Income (Savings) Student Savings -$1,000 Parent Savings -$4,000 Present Income (Current Wages) Parent Contribution to Payment Plan -$3,000 Future Income (Education Loans) Education Loan -$12,000 $0
- 12. • Access the Loan Payment Calculator on mefa.org to learn your loan cost • Print your plan and call MEFA at (800) 449-MEFA (6332) to discuss 3. Assess Loan Affordability
- 13. 4. Get Advice from Trusted Resources •Ask questions of lenders •Look for transparency •Utilize free resources •Work with the college financial aid and student accounting offices •Talk to MEFA
- 14. 5. Timing: Paying Your Bill •Bills for the fall semester sent in June/July, due in July/August – Includes direct costs only (tuition, fees, dorm, meal plans & other direct costs) – May include health insurance charge, which you can waive if already covered – Enrollment deposit, outside scholarships, and financial aid will be deducted – If you set up a payment plan and/or loans you may see these credited amounts •Work-study is not deducted from the bill •Apply for a MEFA Loan or other loan before the billing due date •Set up payment plans according to the school’s schedule
- 15. Contact us: MEFA info@mefa.org (800) 449-MEFA (6332) mefa.org/loans MEFA is your trusted advisor, helping to make your family’s college goals a reality Questions?
Editor's Notes
- Introduce yourself and share your financial aid background Let families know you’ll be speaking on college financial aid Explain to families the benefit of attending this seminar (learning the necessary facts of the financial aid process and free resources to help them throughout the process) Provide the timeframe: presentation will be approximately 1 hour followed by a Q&A Let families know if you’ll be taking questions throughout or just at the end Let families know that this is a presentation timely for seniors in high school and their families, but juniors and sophomores can benefit from learning what’s ahead Remind families to complete the evaluation following the presentation Tell families that the slides to this presentation can be found online on mefa.org/Events Point out the handout that families should have received when they arrived, which is filled with helpful information on financial aid
- We want to discuss student loans with you. Federal options should ALWAYS be considered first. Go over details and limits for students College will instruct students on how to apply Student will need to complete entrance counseling and sign a promissory note Many repayment options for borrowers, including one that can be tailored to the student’s income. Forgiveness provisions for certain professions. See www.studentloans.gov for details. IF YOU HAVE NOT APPLIED FOR AID, it is still possible to go through the process and have your child take advantage of low-cost federal loans. File the FAFSA. Interest rates listed are for 2013-14 academic year loans. Rates are set annually to the 10 Year Treasury Note + 2.05% and will not exceed 8.25%. 2014-15 rates will be announced the first week of May What is reasonable student loan debt? College seniors who graduated in 2011 carried an average of $27,200 in student loan debt (finaid.org) $27,000 maximum 4-year eligibility = standard repayment of approximately $300/month for 10 years based on current 2013-14 rate. Freshman- $5,500; Sophomore- $6,500; Junior & Senior- $7,500; Mention additional Unsub. for PLUS denials as well. Federal Direct Loans Fees are deducted from loan amount: Fees for Direct Loans: 1.072% for Student DL and 4.288% for PLUS Two types: Subsidized & Unsubsidized – have the same interest rate *MEFA recommends that students exhaust their federal student loan options first. Can also mention possibility of NIL and Perkins and PLUS on award letters.
- Families decide the best plan to meet the balance due at the college based on their own personal finances. The options fall under three major categories: past, present and future income. Families don’t need to choose just one option (past, present or future income) to pay the balance due, and combination plans can save money in the long run. Encourage families to visits mefa.org/seniors to access a Monthly Payment Calculator, which allows families to build a monthly payment plan into their strategy in combination with a loan when considering which option is most affordable for their family Past Income: savings or other investment such as college saving plans Present Income: Explain payment plan, i.e., owe $1,000? pay $100 per month for 10 months. Better than ANY loan Future Income: borrowing loans. This will be in addition to student loans that are offered in the financial aid award. If families are considering financing any portion of the student’s education, they should take advantage of federal student loans first Families need to be thinking about a long-term plan when deciding what options to use. This includes the total number of years the student plans to be enrolled as well as multiple children who plan to attend college Colleges who use institutional methodology often expect the student to contribute from savings and/or summer work. Students are able to contribute to the payment plan along with the parents. For families who are not receiving aid, you can still use these same steps. You will not be able to subtract aid, but if you have outside scholarships be sure to subtract them from direct costs. NOTE that many private schools who use the PROFILE require a minimum contribution from student summer work of roughly $1800.
- Use Hyperlink in graphic to demonstrate live MEFA’s Monthly Payment Plan calculator to see how to combine a payment plan with a MEFA loan as well as calculate MEFA Loan payments. You can customize your plan to fit into your monthly budget. Families can also choose between a mix of payment plans and loans to minimize borrowing and maximize cash flow. FOUR WAYS TO PAY A $20,000 BALANCE DUE Most people will consider a monthly payment plan, loan, or combination of the two to cover the balance due, here are 3 examples: 1) Sign up for an interest-free monthly payment plan, divide payments over 10 months for nominal fee (around $65-80). This would be $2,000 per month for 10 months = $0,000 (pay no interest, use no savings – best way to finance if you can afford it). 2) Borrow the full $20,000. For example, a MEFA Undergraduate Loan with Immediate Repayment 5.99% while in school, with a 4% origination fee, would be a little more than $200/mth., about $234/month for 10 years (lower monthly payment but you pay more in the long run). 3) Customized combination plan: let’s say you can afford more than $250 per month (loan option) but not the full $2,000 per month (payment plan) you can use a combination plan based on your budget. If you determine that $700 is a reasonable monthly payment, you could do a combination plan to keep debt levels low: $570 per month in a monthly payment plant ($5,700 total) Approx. $130 per month in a MEFA Undergraduate Loan with Immediate Repayment ($14,300 at fixed rate of 6.29% while in school and 7.29% out of school and 4% disbursement fee) 4) No disposable income? Consider deferred loans
- Point out the timeline in the folder and point out: Bill arrival for both semesters Bill deadline for both semesters When to reapply for financial aid *Remind families to waive the health insurance if covered under a parent’s plan Work-study recipients should expect information from the college regarding employment late summer or at the start of the term Electronic bills – students have to give parents access – most schools are now using e-billing Loans – borrow the amount for the full year – money is sent to the school – describe the loan process Some families do use other resources to pay the bill, such as a home equity loan, a credit card or retirement. Families should be aware of all tax implications, fees and financial disadvantages to using these or any other resources.