Category: Federal Loans

Prosper Act

The House Republicans recently introduced the Prosper Act which, in part, modifies existed law dealing with the availability and repayment of student loans.  Presently, undergraduates are eligible for Perkins loans which are subsidized and Direct Stafford loans which are subsidized and unsubsidized.  Subsidized means that the government pays the interest on the loan while the student is in school and for a grace period after the student leaves school.  Unsubsidized means that interest accrues from the time that the loan is drawn down but payments are deferred.  When you consider that the current rate of interest on undergrad Stafford loans is 4.29% and the average undergrad is in school for a little over 4 years, eliminating unsubsidized loans translate into a higher monthly payment for students.

The Prosper Act replaces the undergraduate Perkins and Direct loans with what is called a Federal One loan.  It also eliminates the 1%+ origination fee for undergraduate loans and the 4.27% origination fee for Parent Plus and Graduate Plus loans.  That is a savings.  It also increases the aggregate amount that an undergraduate can borrow under the Stafford program from $31,000 to $39,000 for dependent undergrads and from $57,500 to $60,250 for independent undergrads.  These amounts are caps.  Under the proposed bill, the school does not have to offer the cap amount to all students.  For example, it may offer the cap amount to engineering or IT students who have better prospects for a higher paying job upon graduation.  And, by the same token, it may offer less to, say, a history or anthropology major.

Currently, Parent Plus and Graduate Plus loans have no cap.  The parent or student can borrow the cost of attendance less any other aid offered to the student.  The proposed bill limits parents to $56,250.  I deal with many parents who have in excess of $100,000 of Parent Plus loans.  How are they going to make up the difference?  Each case is different, but I would suspect that parents will be forced to take on private loans which traditionally have not been as flexible as federal loans in regard to repayment options.

There are other parts to the proposed legislation which we will address in future blogs.



Federal Student Loan Advice For New Grads

Kelsey Gee wrote an article which appeared in the May 13-14 edition of the Wall Street Journal entitled “Outlook is Rosier for Class of ’17”.  Good news for a change.  According to the executive search firm, Korn/Ferry International, salaries, adjusted for inflation, are expected to be up 14% from 2007 for undergrads.  The overall average is expected to be a tad under $50,000; however, the average for software development is $65,232; engineers, $63,036; actuaries, $59,212; and scientists and researchers, $58,773.  A survey conducted at Adelphi University indicates that 2/3 of those responding had at least one job offer.  But, the executive director of career services at Adelphi warned that only about 30% of the class responded to the survey.  He also warned that the average student could expect a 6 month search before landing a job.

A good many of these graduates have federal student loans.  If so, then the student has a six month grace period before payments begin for Stafford loans, and a 9 month grace period for Perkins loans.  There is no grace period for Parent Plus loans.

If you have a subsidized Stafford loan, the government is paying the interest until the end of the grace period.  However, if you have an unsubsidized Stafford loan, you are being charged interest from the time you draw down the money.  The unpaid interest in capitalized onto the principal, so you are paying interest on interest.  Not a good situation (especially if you are a graduate student and are accumulating loans over 5-7 years).  My advice to the undergrad is to contact your servicer upon graduation (or the start of your job) and make arrangements to pay down the interest that is accruing.  It will save you a few bucks.

Also, if you are working in the public sector or a non-profit, look into the Public Service Loan Forgiveness (PSLF) program.  If you are qualified and make 120 payments, you can be eligible to have the remainder of your student loan debt forgiven tax free.  Be careful, though, because you have to have the right type of employer and the right type of payoff plan for this program to kick in.  If you need help in this area, contact a qualified student loan lawyer

And for those students who do not find a job, my advice is, DO NOT let the servicer talk you into applying for a forbearance.  There are better ways to deal with this situation.