The Growing Problem of Student Debt

Remember how I wrote on all the federal loan programs and college debt? Well that college debt keeps growing and it is getting a bit scary.

Key Points

  • Over the past year alone, the total balance of the direct loan program has grown from $687 billion (with a “B”) to $806 billion.
  • The total size of the student loan debt is now in excess of $1.13 trillion (with a “T”).
  • Since 2007, the federal direct student loan program has increased near seven fold.
  • This increase in leverage on students creates an interesting relationship between the federal government and indebted students.

Woe to the Students

ST The College Debt Bubble
Some readers may be able to relate. Image courtesy of CNNMoney.com

Based on the statistics above you may reach the same conclusion I have. The student debt situation in America is a rapidly growing concern that merits some attention. When considering the sour job market and the ever growing cost of attending college the above statistics really should come as little surprise.  Unlike the housing bubble where banks were the holders of the debt, the federal government now holds 80% of this debt. The future consequences of this system have yet to be seen.

An interesting consequence viewable now is that young adults are lessening consumption according to research by the New York Federal Reserve. Less than 25% of young adults aged 27-30 have any sort of home secured debt (eg. A mortgage).  This pattern is also evident in the auto market. This makes intuitive sense as this age group is already straddled with student debt and is unwilling to take on more debt.

Will universities continue to increase costs of attending? Will the federal government continue to grow the monstrous student debt? What alternatives are available to solve the ubiquitous issue of paying for college?  I wish I knew these answers. What can be said is that it will be interesting to see the relationship that emerges as more and more young Americans become indebted to the federal government.

Further Reading

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Student Loans and Paying for College (Part 2)

Student Debt with Ball and Chain
A commentary on today’s student loan situation. Image courtesy of Cognoscenti.

Let’s explore a bit more of the technical details relating to the different grants and loans out there. I won’t touch on scholarships because they vary so widely depending on the offering organization.  Just as a quick refresher grants are need-based gift aid, scholarships are merit-based gift aid, and student loans are loans that must be paid back. We will first discuss the types of federal grants then move on to the different types of federal loans.

Key Points

  • The most common federal grants offered are Federal Pell Grants, FSEOG, and TEACH grants.
  • The most common federal loans offered include Perkins loans, direct unsubsidized loans, direct subsidized loans, and direct PLUS loans.
  • Pay close attention to the Master Promissory Note (MPN), which is essentially the terms and agreements when accepting a federal loan.
  • Federal loans possess many qualities that make them superior to federal loans.

Federal Pell Grants

Federal Pell grants are federal grants granted to undergraduate students who have not earned a bachelor’s or a professional degree who exhibit a degree of financial need.  It also should be noted that you cannot receive a Federal Pell Grant if you are incarcerated or subject to an involuntary civil commitment so before you commit that crime realize it could affect your future education prospects.  The yearly distribution amount differs on a number of factors including the level of your financial need, the cost of attendance, and whether you are a full-time or part-time student. The maximum award for the July 2014-June 2015 academic year was $5,730. This number can be adjusted slightly each year, but do not expect it to jump $1,000 in one year.  You can receive the Pell Grant for 12 semester (or approximately six years). You will receive the full amount you qualify for from your attending college.  As I nagged last lesson and will nag this lesson, you must fill out the Free Application for Federal Student Aid (FASFA) in order to receive a Federal Pell Grant.

Federal Supplemental Educational Opportunity Grant (FSEOG)

The FSEOG is a federal grant granted to undergraduate students who exhibit exceptional financial need such that a Federal Pell Grant is insufficient.  A FSEOG is only available to those student who have received a Pell Grant and exhibit the most financial need.  The FSEOG is not offered at all colleges therefore contact your prospective college’s financial aid office to find out if your college offers the FSEOG. The amount of aid offered through the FSEOG ranges from $100-$4,000 depending on your financial need, the other financial aid you receive, and the availability of funds at your college.

TEACH Grant

The TEACH Grant program is a specific federal grant program that grants up to $4,000 per year to students who are completing coursework related to a career in teaching.  There are some stipulations to accepting this aid such as if you accept you must teach: in a high-need field, at an elementary or secondary school that serves low-income families, and teach at least four academic years of the eight years after you cease schooling. What happens if you do not fulfill these requirements?  The grant is transformed into a direct unsubsidized loan for your breach of contract.  In addition to completing the FASFA if you are interested in the TEACH Grant program, be sure to contact your college’s  financial aid office and ask if they participate in the program. The other stipulations are explained in the TEACH Grant Agreement to Serve which acts as the contract for the grant.

Federal Perkins Loan

The Federal Perkins Loan is a low-interest student loan offered to undergraduate and graduate students who exhibit exceptional financial need.  Once again not all colleges participate in this program so you should contact your college’s financial aid office to see if it participates in this program. The amount you are allowed to borrow depends primarily on your financial need, the amount of aid you have received, and the availability of funds at your college. Unlike the Pell Grants, not everyone who qualifies for a Perkins loan will receive a loan.  As an undergraduate you are allowed to borrow up to $5,500 up to a total of $27,500.  As a graduate you are allowed to borrow up to $8,000 per year up to a total of $60,000.  Repayment begins nine months after you graduate, leave college, or drop below half-time status.  Before the nine months has passed interest does not accrue on the loan.  In addition the interest rate on these loans is fixed at 5% (currently).  To apply for this or any of the following loans you must complete and submit your FASFA (a big surprise I know).

 The Difference between Direct Subsidized and Unsubsidized Loans

Before I describe the direct subsidized and unsubsidized loans, it is worth that the biggest difference between the two is that with a direct subsidized loan the U.S. Department of education pays for (subsidizes) the interest payments that accrue when you are in college. If a student has an unsubsidized loan interest does accrue during your time in college.

Direct Subsidized Loans

Direct subsidized loans are student loans available to undergraduate (not graduate) students who exhibit financial need and are enrolled at least half-time. Once again check with your college’s financial aid office to see if the college participates in the Direct Loan Program.  The annual award is $3,500-$5,500 depending on grade level.  One of the most notable characteristics of the direct subsidized loan  is the interest owed (the rate is now at 4.66%) is paid by the federal government as long as you are in school as at least a half-time student and the grace period during the first six months after leaving school.  Also repayment of principal is not required until this grace period of six months has ended.

Direct Unsubsidized Loans

Direct unsubsidized loans are student loans available to both undergraduate and graduate students who are enrolled at least half-time and there is no requirement for financial need to acquire the loans.  The annual award can range from $5,500-$20,500 depending on grade level and dependency status.  The difference between the unsubsidized and subsidized loan is that that while you are in school you are responsible for paying the interest that accrues on the loan and during all grace periods.  You have the option to not pay the interest at that time but if you choose this option the interest will be capitalized (added to the principal amount of money you owe) thus increasing your interest payment later down the road.  The interest rates for direct unsubsidized loans are fixed and are currently 4.66% for an undergraduate student loan and 6.21%. Similar to the subsidized loans there is a six month grace period following the first six months after leaving school during which no principal payments are required.

Direct PLUS Loans

PLUS loans are federal student loans that graduate students and parents of dependent undergraduate students can use to pay college expenses without the need to show financial need.  Not all colleges participate in the federal loan program so be sure to contact your financial aid office. One of the most notable features of the PLUS loans is that the borrower must have a “good” credit history.  The maximum loan amount is the student’s cost of attendance (which is equal to total costs of attending minus financial aid received). Accrued interest must be paid while in school else it is capitalized to the principal of the loan.  If a parent takes out the loan for his (her) student, there is no grace period and repayment of principal must begin immediately, this is not the case for a graduate student who has a grace period following the first six months of leaving school. The current interest rate on direct PLUS loans is 7.21%. I really should stop beating this dead horse, but in order to apply for the direct PLUS loans you have to complete and submit the FASFA.

Federal vs. Private Loans

I’ve outlined a lot of different options and some may not seem very generous. You may be thinking “Is that the best that is out there?” Sadly I would say yes it is.  Many aspects of federal loans make them superior to loans offered by other institutions (private loans).  These include fixed interest rates instead of variable interest rates (interest rates that could change), the student is not required to repay any principal while in school, and the need for an established credit history or cosigner in order to secure the loan.

Before you agree to any federal loan be sure to read the Master Promissory Note (MPN) that serves as the loan contract and outlines the terms of the loan.

Definitions

  1. Grant: A need based form of gift aid which usually does not require repayment
  2. Student loan: A loan made to a student in college which may either by administered by the federal government or a private financial institution.
  3. Grace period: A period of time during which principal payment of a loan may be suspended.
  4. Interest capitalization: A type of loan stipulation in which unpaid interest is added to the principal balance of a loan.
  5. Private loans: Student loans offered by a private institution.
  6. Master Promissory Note (MPN): The contract outlining the terms and conditions for most federal student loans.

 

Further Reading

Student Loans and Paying for College (Part 1)

I can’t tell if the money is coming out or going into the hat. Image courtesy of saleshq.com

So you got accepted to the school of your dreams?

Congratulations! I’m happy for you! My next question merits a bit of scary thought. How are you going to pay for attending that school? Maybe you have wealthy relatives. If so, count your blessings and the rest of this post is irrelevant for you so you can move on to something else.  For the rest of us…paying for college is no laughing matter. Cost is one of the top determinants of where an individual chooses to attend college (I was one of these individuals). As tuition continues to rise and the job market continues to flounder financial aid for students is becoming a very ubiquitous issue that merits a bit of explanation and study.

Key Points

  • There are some key differences between scholarships, grants, and student loans.
  • The FASFA is arguably the most important financial aid form to complete.
  • Scholarships, grants, and student loans are the most popular methods to pay college costs.
  • Your financial aid office at your school is your friend not your foe.

Grant, Scholarship, or Loan?

Let’s start with the good news. There are entities out there who will give you free money to attend school. These entities can be the school you choose to attend, the company your parent(s) work for, or even the federal government. This “free money” or “gift aid” is usually referred to as grants and scholarships.  Grants are financial aid packages usually given on a financial need basis. Scholarships are financial aid packages usually given on a merit basis.  It is important to note that while scholarships and grants do not usually require repayment they may still have performance conditions attached to them (ex. You cannot fall below a certain G.P.A. while attending school). The largest provider of grants is the U.S. federal government.

Here’s the bad news: this form of aid may not cover all the costs of attending college. When gift aid isn’t enough we must turn to student loans which are loans specifically provided to individuals attending universities that do require repayment. The largest provider of student loans is again the U.S. federal government though there are private student loans offered by banks, credit unions, and universities.

How a Piece of Paper Can Save You $100,000

The Free Application for Federal Student Aid (FASFA) is arguably the most important form to fill out when it comes to financial aid for paying for college.  By filing out the FASFA you are essentially revealing to the government how much of the cost of attendance your family will have to pay (the exact term for this is expected family contribution) and how much of the bill the government will cover.  Needless to say the FASFA is a pretty thorough form that will ask family net worth, family income, number of family dependents, etc.  I do not recommend lying on this form. Why? Because the information you enter is cross referenced with the friendly, neighborhood IRS (Internal Revenue Service) and the last thing someone wants is a call from the IRS regarding the apparent fraud you filled out on the FASFA.

Different states and schools have different deadlines than the federal government (the deadline page can be found here). It is very important to not miss these deadlines as you would be missing out on free money…ouch.  Usually the deadline for the upcoming school year is before the fall of that academic year (Ex. If I were attending LSU from Fall 2015 – Spring 2016 I would have to submit the FASFA before June 30, 2015.)  Another important aspect of the FASFA is that you must reapply each year you want to receive some form of financial aid.  Why? Let’s say that your second year of college your family wins the lottery (or your father loses his job).  This new source (loss) of income will show up on your FASFA and as a result the federal government will expect a larger (smaller) expected family contribution. To capture situations like this the federal government and universities require the FASFA be completed each academic year. Thus write down your log-in information and keep it in a secret, reliable place.

Scholarships

Scholarships are a merit based form of gift aid and are arguably the most sought out form of financial aid. They are offered by universities and many private and non-profit organizations.  The best ways to find these financial gold mines are contacting the university you plan to attend or performing your own private research.

A quick caveat about private research on financial aid: Beware companies that want you to pay for scholarship or grant searches.  Most of these companies want you to pay for results you could get by googling ‘’popular scholarships”.

Once you find a scholarship that you fit the criteria for, apply.  Though sometimes a pain you are sacrificing your time for a chance to lessen that financial burden (I personally applied to a scholarship offered through the finance department at my school and received $3,000 from it. Not bad for spending an hour on the application.)  Scholarships have their own deadlines and criteria so pay close attention so you don’t miss out.

Grants

Grants are a financial need based form of gift aid and take up the greatest percentage of total financial aid offered to students.  They are commonly offered by both colleges and the federal government.  The federal government has quite a few notable grant options which will be discussed in part two.

Apart from being based on financial aid vs. merit, grants function in the same way as scholarships. Based on the results of the completed FASFA different grant options may be available.  Once again grants may have terms attached to them so be sure you understand the terms of agreement when you accept the financial aid.  What do you do if the scholarships and loans are not enough? Other than working three part time jobs, you may want to consider taking on a student loan.

Student Loans

So you have crunched some numbers and discovered that the grants and scholarships just won’t cover all of the expenses. Now what?  You could put the remaining costs on a high interest credit card and bite the bullet, but I would not recommend that.  Seeing the need for a reliable source of student loans the U.S. Department of Education created a loan program to help fill the gap in paying for all of college costs. Some banks and other financial institutions began to offer student loans. The major distinction in the world of student loans is that there are federal student loans (government) and private student loans (non-government).  In many of the cases federal student loans have some key characteristics (fixed low interest rate, possible tax reductions, and post-graduation payment plans) that make them superior to most private student loans.  To apply for a federal student loan you must complete your FASFA (told you it was kind of important) and the results of the FASFA will dictate which types of federal loans you are eligible for.

 

Student with ball and chain attached
You shouldn’t feel like this. Image courtesy of McCarthy’s Weekly.

 

If there is one take away from this lesson let it be this: Your school’s financial aid office is your friend when it comes to paying for college; go to them if you have financial concerns.  For now let’s look a bit more in depth at the different types of federal grants and loans available to students.

Definitions

  1. Grant: A need based form of gift aid which usually does not require repayment.
  2. Scholarship: A merit based form of gift aid which usually does not require repayment.
  3. Student loan: A loan made to a student in college which may either be administered by the federal government or a private financial institution.
  4. Cost of attendance: The total cost of attending a particular university for a certain period of time (usually a year) and includes expected costs such as tuition, room and board, books and supplies, etc. This metric is used in calculating the amount of financial aid offered.
  5. Expected family contribution: The expected dollar amount the family of a student is expected to contribute to college expenses. This metric is used in calculating the amount of financial aid offered.

Further Reading