According to the National Center for Education Statistics, debt level for graduating seniors with student loans increased by 108%, from $9,250 to $19,200, between 1994 and 2004. Those numbers are continuing to trend upward. The five or six digit debt accumulated while studying may seem like inconsequential numbers on a page now, but after graduation the terms agreed upon come into focus. Money will be owed regardless, but whether the amount you owe is a small part of your income or a small fortune often depends on the interest structure of your loan. The most common types of interest offered by lenders—simple and compound—vary greatly over a long period of time. Compound interest loans pose the most problems because by the time you get your head around how they work, you are more in debt than you would’ve been under the simple interest formula.
A compound interest loan adds the interest amount to the principal (balance) every time it is compounded. The frequency which this happens may be yearly, semiyearly or monthly depending on your borrowing terms. After being compounded, the new balance is then subject to the interest rate, rapidly increasing the amount of debt owed. For example, let’s say you owe $20,000 to your lender. The interest rate is 6.8%, which is compounded yearly. Your goal is to pay off the debt in ten years. At the end of a decade, you will end up shelling out $38,613.80. Under the rules of simple interest, on the other hand, the interest rate only applies to the initial balance. So after 10 years, if the balance and interest rate are the same as above, you will owe $33,600, nearly $6,000 less than compounding.
If stretched out to 20 years, the gap gets considerably wider. Compounding turns a $20,000 loan into a $74,551.28 debt. Compare that to the $47,200 paid on the same loan based on simple interest terms.
The best strategy for beating compounding interest student loans is to get the principal amount down quickly. This will lessen the amount of interest added when it’s time for the loan to compound. The longer a loan is drawn out, the more money that goes in the pocket of your lender. There’s a reason why Sallie Mae’s vice chairman and chief financial officer Jack Remondi made $13.3 million in 2008.
Remember, student loans are arguably the hardest type of debt to get rid of and even after bankruptcy they remain on your credit report. Defaulting on your student loans can severely impact your credit score, which in term will increase the interest you pay on everything from a car, to a house, to that Playstation 4 you’ll want to put on your Best Buy card in eight years.
The frequency that the lender compounds your interest varies, check with them to find out what terms you are obligated to.
Thursday, July 30, 2009
Wednesday, July 29, 2009
The FAFSA: Finally Simplified
The online version of the Free Application for Student Aid, better known as the (FAFSA) will be much easier to get through in 2010-11 than it was in 2009-10, or any school year prior for that matter. Here are some of the important changes made to streamline the FAFSA:
-The number of questions will be reduced from 100 to 65.
-Using a new technology called "skip-logic", the number of screens it takes to get through the FAFSA will go from approximately 29 to 9.
-Parent and student income and tax information will instantly be available via the IRS. This saves students from having to ask their parents to mail, fax or email tax information. This will also expedite the financial verification process and greatly reduce the need for audits.
-Instant estimates of Pell Grant and student loan eligibility will be available upon completion of the FAFSA online.
Coupled with the changes coming from the likely passing of The Student Aid and Fiscal Responsibility Act of 2009
in the fall, this is great news for the future of higher education in America.
-The number of questions will be reduced from 100 to 65.
-Using a new technology called "skip-logic", the number of screens it takes to get through the FAFSA will go from approximately 29 to 9.
-Parent and student income and tax information will instantly be available via the IRS. This saves students from having to ask their parents to mail, fax or email tax information. This will also expedite the financial verification process and greatly reduce the need for audits.
-Instant estimates of Pell Grant and student loan eligibility will be available upon completion of the FAFSA online.
Coupled with the changes coming from the likely passing of The Student Aid and Fiscal Responsibility Act of 2009
in the fall, this is great news for the future of higher education in America.
More on the Future of Student Lending
From The Kiplinger Letter:
Private lenders are losing the battle over student loans. By this time next summer, they will be cut out of the lucrative student lending market, with a handful of them relegated to the role of simply servicing loans made by Uncle Sam. On July 21, the House Committee on Education and Labor began marking up a bill, introduced by Rep. George Miller (D-CA), that seeks to eliminate government subsidized private student lending and replace it with direct loans to students through the Department of Education.
“This is the biggest change in federal loans for higher education since 1965 when the original program was created,” says Terry Hartle, senior vice president at the American Council on Education.
Sallie Mae was one of four companies awarded a loan servicing contract by the Department of Education. NelNet, American Education Services/PHEAA and Great Lakes Education Loan Services Inc. were the others. Even with the servicing contract, the bill means “we would be about half of our size,” says Martha Holler, spokesperson for Sallie Mae.
Look for Congress to pass the direct lending plan sometime this fall. The Congressional Budget Office estimates that it will save about $87 billion over the next 10 years. “Among other things, the savings will be used to significantly boost Pell Grant scholarships [ need-based grants given to low income students] to keep interest rates low on need-based federal student loans for years to come, to simplify the [Free Application for Federal Student Aid] form, [and] to invest in strengthening community colleges,” said Rachel Racusen, deputy communications director of the House Education and Labor Committee, in an e-mail.
Lenders worry that the savings will be used to plug other budget gaps rather than to fund additional higher education financing. Already, Congress’ plan dramatically cuts the level of Pell Grant entitlements envisioned in the Obama administration’s proposal to address the issue of who should be in the student lending market. Under that plan, less than half the savings would have gone toward that grant measure, with the other money going toward other purposes.
Meanwhile, many lenders argue that with only direct lending, students get less in the way of services. “We offer the ability to maintain the diversity needed to keep competition up and pressure on other lenders,” says Christopher Chapman, CEO of Access Group, a Wilmington, Del.- based nonprofit student lender. “We also provide the value-added services,” such as financial education.
Banks have their own turf to protect. The legislation means not only lost profits for banks now, but also a tougher time courting young borrowers in the future. In the past, college loans provided lenders easy entrée to establish a relationship with a future customer.
For schools, the legislation translates into a major overhaul of their lending programs. Only about a quarter of eligible schools participate in direct government lending. “To implement the proposal, about 4,500 schools would have to convert lending systems,” says Holler. “It’s not like putting a different disk in their PC; the whole system has to be reworked.”
Private lenders are losing the battle over student loans. By this time next summer, they will be cut out of the lucrative student lending market, with a handful of them relegated to the role of simply servicing loans made by Uncle Sam. On July 21, the House Committee on Education and Labor began marking up a bill, introduced by Rep. George Miller (D-CA), that seeks to eliminate government subsidized private student lending and replace it with direct loans to students through the Department of Education.
“This is the biggest change in federal loans for higher education since 1965 when the original program was created,” says Terry Hartle, senior vice president at the American Council on Education.
Sallie Mae was one of four companies awarded a loan servicing contract by the Department of Education. NelNet, American Education Services/PHEAA and Great Lakes Education Loan Services Inc. were the others. Even with the servicing contract, the bill means “we would be about half of our size,” says Martha Holler, spokesperson for Sallie Mae.
Look for Congress to pass the direct lending plan sometime this fall. The Congressional Budget Office estimates that it will save about $87 billion over the next 10 years. “Among other things, the savings will be used to significantly boost Pell Grant scholarships [ need-based grants given to low income students] to keep interest rates low on need-based federal student loans for years to come, to simplify the [Free Application for Federal Student Aid] form, [and] to invest in strengthening community colleges,” said Rachel Racusen, deputy communications director of the House Education and Labor Committee, in an e-mail.
Lenders worry that the savings will be used to plug other budget gaps rather than to fund additional higher education financing. Already, Congress’ plan dramatically cuts the level of Pell Grant entitlements envisioned in the Obama administration’s proposal to address the issue of who should be in the student lending market. Under that plan, less than half the savings would have gone toward that grant measure, with the other money going toward other purposes.
Meanwhile, many lenders argue that with only direct lending, students get less in the way of services. “We offer the ability to maintain the diversity needed to keep competition up and pressure on other lenders,” says Christopher Chapman, CEO of Access Group, a Wilmington, Del.- based nonprofit student lender. “We also provide the value-added services,” such as financial education.
Banks have their own turf to protect. The legislation means not only lost profits for banks now, but also a tougher time courting young borrowers in the future. In the past, college loans provided lenders easy entrée to establish a relationship with a future customer.
For schools, the legislation translates into a major overhaul of their lending programs. Only about a quarter of eligible schools participate in direct government lending. “To implement the proposal, about 4,500 schools would have to convert lending systems,” says Holler. “It’s not like putting a different disk in their PC; the whole system has to be reworked.”
Major Changes Coming to the Student Loan Industry
A House commitee cleared a bill last Tuesday that would all but remove private lenders from the federal loan industry. If passed, The Student Aid and Fiscal Responsibility Act of 2009, will do away with private loans subsidized by the federal government, which in turn will save the government $87 million over the next 10 years.
Democrats plan to use the savings to fund a $40 billion increase in federal Pell Grant scholarships over 10 years, $10 billion in community college upgrades and $8 billion in pre-kindergarten changes, among other uses.
Across the aisle, opposing Republicans see the Act as a federal takeover of the student loan industry.
The Student Aid and Fiscal Responsibility Act of 2009 will now go before the entire House for a vote. If approved by the House of Representative's Democratic majority, the Senate will vote whether to enact the Act into law.
The restructured student loan component of the Act will increase the maximum annual Pell Grant scholarship from $4,731 last school year to $5,500 in 2010-11 and $6,900 in 2019. Starting in 2011, the annual grant would be linked to cost-of-living increases.
Democrats plan to use the savings to fund a $40 billion increase in federal Pell Grant scholarships over 10 years, $10 billion in community college upgrades and $8 billion in pre-kindergarten changes, among other uses.
Across the aisle, opposing Republicans see the Act as a federal takeover of the student loan industry.
The Student Aid and Fiscal Responsibility Act of 2009 will now go before the entire House for a vote. If approved by the House of Representative's Democratic majority, the Senate will vote whether to enact the Act into law.
The restructured student loan component of the Act will increase the maximum annual Pell Grant scholarship from $4,731 last school year to $5,500 in 2010-11 and $6,900 in 2019. Starting in 2011, the annual grant would be linked to cost-of-living increases.
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