Student Loan Update - August 2008

Yesterday, while driving[i] down Interstate-70, I was listening to National Public Radio and heard a report on problems within the Massachusetts’s student loan program. The predictions were grim, the interviews were heart wrenching, and the somber tone created real concerns within me. Why wouldn’t it? The way I see the world, today’s college students are our light into the future. Besides, on a personal level, my paycheck depends on them. Regardless, I wanted to learn more and provide you with what I had learned.

The bottom line is to take this off your list of worries.

I spoke with the Director of Financial Aid at the University of Missouri, Joe Camille, to get his take on the local situation and his vision of the situation elsewhere. While he admitted that some states’ student loan programs are in difficulty, due to the reluctance of investors to purchase securitized debt, most states, including Missouri, are not in this situation. We briefly talked about student loans and our advice is simple. I encourage you to consider it, in light of your situation.

First, do you really need the student loan to go to school, or are there other sources of financing available to you like a part-time job, scholarships you could apply for, or participation in a work-study program? A student loan is debt. Loans of all types cost you money and have the potential to lower your level of living upon graduation and to reduce your ability to reach other goals.

Second and importantly, if you have questions about your financial aid, including the availability of student loans, first contact the financial aid office of your university. Always take advantage of the expertise of those that are hired to help you succeed.

Third, if you need a student loan to pay for your investment in yourself that you are making by going to school, chose it wisely. Spending a few minutes researching the various loan products can save thousands of dollars over the repayment of the loan. The following is adapted from a past Financial Tip of the Week…

FEES & INTEREST RATES.

· Most of the application and loan origination fees can be avoided, if you shop around.

· Interest rates vary dramatically (as much as 2.5%+) depending on the credit of the individual; fees charged, borrower benefits, and repayment terms.

LOAN ELIGIBILITY ISSUES.

· Do you need a cosigner and will a cosigner reduce the loan costs to you? Is there a cosigner release option.

· Do you need to be enrolled full-time in school to be eligible?

BORROWER TERMS.

· What is the interest rate?

· If the rate is variable, what is the formula they utilize?

· What is the interest rate cap? (As interest rates rise, most alternative loan rates will also raise because they are linked to the Prime Rate or LIBOR Rate.)

· Are there fees? What are they? When are they assessed (rolled into loan?)?

· What are the minimum/maximum borrower limits?

· What is the aggregate borrower limit?

· Will loan terms change if your debt-to-income ratio changes?

REPAYMENT TERMS.

· When does repayment begin? And what are your repayment options?

· Are payments required while you are in school?

· Is interest capitalized? If so, when?

· What will be your monthly payments?

· What will be the total costs of the loan (interest, principal, fees)?

BORROWER BENEFITS.

· Are there any discounts for on-time and/or automatic payments?

· Is consolidation available? What are the costs/benefits for doing so?

· Are there deferment/forbearance options during repayment if needed?

· What benefits does this company offer that makes their loan better for you than other lenders’ programs?

LOAN PROCESS.

· Can you apply online?

· Is the money disbursed (paid out) electronically?

· How long will it take for you to receive the money?

· Are there other elements that would simplify the process? Save you time/money?

Once you have your loan try to use the loan for the expenses that are required by you to attend school. Do not use it to upgrade your life style by buying frills that you may want but that you do not need. You know that loans need to be repaid – with interest – and they can greatly reduce your choices upon graduation and make it harder for you to reach your Financial Success.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211