I asked geg6 if she would be up for writing an “explainer” for us on student loans, and she graciously agreed. So 30 minutes or an hour from now, I expect that many of us will be smarter than we are right this minute, at least about federal student loans.
I think we’ll see what questions you guys might have, and then edit this explainer to include answers to some of those, and then we can release it in PDF form so you guys can share it far and wide. (Though maybe without all the details in the credentials that could be used to identify geg6!)
Oh, and in case you’re worried, there will not be a quiz!
Federal Student Loans: An Explainer
by geg6
My Credentials
Before I go into the details of federal student loans, I should give a bit of my background. I’ve worked in higher education in financial aid for the last 33 years. I started at a local community college where I worked for nine years, and then got my current job as a financial aid officer at local campus of a major public research university for the last 24 years.
Here’s what I do: 1) help students complete the FAFSA (Free Application for Federal Student Aid), 2) award scholarships, 3) get parents’ and students’ loans and grants into place, 4) verify information from the FAFSA, 5) conduct special circumstance reviews and satisfactory academic progress reviews (professional judgment), 6) administer special aid programs and federal work study, and 7) other duties as assigned, such as serving on several committees for hiring, student success and diversity.
But there’s more! I am also the campus’ VA Certifying Official for students who are using VA educational benefits, a job which comes with many reporting responsibilities to the VA. In addition to all of that, I am currently the senior campus financial aid officer among the western campuses of my university, which means I am mentoring new financial aid officers at three other campuses in my region of the state.
Background
There has been a lot of discussion of loan forgiveness lately and from what I have seen here at Balloon Juice, there is a lot of misinformation and misunderstanding of student loans.
Much of it reflects the same misinformation and misunderstandings that my students and their families have. I think it is important for those of us who are advocating for loan forgiveness to understand how these loans work so that when we run across people discussing or writing about these issues, we can know whether or not they understand the issue enough to be a credible voice for whatever position they are arguing.
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THE BASICS
So let’s start with the basics. There are four types of federal loans for education:
- Federal Direct Loan for students (subsidized)
- Federal Direct Loan for students (unsubsidized)
- Federal Direct Parent PLUS Loan
- Federal Direct Graduate PLUS Loan
For those who remember them, Federal Perkins Loans used to be a part of the mix but were phased out during the Obama administration.
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FEDERAL DIRECT STUDENT LOAN OVERVIEW
Federal Direct Loans have had many names over the years (most recently, Stafford Loans but are just Direct Loans now) are in students’ names and the FAFSA is the loan application.
Source of Funds:
The funds come directly from the U.S. Department of Education and there are no banks or other financial institutions involved in the lending process.
Limits on Borrowing
Legislation limits the amounts dependent students can borrow each year and these annual borrowing limits have not changed since the 1990s.
First-year students can borrow a total of $5500/year (whether subsidized, unsubsidized or both).
That increases $1000/year until their senior year when they can only borrow the same $7500/year as juniors.
Independent students are offered an extra $4000/year in their unsubsidized loans.
Interest
Interest on these loans is capped by law, but have been historically low for the last several years as the interest is based on the annual auction of 10-year U.S. Treasury bonds plus or minus a point or two. The 2021-22 interest rate on these loans is 3.73%.
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FEDERAL DIRECT STUDENT LOANS
Subsidized Loans
First-year students who have been determined to have financial need based on the FAFSA can receive $3500 of their $5500 annual limit as a subsidized loan. This means the federal government pays the interest on the loan during the student’s enrollment and the 6-month grace period after graduation or stopping attendance before repayment begins. So these are essentially no interest loans during the time the student attend and the grace period.
Unsubsidized Loans
Students who have no financial need or subsidized borrowers who need more funds to reach their annual limit will be offered unsubsidized loans up to the annual limit.
Interest will accrue on these loans as soon as they disburse and students have the choice to either let the interest accrue while they are in in-school deferment or pay the interest only as they go through school. If a student chooses not to pay the interest, the interest will be capitalized when they enter repayment after graduation.
This means that the interest that accrued will be added to the principal borrowed and, while in repayment, the student will be paying interest on interest. I always advice students and parents to pay that interest and that this is a good reason for students to have a part-time job. Paying that interest will literally save them thousands of dollars in repayment.
In addition to the annual limits, there are lifetime borrowing limits. Dependent undergrads can borrow up to $31000 and independent undergrads can borrow up to $57500. If a student wishes to make early repayment, there are no penalties for doing so.
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FEDERAL DIRECT PARENT PLUS LOANS
Federal Direct Parent PLUS Loans are a parent loan and, thus, not automatically approved.
The student must have submitted a FAFSA and, ideally, the parent borrower is the parent who signed the FAFSA but that is not necessary. Only biological parents can borrow under this program.
Most schools prefer that students and parents apply for this loan online directly on the Federal Student Aid website at https://studentaid.gov/. Parents can borrow any amount up to a student’s Cost of Attendance (COA: tuition, fees, room/board, books, travel, personal expenses) as determined by the school minus any aid the student is receiving.
If the parent applies online, the approval or denial of the loan is immediate. There is a credit check, but that credit check does not include credit scoring, debt-to-income ratio or employment status.
Basically, if you pay your bills, have not declared bankruptcy and have not defaulted on a federal loan, you will be approved. Although the default on this loan is that repayment begins 30 days after full disbursement, there is an option to request deferment on the principle until after the student graduates. There is no lifetime limit.
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FEDERAL DIRECT GRADUATE PLUS LOANS
Federal Direct Graduate PLUS Loans are strictly for students in graduate programs. If needed, this loan is meant to supplement the graduate level Direct Unsubsidized Loan for graduate students, which is limited to $20500/year.
Both the Parent PLUS and Graduate PLUS have a 2021-22 interest rate of 6.28%. Neither the Parent PLUS, the Grad PLUS nor the graduate level Direct Loan are expected to be a part of any loan forgiveness.
Basically, all the loan forgiveness talk is really only about the Direct Loans for undergraduates. Not only aren’t other federal loans in the discussion, but about 12% of all student loan debt is for what we call private alternative loans and cannot be forgiven by the federal government.
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This is a lot, so I’ll stop for now. If you have questions, I’m happy to answer them as best I can.
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WaterGirl
I believe geg6 plans to be here for questions.
West of the Rockies
Please forgive what may be a ludicrously stupid question… There is still financial aid, yes? Money given to students in need as opposed to a loan?
geg6
Yes, I’m here and will answer questions as I can.
geg6
@West of the Rockies:
Absolutely. The Federal Pell Grant and Federal Supplemental Educational Opportunity Grant (FSEOG) still exist but are only available to students with very high financial need. Federal Work Study also exists and is available to students who have financial need, but who don’t have high enough need to qualify for Pell or FSEOG. In addition, there are some specialized federal grant programs for dependents of service members who were killed in Afghanistan and Iraq, for education majors who commit to teaching in high need subjects and/or high need schools and for students who were in foster care.
In addition, most states have their own financial aid programs. For instance, PA has the PA State Grant for which a student can receive up to $5200 per year.
geg6
@geg6:
Also, most colleges and universities have many aid programs for their students. At my school, we have thousands of scholarships, student work programs, several grant programs and a university loan program.
Damien
Dear geg, I am preparing an application for defense to repayment presently. I attended the Art Institute, which is one of my if not my greatest regret.
Does the fact that my school system was found to have violated federal law and settled, as well as having misled me about average salary of my major, help me with my case? I was defrauded across the board by EDMC, and will absolutely never repay a single dollar that those crooks stole from me, but I would like to know my chances of getting off the hook.
zhena gogolia
Impressive, thanks!
A Good Woman
FWIW I thought Sen. Warren and other advocates for student loan forgiveness were targeting ALL of it. Can you point to anything specific that specifies that the undergrad loans you described are the sole targets? What is the total amount of those outstanding loans?
In view of your post, I don’t trust the numbers being thrown around.
Thanks for the info. I got a Perkins loan back in the day. Didn’t realize how much evolution occurred in the loan program.
West of the Rockies
@geg6:
Thank you. We have free community college for local kids here in Butte County CA. My daughter attended but also received money each semester after “applying for FAFSA.” She is now at UofO in Eugene, OR. She has told me the money she’s received is aid, not a loan. I just got nervous and wanted to make sure.
Kay
@geg6:
But students could get a Pell grant and still need a loan, right? Because Pell grants are capped at 6k a year?
Raven
Remember BEOG’s???
geg6
@Damien:
From what I have been reading in professional spaces, you are exactly who they are targeting for forgiveness first and foremost. I think your chances are very good.
Old School
Is an “independent student” one who is not claimed by a parent/guardian as a dependent on their tax return?
What is the reasoning behind loaning those students more funds?
geg6
@West of the Rockies:
“Aid” includes any funding, gift aid (grants, scholarships) or self-help aid (loans and work study), from outside the family.
WaterGirl
@geg6: So everything you talked about in the post is considered financial aid, even though they are loans?
geg6
@Kay:
Students can receive as much aid as they qualify for, regardless of whether it’s gift aid or self-help aid.
For instance, I have students that have Pell, a PA State Grant, FSEOG, the Pittsburgh Promise (for city school graduates only), our internal housing grant, our internal tuition grant, a recruitment scholarship from us, work study and Direct Loans all at once. As long as the aid is not more than cost of attendance, the student can have it.
Damien
@geg6: thank you for your response, it really made me feel better. My entire financial life was ruined by that school, and it quite honestly turned me against higher education in general. Personally, I think every executive of every for-profit school should have their assets seized like Russian oligarchs to pay back their perfidy, but that’s just not how capitalism works
I only hope that if this nightmare comes to a close that my credit will recover.
Ohio Mom
I went to a state college a long, long time ago and my family footed the (in those days, reasonable) bill; I haven’t any first-hand experience with student loans so my questions may not be the most sophisticated.
As I understand it, a year of college today can cost I don’t know, $30,000 or more. The loan amounts listed here don’t come near that. Where is the difference coming from? Private loans?
Who are these people I keep reading about who borrowed $20k, paid back $40k and still owe $80k? I guess they are paying interest on interest?
What is this, “biological children” only? Adoptees’ parents aren’t eligible?
I get that these are the rules and you, geg6 have to work within them. What would you change if we could make you Queen of the World?
I just keep going back to why are we charging interest? Especially interest on interest? Yeah, some students can handle a part-time job but others can’t, for all sorts of reasons. Isn’t our goal to have these young people go the best they can in college? Why are we stressing the ones who don’t have the slack with interest on interest? These last few are rhetorical questions.
Old Dan and Little Ann
This is the current dilemma my wife and I are in. She actually Zoomed with a bunch of random FB people last week that are trying to spearhead getting it fixed. We shall see. Mother Jones Article describing how married and divorced people are getting screwed.
Raven
When LBJ (fuck LBJ) signed the “Servicemen’s Readjustment Act” (GI Bill) in 1966 he noted that the WW2 GI Bill was “the greatest economic flywheel” in US history. Amazing what educational opportunity can do.
trollhattan
@Raven: Yes, and for the love of gawd it’s not limited to STEM, either.
geg6
@Old School:
An independent student is any one or all:
Who claims what child on their tax form is irrelevant. These students are offered more in their loans because they have higher expenses than your typical college student.
Raven
@Damien: Proprietary schools are the worst. Their swindling caused major changes to the WW2 GI Bill. It’s nothing new, there is always someone out there waiting to rip you off.
geg6
@WaterGirl:
Yes. Literally any funding outside of the immediate family is financial aid.
West of the Rockies
Totally OT, but I think free college (to PhD) for indigenous Americans and descendants of slaves would be an excellent way to begin to address reparations.
WaterGirl
@Damien: That sounds awful, I feel really bad for the folks who have gotten screwed over. You are definitely not the only person here on Balloon Juice who is in that boat.
Maybe we need to have a special thread where you guys can bitch and compare notes. But that’s might be best done with adult beverages, so maybe not.
Ohio Mom
I’m not saying I am against loan forgiveness, far from it. But if only Direct loans are forgiven, there are going to be very many furious parents with Parents Plus Loans and others with other types of loans who are going to be feel cheated and betrayed. “Why was his loan forgiven and my isn’t?”
This is a public relations disaster (for Biden and all Democrats) in the making.
A Good Woman
@Ohio Mom:
That is why I don’t trust the numbers being tossed around. I suspect some serious misconceptions at work, and certain I had some.
catothedog
Re: “the interest will be capitalized when they enter repayment after graduation.”
How does this work over the course of the 4 year degree? If a student borrows at the beginning of the degree, the first year’s interest will in turn accrue no interest on it till year 4 is done and so on?
For eg:, 1000 borrowed at 10% will only be 1400 at the time of graduation? Instead of 1464?
Ohio Mom
@Old Dan and Little Ann: I read that article. What a mess! And who could have foreseen that or warned you against that?
WaterGirl
@Ohio Mom: As Barack Obama said, if it was easy, it would have already been done.
My view is that doing nothing is not better than doing something, however imperfect.
geg6
I’ll try to answer everything here.
First, college costs vary so much it’s impossible to make any sort of generalizations about what costs are. That’s true even at my own institution which has variable costs depending on in-state/out-of-state residents, lower division/upper division and certain majors that cost more to deliver classes. We recommend that families go with the Federal Direct Parent PLUS, which has protections that private alternative loans do not have.
The people who say they borrowed $20K, paid back $40K and still owe $80K are liars or exaggerators if they are talking about federal loans. It is possible that they have not made interest payments while in school or even after they graduated because they wouldn’t have that high debt just from borrowing from the government. There are tons of ways the government can help a student avoid that. They are also almost always conflating federal loans with private loans, which drives me nuts.
I should also have added adoptive parents as being able to access the Parent PLUS. Which is stupid because my oldest niece was adopted, so I know this from experience.
I don’t have a problem with low interest on these loans. It’s a way to build credit for young people and it is their first real experience with real life credit. So I don’t agree with you on that. I do want to keep interest rates low, however.
If I was queen of federal financial aid for education, I’d vastly increase the number of students who qualify for Pell and I’d increase the amount students can borrow from the feds to whatever their cost of attendance is. I am okay with the many non-traditional repayment plans available through the DOE which forgives the loans after a certain number of on-time payments.
geg6
@catothedog:
Capitalization happens after the student graduates and the 6 month grace period before repayment. Think of it like the principal accrues in one pot, the interest accrues in another pot and after graduation and the grace period, they are thrown into the pot together and interest is paid on what’s in the pot.
geg6
Gotta head home from work, so ducking out for a little while.
But I shall return!
prostratedragon
Thanks for the explainer, geg6. Will tuck it away for reference.
Old Dan and Little Ann
@Ohio Mom: You’re telling me. We spent several months convinced that at least something would be forgiven. When we got the denial letter my wife broke down in tears. Both teachers, both close to 50, still owe about 60 grand. Ugh.
Ohio Mom
@Old Dan and Little Ann: Good god. I’d cry too.
In my more tin hat moments, I think this student debt bondage was punishment for the student protests of the 60s and 70s: Want to change the world you college student you? Hah! We’ll have you working two jobs just to keep up with your interest payments.
Eunicecycle
Thanks for the explanations! You said that the amount a student can borrow hasn’t changed since the 90s. College costs have definitely gone up a lot since then. If students could borrow more from the government, at the better terms, wouldn’t that keep many of them from accruing expensive private debt?
geg6
@Eunicecycle:
YES! This is something my professional organization, NASFAA (National Association of Student Financial Aid Administrators), has been lobbying Congress on for almost as long as I’ve been doing this.
ETA: Congress always tells us they are controlling student debt by limiting the amount they can borrow. Which, as anyone can see, is complete and utter bullshit.
geg6
And FTR, private loans are the absolute worst and should be avoided like the plague unless there is no other option.
Eunicecycle
@geg6: yes so students borrow from private sources at much higher rates. (eyeroll) I hope Congress does change the amounts because they do seem ridiculously low.
geg6
@A Good Woman:
Sorry, just saw this comment.
Parent and grad loans are not being targeted for forgiveness mainly because they are a fraction of federal loan debt compared to undergrad debt. Each, I believe, are less than 15% of total federal loan debt.
brendancalling
@Old Dan and Little Ann: I’m over 50, first year teacher and I owe close to $100K. Whenever the Democrats trot out the old “student loan forgiveness,” I laugh bitterly. It’s a fucking lie. I’ll be dead before that loan is ever repaid.
Erieg
So lets say the government says all student loans up to 8/1/2022 will be forgiven. My son who is graduating this spring will have all debt removed. My daughter who starts school this fall will not?
If that is the situation, I have a really hard time supporting this. We are not addressing the underlying issue. No, I don’t want to hear “we will address that later” because there will not be a later.
One thing I can support is making the loans interest free. That helps everyone, not just those blessed to be born before a certain date.
Ohio Mom
@Erieg: It sounds like the federal government has to make larger loans available and I agree — even if geg6 doesn’t — on making them interest free. Or a very small token amount, say 1%.
It’s beginning to sound to me that the biggest problem may be the private loans, which the government can’t do anything about.
geg6
@Ohio Mom:
When someone who didn’t go through grad school or medical school or law school claims to have eighty, ninety, a hundred thousand or more in loan debt, it absolutely is mostly private loan debt.
I am against no interest loans but I’d fully support an interest cap lower than what we have currently (8.5%). I think a cap of 2% sounds fair to me.
Erieg
@geg6: I have another question that should allow my ignorance to shine. I have read that one of the reasons behind the explosive growth in cost for higher ed was caused by the ease in which students can get loans which prompted schools to offer more and more amenities to chase those dollars.
What’s going to happen if generations worth of student loans are wiped away? Will the costs go even higher with the thought of “Well the government is just going to forgive the loans anyways so why not”?
geg6
@Erieg:
Your scenario is plausible if you separate out proprietary (for profit) schools from non-profits. For profits are unethical in so many ways that I’d believe them capable of this for sure. I know of a local one that I am sure is exactly what you are talking about. Non-profits have rules and regulations they have to follow. And public non-profits have the additional budgetary handicap of the states’ disinvestment in higher ed. State funding for my university has been cut or stagnant my entire career. In order to keep quality faculty and staff and get research funding, you have to make it worth their while. There are many things I could have done in the private sector and made a lot more money but I make enough and have such fabulous benefits that I’ve been happy to stay. Pay me less and I’m gone. And that’s even more true of much of our faculty, especially those in STEM fields.
Feckless
They won’t do anything real about college funding for one reason:
People mostly join the army for the education money.
Free college = no army
So if he erased student loans Biden would be doing the socialism and decreasing war making ability?
The ‘liberal’ media would shit it’s pants, break its own nose and run in circles screaming about shit and blood for decades.
For the record Russia’s Ukraine debacle shows we are wasting economic capacity ‘defending’ against paper tigers with Napoleonic era weapons and tactics. We should cut the military shackle off our economy’s ankle. (neck?)