If a child does receive FAFSA can they still receive scholarships
and grants?
— Y.P.

The Free Application for Federal Student Aid (FAFSA) is used to apply
for need-based financial aid from the federal government, state
governments and most colleges. The financial aid will include a mix of
grants, loans and student employment.

The terms grants and scholarships are often used
interchangeably, but have different meanings. A grant is a gift of
money that does not need to be repaid, typically awarded based on
financial need. Financial need is the difference between total college
costs and the expected family contribution (EFC). Financial need is
reduced by other financial assistance received by the student. The
largest federal grant program is the Pell Grant. Scholarships are also
gifts of money that do not need to be repaid, but are typically
awarded based on merit, such as academic, artistic or athletic merit.

When a student receives a private scholarship it reduces the student's
financial need. Federal overaward regulations and the college's
outside scholarship policy require reductions in the need-based
financial aid package corresponding to the amount of the outside
scholarship. This is often referred to as displacement.

However, colleges have flexibility in how they reduce the need-based
aid package. About four fifths of colleges will reduce the student's
unmet need, if any, and then the student's loan and work burden before
reducing the college's grants. Such a favorable outside scholarship
policy will reduce the student's net price by ensuring that the
student retains some financial benefit from winning a
scholarship. Other colleges, however, will reduce grants first,
yielding no net financial gain to the student.

Some sources of financial aid consider their funds to be first
dollar, awarded before all other forms of financial aid. For
example, the federal Pell Grant is never reduced, not even if the
student wins many private scholarships. Other sources of financial aid
consider their funds to be last dollar, awarded after all other
aid. For example, some state grants are awarded based on the student's
remaining financial need and require colleges to reduce the state
grant first even if the college itself has a favorable displacement
policy. He who has the gold makes the rules.

Most scholarship providers dislike displacement rules. When a
scholarship provider grants a scholarship to a particular student, the
scholarship provider is trying to reduce the student's loan and work
burden. This helps the student succeed in college by removing money as
a barrier to retention and completion. But if a college fully
displaces the scholarship by reducing its own grants, there is no net
improvement in student outcomes. This makes it more difficult for the
scholarship provider to justify the scholarship expense to its
board. If the scholarship provider wanted to help all students at the
college, as opposed to specific students, it would make grants
directly to the college, not to individual students.

Some forms of financial aid are also subject to cost-of-attendance
limits, where total financial aid cannot exceed total college costs or
total financial need. For example, if the total financial aid,
including non-federal private student loans, exceeds the cost of
attendance, federal regulations treat the excess funds as a resource,
reducing need-based aid dollar for dollar. In some cases a
cost-of-attendance cap will be applied on a payment period basis, so
that total aid for the semester cannot exceed total costs for the
semester.

Ask Kantro is written by Mark Kantrowitz, an expert on paying for
college and publisher of Fastweb.com and FinAid.org, the leading free
web sites for information about student financial aid, student loans
and scholarships. Write to Ask Kantro at AskKantro@Fastweb.com.
Questions may be edited for style and clarity.
Follow him on Twitter at @mkant.

The student loan debt
clock reached the $1 trillion milestone at about 6:40 am ET on
Tuesday, May 8, 2012.

Although the student loan debt clock is for entertainment purposes
only, reaching this milestone demonstrates that student loan debt is a
macroeconomic factor, with the potential to affect the economy, albeit
modestly at present. Student loan debt will not derail the economy the
way mortgage debt did, because student loan debt outstanding is about
a tenth the size of the mortgage marketplace. Total annual student
loan payments are only about 0.4% of GDP. But students who borrow too
much have a tendency to delay lifecycle events, such as getting
married, having children, buying a car, buying a home, saving for
their children's college education and saving for retirement. As the
amount of debt and interest rates increase, a greater percentage of
family income must be devoted to repaying student loans instead of
other priorities.

Accordingly, there is a clear need for better tracking of total
student loan debt outstanding and better analysis of the impact. For
example, there is a lack of agreement on just how much student loan
debt is outstanding.

• The Federal Reserve's G.19 report lists $453.3 billion in
education debt as of February 2012. This figure reports just federal
loans held by the federal government. It does not include federal
loans held by private lenders nor does it include private student
loans.

• The Consumer Financial Protection Bureau (CFPB) reported on
March 21, 2012 that
total student loan debt outstanding exceeded $1 trillion
in late 2011. The CFPB figures, which are based on a survey of
education lenders, include capitalized interest, while the student
loan debt clock does not. The student loan debt clock bases total
federal student loan debt outstanding on figures from the federal
budget, which does not include capitalized interest. The student loan
debt clock bases total private student loan debt outstanding on a
repayment trajectory model, which does include capitalized
interest. Student loans are unique among forms of consumer debt in
that most students defer repaying the loans while they are still in
school. If the borrower does not pay the interest as it accrues, it is
capitalized (added to the loan balance), usually once when the loan
enters repayment.

• The Federal Reserve Bank of New York (FRBNY) estimated
in the quarterly Household Credit report
that
total education debt outstanding reached $867 billion in Q4 of
2011. The FRBNY figures are based on a statistical sample of Equifax
credit report data. Although Equifax has corrected errors in the
classification of student loan debt, there may still be issues with
the aging of the consumer panel that was used to sample the Equifax
data. Even a slight shift in the age distribution of the panel toward
older consumers may be enough to overlook about $100 billion in
recently disbursed student loan debt.

The nature of student loan debt is sufficiently different than other
forms of consumer credit that it should be tracked separately.

It is unclear how one should celebrate the $1 trillion
milestone. Somehow, greeting one another with "Happy Student Debt Day"
doesn't seem appropriate.

Perhaps this occasion should be marked by a review of several tips on
ways to minimize student loan debt.

Next Page: How to Cut Student Loan Debt Before College

[page]

How to Cut Student Loan Debt Before College

• Compare colleges based on the net price, the difference between
total college costs and grants, scholarships and other aid that does
not need to be repaid. The net price is the amount of money the family
must pay from savings, income and loans to cover college costs. A
higher net price usually means more debt at graduation.

• Estimate debt at graduation by multiplying first year debt by
the length of the education program (e.g., 4 years for a Bachelor's
degree). Your total student loan debt at graduation should be less
than your expected annual starting salary, and ideally a lot less. If
total education debt is less than annual income, the borrower will be
able to repay the loans in about 10 years. If total debt exceeds
annual income, the borrower will struggle to repay the loans and will
need an alternate repayment plan, like extended repayment or
income-based repayment, in order to afford the monthly loan
payments. These repayment plans reduce the monthly payment by
stretching out the loan term, which means the borrower will still be
repaying his own student loans when his children enroll in college.

• Don't borrow more than $10,000 for each year in college. If you
do, you'll graduate with more debt than 90% of your peers.

• One of the best ways to save on college costs is to enroll at
an in-state public college or at a college with a generous
"no loans" financial aid policy.

• Start searching for scholarships and saving for college as soon
as possible. It is worthwhile to save even if you start late. Every
dollar you win and every dollar you save is about a dollar less you
will have to borrow. It is literally cheaper to save than to borrow.
If you save $200 a month for ten years at 6.8% interest, you'll
accumulate about $34,400. If instead of saving, you borrow this
amount, you'll pay $396 a month for 10 years at 6.8% interest.

Next Page: How to Cut Student Loan Debt During College

[page]

How to Cut Student Loan Debt During College

• Always borrow federal first. Federal student loans are cheaper
in the long term, more available and have better repayment
terms. Federal student loans offer income-based repayment and public
service loan forgiveness, while private student loans do not.

• Beware of variable rate loans. Variable interest rates are
currently at unusually low levels and have nowhere to go but up. Add
about 4 percentage points to the interest rate on a variable rate loan
to get a ballpark estimate of the interest rate on an equivalent fixed
rate loan.

• Use tuition installment plans as an alternative to
borrowing. Tuition installment plans allow the family to spread out
college costs into equal monthly payments over the academic
year. Tuition installment plans do not charge interest, but usually
have an upfront fee of $50 to $100.

• Students can also save on the indirect costs of college, such
as textbooks and living expenses. Textbook prices can add up, so save
by buying used textbooks and selling textbooks back to the bookstore
at the end of the semester. Cut back on living expenses by minimizing
the number of trips home from school, by living at home or with a
roommate and by minimizing personal expenses. Live like a student
while you are in school so you don't have to live like a student after
you graduate. A $10 pizza a week will cost $2,000 by the time you
graduate. And if you spend student loan money to buy the pizza, it
will cost about $4,000 by the time you pay back the debt. Every dollar
in student loan money costs about two dollars by the time the debt is
paid in full. So before you spend student loan money on anything, ask
yourself if you'd still buy it at twice the price, since that's
realistically what it is going to cost you.

• Take a heavier workload, so you can graduate on time or even a
semester or two early, cutting college costs by 10% to 20%.

• Pay the interest on unsubsidized loans while you are in school
to keep the loan from growing bigger.

• Work part-time during the school year (no more than 12 hours a
week) and full-time during the summer to earn money to help pay for
college.

Additional tips for minimizing debt are available from the
Quick Reference Guide on Choosing a Student or Parent Loan.

Next Page: How to Cut Student Loan Debt After College

[page]

How to Cut Student Loan Debt After College

• Get organized. Make a list of all your loans. Use a spreadsheet
or FinAid's Student Loan Checklist.
Put a reminder in your calendar two weeks before your first payment is
due. You must make a payment even if you don't receive a statement
from the lender.

• Sign up for auto debit, where monthly loan payments are
transferred automatically from your checking account. Many education
lenders will reduce your interest rate by 0.25% if you do this.

• Take advantage of the student loan interest deduction, which
allows you to deduct up to $2,500 in interest on federal and private
student loans on your federal income tax return. You can take the
deduction even if you don't itemize.

• If you have extra money, accelerate repayment of the loan with
the highest interest rate first. There are no prepayment penalties on
student loans, and this can save you money by reducing the interest
you pay.

• If you will be working full-time in a public service job, such
as police, fire, EMT, military, public school teacher, librarian,
city/state/federal government, public defender, prosecutor or for most
501(c)(3) tax exempt charitable organization, look into
public service loan forgiveness.

• If you run into financial difficulty, talk to the lenders
before you default. You will lose options if you default
first. Federal student loans have many options for financial relief,
such as temporary suspensions of the obligation to repay the debt
(deferments and forbearances) and flexible repayment plans (extended
repayment, graduated repayment, income-based repayment).

• Don't default. The penalties for defaulting are severe. The
government can garnish up to 15% of wages and seize federal and state
income tax refunds to repay your debt. A quarter (25%) of every
payment will be deducted for collection charges, so a loan that
normally takes 10 years to repay may take as long as 19
years. Borrowers who have defaulted on federal student loans are not
eligible for FHA and VA mortgages, can't enlist in the military and
may find it more difficult to rent an apartment or get a job. The
government can also block renewal of professional licenses. The
nightmare doesn't end when you retire - the government can offset up
to 15% of Social Security disability and retirement benefits to repay
defaulted student loans. It is also almost impossible to discharge
student loans in bankruptcy.

Additional tips on repaying student loans may be found in the
Quick Reference Guide on Repaying Student Loans.

My 17-year-old daughter is eager to begin college. We have some
difficult financial situations to contend with and could use your
advice and direction. Her dad and I are divorced. I have poor credit
due to excessive debt, and late payments. I am considering a debt
settlement plan right now on two of my debts. I have outstanding
student loans, and my ex does as well. He is unemployed, and has been
for almost two years now but he has good credit (I think!) Because of his
unemployment and my financial hardship, both our student loans are in
forbearance now. Neither of us can afford to help very much with
college expenses. How will our situations affect her ability to get a
loan with either/both of us as cosigners?
— D.N.

Federal student loans are the best option, because they have the
lowest interest rates and the most flexible repayment terms. Federal
student loans include the Perkins loan and the Stafford loan, which
have fixed interest rates of 5.0% and 6.8%, respectively. A lower
interest rate may be available on the subsidized version of the
Stafford loan, which is awarded based on financial need. The Perkins
loan is also awarded based on financial need. Eligibility for the
unsubsidized Stafford loan is not based on financial need.

Eligibility for federal student loans does not depend on the parent's
credit history. These loans don't even depend on the student's credit
history.

(Most students who enter college immediately after high school have
thin or non-existent credit histories, so few would qualify if
eligibility for the loans were based on the student's credit
history. The government's goal in providing low-cost student loans
without regard to the student's credit history is to enable students
to enroll in and graduate from college without regard to ability to
pay. So long as the student graduates and doesn't borrow too much debt
for the degree and major, the student should be able to repay the
federal student loans after graduation.)

Dependent students are eligible for up to $5,500 in Stafford loans as
college freshmen. The annual loan limits increase with each year in
school, reaching up to $7,500 as a college senior. The annual limit
on the Perkins loan is $5,500 per year for undergraduate
students. However, the average Perkins loan amount is about $2,000 per
year since the loan funds are limited.

If federal student loans do not provide enough funding, the main
alternatives are Parent PLUS loans and private student loans.

The Parent PLUS loan is a federal loan borrowed by parents of
undergraduate students. It has a 7.9% interest rate. The annual loan
limit on the Parent PLUS loan is up to the full cost of attendance,
reduced by the amount of other aid received. Eligibility for the
Parent PLUS does not depend on financial need.

However, eligibility for the Parent PLUS loan does depend on the
borrower's credit history. The borrower of a Parent PLUS loan must not
have an adverse credit history. If the borrower has had certain
derogatory events in their credit history during the last five years
or currently has a delinquency of 90 or more days on any debt, the
borrower will not qualify for a Parent PLUS loan. The derogatory
events include bankruptcy discharge, default determination,
foreclosure, repossession, tax lien and wage garnishment. The Parent
PLUS loan does not depend on credit scores. If a 90-day delinquency is
the only reason why a parent is ineligible for the Parent PLUS loan,
it is possible for the parent to regain eligibility for the PLUS loan
by bringing the delinquent account current. A parent could also
qualify for a Parent PLUS loan by having an endorser cosign the
loan. The endorser must not have an adverse credit history.

[page]

Like the Stafford and Perkins loans, Parent PLUS loans are borrowed
through the student's college. Ask the college's financial aid
administrator about how to obtain Parent PLUS loans.

If the parents are divorced, either or both parents can borrow from
the Parent PLUS loan, so long as the combined total borrowed does not
exceed the annual loan limit. Stepparents may also borrow from the
Parent PLUS loan program while they are married to the student's
parent.

If the parent does not qualify for a Parent PLUS loan, the student
will be eligible for higher unsubsidized Stafford loan limits. These are
the same limits available to independent students. The annual loan
limits start at $9,500 for college freshmen and increase to $12,500
for college seniors. Note that if one parent is denied a Parent PLUS
loan but the other parent is approved, the student will not be
eligible for the higher unsubsidized Stafford loan limits. So if the
parents prefer that the student qualify for the higher unsubsidized
Stafford loan limits, only one parent — the parent with the
worse credit — should apply for the Parent PLUS loan.

Private student loans are non-federal loans offered by banks and other
financial institutions. The terms vary from one lender to the next,
but generally are more expensive than federal education loans for all
but borrowers with excellent credit. The loans are credit underwritten
with stricter guidelines than the Parent PLUS loan. Not only is
eligibility based on the credit scores of the borrower and cosigner,
but also the interest rates. Borrowers with better credit scores are
more likely to be approved and will qualify for lower interest
rates. Typically less than 5% of borrowers qualify for a private
student loan's best advertised rate.

More than 90% of new private student loans require a cosigner,
typically a parent or other relative. Parents with bad credit are
unlikely to qualify as cosigners on private student loans. Parents who
are unemployed or self-employed or who have a volatile income history
are also unlikely to qualify as cosigners.

Parents need to be careful about cosigning loans. A cosigner does not
just enable the borrower to get a loan. A cosigner is a co-borrower,
equally obligated to repay the debt. If a parent cosigns a loan, the
loan will show up on the parent's credit history. Late payments and
defaults will ruin the credit of both the borrower and
cosigner. Lenders will start seeking repayment from the cosigner after
the first late payment. The cosigned loan will also affect the
cosigner's access to other credit. For example, if a parent tries to
obtain or refinance a mortgage, the cosigned loan will be counted
against them as though it were their loan because it really is their
loan.

Students and parents should beware of taking on too much debt to pay
for the college education. Total student debt at graduation should be
less than the student's expected annual starting salary and ideally a
lot less. If total education debt is less than the annual income, the
student will be able to repay the loans in about 10 years. Likewise,
parents shouldn't borrow more than they can afford to repay by
retirement or in 10 years, whichever is less.

Ask Kantro is written by Mark Kantrowitz, an expert on paying for
college and publisher of Fastweb.com and FinAid.org, the leading free
web sites for information about student financial aid, student loans
and scholarships. Write to Ask Kantro at AskKantro@Fastweb.com.
Questions may be edited for style and clarity.
Follow him on Twitter at @mkant.

A new version of income-based repayment (IBR) was enacted by the
Health Care and Education Reconciliation Act of 2010, but will be
effective only for new borrowers on or after July 1, 2014. President
Obama has proposed fast-tracking the new IBR plan to make it available
to more students sooner. This article presents a sneak peak at the
details of the fast-tracked IBR plan, which differs somewhat from the
current and new IBR plans. Please note that these details are not yet
final and may change.

Summary of the New Fast-tracked Income-Based Repayment Plan

Name: ICR-A

Available: July 1, 2013

Eligibility: Borrowers with Direct Loans disbursed on or after October
1, 2011 who were new borrowers as of October 1, 2007.

Restriction: The repayment plan is available only to loans in the
Direct Loan program. FFEL program loans must be consolidated into the
Direct Loan program to qualify.

Loan Payment: 10% of discretionary income, which is defined as the
amount by which adjusted gross income exceeds 150% of the poverty line.

Forgiveness: 20 years after the first payment in a qualifying
repayment plan or receipt of an economic hardship deferment or October
1, 2007, whichever comes later.

Background

Income-based repayment bases the monthly loan payments for federal
student loans on a percentage of the borrower's discretionary income,
not the amount they owe, forgiving the remaining loan balance after a
number of years in repayment. Discretionary income is defined as the
amount by which adjusted gross income exceeds 150% of the poverty
line. Income-based repayment provides a meaningful reduction in the
monthly loan payment for borrowers whose total federal student loan
debt exceeds their annual income.

The current version of income-based repayment bases the loan payment
on 15% of discretionary income and forgives the remaining loan balance
after 25 years in repayment. This version of income-based repayment
was enacted by the College Cost Reduction and Access Act of 2007 and
became available to all federal student loan borrowers on July 1, 2009.

A new version of income-based repayment was enacted by the Health Care
and Education Reconciliation Act of 2010 and will become effective for
borrowers who are considered to be new borrowers as of July 1, 2014. A
new borrower is a borrower who had no loans prior to the effective
date, not even old loans that were consolidated on or after that
date. The new version of income-based repayment bases the loan payment
on 10% of discretionary income and forgives the remaining loan balance
after 20 years in repayment. Thus the monthly loan payment under the new
income-based repayment plan is 1/3 lower than in the current
income-based repayment plan and the forgiveness occurs five years sooner.

As part of his "we can't wait" campaign, President Obama proposed
fast-tracking the new income-based repayment plan to make it available
to more students sooner.

[page]

Use of Regulatory Authority to Fast-Track the New IBR

Presidential authority is limited. The executive branch must operate
within the constraints established by Congress. For example, in some
cases Congress grants the executive branch the authority to issue
regulations that specify the implementation of programs established by
Congress.

The authority provided to the US Department of Education to issue
regulations for the income-based repayment plan is somewhat limited. While the
US Department of Education may reduce the number of years until the
remaining balance is forgiven, the US Department of Education does not
have the authority to reduce the percentage of discretionary income in the
current income-based repayment plan from 15% to 10%. The US Department
of Education also does not have the authority to change the effective
date of the new income-based repayment plan.

However, the regulatory authority under the income-contingent
repayment plan is much broader. Income-contingent repayment is a
predecessor to income-based repayment that became available on July
1, 1994. The Student Loan Reform Act of 1993, which was included in the
Omnibus Budget Reconciliation Act of 1993, authorized the
income-contingent repayment plan as part of the Federal Direct Loan
Program. The income-contingent repayment plan bases the monthly
payment on 20% of discretionary income, where discretionary income
is defined as the amount by which adjusted gross income exceeds 100%
of the poverty line. Any remaining debt is forgiven after 25 years in
repayment.

The US Department of Education has the regulatory authority
to change most of the terms of the income-contingent repayment plan,
including the percentage of discretionary income, the definition of
discretionary income and the number of years until the remaining
balance is forgiven.

Accordingly, the US Department of Education will be issuing new
regulations to modify the income-contingent repayment plan into
something similar to the new income-based repayment plan and to make
it available sooner. The new version of income-contingent repayment
will be named ICR-A. The existing version of income-contingent
repayment will be named ICR-B.

The process for setting new regulations begins with the selection of a
set of negotiators to represent the interests of affected parties,
including borrowers, colleges and lenders, among others. These
negotiators meet with representatives of the US Department of
Education to discuss the terms of the proposed regulatory changes in a
process called negotiated rulemaking (NegReg). If consensus is
reached, the agreement forms the basis of a Notice of Proposed Rule
Making (NPRM). Otherwise the US Department of Education writes the
NPRM as it sees fit. There is a public comment period after the NPRM
is published in the Federal Register, typically 30, 45 or 60
days. After the end of the public comment period, the US Department of
Education issues a final rule that responds to the public comments and
specifies the details of the new regulations. If the final rule is
published by November 1, the regulations become effective on the
following July 1.

Session three of the negotiated rulemaking on student loans
ended on March 30, 2012. It is expected that the US Department of
Education will publish the NPRM soon, in time for a final rule to be
published by November 1, 2012.

[page]

Implications for the Design of the Fast-Tracked IBR Plan

This process has several implications for the fast-tracking of the new
income-based repayment plan.

• Because it is reliant on the negotiated rulemaking process, the
soonest the new income-based repayment plan can become available is
July 1, 2013. The master calendar provisions do not permit an earlier
implementation except in emergency situations.

• However, eligibility will not be restricted to new borrowers as
of the effective date of the regulations. Instead, eligibility will be
restricted to new borrowers who have no outstanding balances on Direct
or FFEL program loans as of October 1, 2007 (the start of FY2008) and
who had no outstanding balance on a Direct or FFEL program loan on the
date the borrower received a new loan on or after October 1, 2007 (the
start of FY2008). So borrowers who have loans from before October 1,
2007 cannot become eligible by consolidating or otherwise refinancing
the loans. In addition, to be eligible the borrower must have at
least one Direct Loan disbursed on or after October 1, 2011 (the start
of FY2012).

The US Department of Education had to restrict eligibility for
financial reasons. Making the ICR-A plan available to all borrowers
would be too expensive. Only Congress can appropriate funds, so
executive actions must be cost-neutral to the taxpayer. The Obama
administration is using the savings from the consolidation of split
borrowers to pay for the costs of the fast-tracking the new
income-based repayment plan. Since the savings from the consolidation
of split borrowers are limited, the eligibility of the new
income-based repayment plan had to be restricted to contain the
costs. In addition, the October 1, 2007 start date is partly motivated
by the effective date of the College Cost Reduction and Access Act of
2007.

• Because the new income-based repayment plan is based on the
income-contingent repayment plan, it is restricted to loans that are
in the Direct Loan program. Borrowers with loans in the
federally-guaranteed student loan program (FFELP) will need to
consolidate their loans into the Direct Loan program in order for
those loans to qualify for the new income-based repayment
plan. Otherwise, the loan payments under the new income-based
repayment plan will be applied only to loans in the Direct Loan
program, prorated by the percentage of the outstanding principal
balance of the borrower's federal student loans that are Direct Loans.

• Defaulted loans are not eligible, nor are Parent PLUS loans or
private student loans.

• The clock on the 20-year forgiveness period begins the date the
borrower first made payments under ICR-A, ICR-B or IBR or the date the
borrower received an economic hardship deferment, whichever came
earliest, but no earlier than October 1, 2007.

• Borrowers who were in the old version of income-contingent
repayment that was in effect prior to July 1, 2013 (ICR-B) will be
able to continue in the ICR-B plan, as will borrowers who are
ineligible for ICR-A or IBR. Borrowers who were already in the
income-contingent repayment plan will not be required to switch to the
ICR-A or IBR plans. Since borrowers who are eligible for ICR-B are
almost always eligible for ICR-A or IBR, the ICR-B plan will
eventually be phased out as ICR-B borrowers reach the 25-year
cancellation of the remaining debt. (ICR-B borrowers who made payments
under ICR-B before October 1, 2002 are unlikely to switch to ICR-A, as
they will reach the 25-year forgiveness sooner than they would reach
the 20-year forgiveness under ICR-A.)

I am currently in community college, hoping to transfer to a
traditional 4-year college and then proceed to get my masters in
teaching. Where my frustration lies is this: I had a different career
focus before and was taking classes toward fulfilling that
goal. Now my college's financial aid administrator says that I have
taken too many credits at the community college level and will not
eligible for any government financial aid until I continue on to a
4-year institution. Is this really true? Is there any way around this?
She mentioned maybe trying to enroll into another community college
but she wasn't sure that this would work either. I have never received
financial aid in the past; I have simply paid my own way and worked
full-time. I need to start going full time and can't find many
options. I received a private student loan last semester but only with
a co-signer. My current co-signer will not do so again.
— Glenda S.

Continued eligibility for student financial aid requires the student
to be making Satisfactory Academic Progress (SAP). By federal law and
regulations, college policies for measuring SAP must not only consider
the grades earned by the student, but also the pace of progress toward
a degree. In particular, the student must be on track to graduate
within the maximum timeframe for the degree program. The maximum
timeframe is 150% of the normal timeframe for the program, such as 6
years for a 4-year degree and 3 years for a 2-year degree. After
violating the 150% maximum timeframe restriction, the student is no
longer eligible for federal student aid and often institutional
college aid as well.

Students who change majors repeatedly often encounter the maximum
timeframe restrictions, especially if few of their previous classes
count toward the new major.

One way of working around this problem is to transfer to a different
community college. Depending on how many of the previous credits are
counted toward the degree program at the new college, the student
may be able to reset the maximum timeframe clock.

If a student already has enough credits to obtain an Associate's
degree, the student could graduate with the degree even if it isn't in
the student's current field of study. This then resets the maximum
timeframe clock, allowing the student to pursue a second Associate's
degree in the desired field of study. Eligibility for many forms of
student financial aid for an undergraduate education ends when a
student obtains his or her first Bachelor's degree, but there are no
similar restrictions on the receipt of multiple Associate's degrees.

Another solution is to transfer to a 4-year college, if the goal is to
ultimately obtain a Bachelor's degree. The 4-year college will be more
expensive than a community college, but perhaps enough of the
community college credits will transfer to allow the student to
graduate with a Bachelor's degree in only one or two more years of
classes. An in-state public college will be less expensive than most
private and out-of-state public colleges.

The ability to reset the clock may become more restricted in the
future, as Congress and the US Department of Education seek ways to
eliminate waste and abuse. Perpetual students, also known as Pell
runners, often enroll in low-cost community colleges in order to
maximize the amount of money disbursed after tuition and fees are
deducted from the financial aid funds. Pell runners use this money for
living expenses without any intention of getting a college degree,
treating student aid as a kind of welfare. Often a Pell runner will
switch majors or colleges in order to stretch out the eligibility for
financial aid. Overall, Pell runners represent a very small percentage
of student aid funds, but they are much more prevalent at community
colleges. Congress recently reduced the maximum number of semesters of
Pell Grant eligibility from 18 to 12 in order to address this form of
fraud. But this can also affect genuine students who are having
difficulty choosing a field of study.

If at all possible, a student who intends to become a teacher should
borrow only federal student loans. Teachers are eligible for a variety
of loan forgiveness programs, including public service loan
forgiveness. These loan forgiveness programs, however, are available
only for federal student loans. Private student loans are not
eligible.

Ask Kantro is written by Mark Kantrowitz, an expert on paying for
college and publisher of Fastweb.com and FinAid.org, the leading free
web sites for information about student financial aid, student loans
and scholarships. Write to Ask Kantro at AskKantro@Fastweb.com. Questions may be edited for style and clarity.
Follow him on Twitter at @mkant.

This article summarizes the background concerning the doubling of the
interest rate on new subsidized Stafford loans to undergraduate
students from 3.4% to 6.8% on July 1, 2012. It also discusses the
impact of the pending change.

Background

The College Cost Reduction and Access Act of 2007 (P.L. 110-84)
enacted a phased-in interest rate reduction on subsidized Stafford
loans to undergraduate students, gradually reducing the interest rates
from 6.8% to 3.4%. This legislation was enacted to fulfill the
Democrats' "Six for '06" pledge to slash the interest rates on student
loans in half.

The interest rate reduction applied only to subsidized Stafford loans
to undergraduate students. The interest rates on unsubsidized Stafford
loans to undergraduate students remained at 6.8%, as did the interest
rates on subsidized and unsubsidized Stafford loans to graduate and
professional students. The interest rates on PLUS loans remained at
8.5% (FFELP) and 7.9% (Direct Loans).

Congress did not reduce the interest rates on other types of federal
education loans because of the high cost of the legislation. Congress
also phased-in the interest rate reductions to reduce the cost.
Likewise, the legislation did not permanently reduce the interest rate
to 3.4% because of the cost, which is about $6 billion for each year's
worth of 3.4% rate loans.

The interest rates were reduced from 6.8% in 2007-08 to 6.0% in
2008-09, 5.6% in 2009-10, 4.5% in 2010-11 and 3.4% in 2011-12. If
Congress does not act, the interest rates will be 6.8% in 2012-13 and
subsequent award years. (Award years start on July 1 and end on June 30.)

The original interest rate reduction fulfilled a 2006 campaign pledge,
so it's not surprising that that expiration would be timed to coincide
with an election year. Congress normally passes legislation with a
5-year or 10-year window. This legislation involved a 4-year
window. The doubling of the interest rate also yields a dramatic issue
that may motivate middle-income voters.

What is Changing?

The fixed interest rate on new subsidized Stafford loans to undergraduate
students will be doubling on July 1, 2012, increasing from 3.4% to 6.8%.

What isn't Changing?

The interest rates on unsubsidized Stafford loans to undergraduate and
graduate students remain unchanged at 6.8%.

The interest rate on subsidized Stafford loans to graduate and
professional students remained at 6.8%. However, graduate and
professional students will no longer receive subsidized Stafford loans
starting July 1, 2012, due to changes enacted by the Budget Control
Act of 2011. Graduate and professional students can still borrow the
same amount of money, but it will be entirely unsubsidized.

[page]

Who is Affected?

7.4 million undergraduate students will receive subsidized Stafford
loans in 2012-13.

The interest rate increase affects only new loans made on or after
July 1, 2012. The rate increase does not affect previous loans, which
keep their existing interest rates.

Only undergraduate students are affected. The interest rates on
Stafford loans to graduate and professional students have remained
unchanged at 6.8% since the switch to fixed rates on July 1, 2006.
Also, the Budget Control Act of 2011 ended subsidized Stafford loans
to graduate and professional students effective July 1, 2012. Graduate
and professional students will still be able to borrow the same amount
of money, but the loans will be entirely unsubsidized.

Eligibility for subsidized Stafford loans is based on financial
need. Financial need is defined as the difference between the total
cost of attendance (COA) and the expected family contribution
(EFC). Thus even high-income students may qualify for a subsidized
Stafford loan if they enroll at a more expensive college. For example,
more than a quarter (27.4%) of undergraduate students with family
income of $100,000 or more received subsidized Stafford loans at
colleges costing $30,000 or more in 2007-08, compared with only 3.4%
at colleges costing less than $10,000. More than two-fifths (43.6%) of
high-income students who received subsidized Stafford loans were
enrolled at the most expensive colleges.

Based on data from the 2007-08 National Postsecondary Student Aid
Study (NPSAS), 54.8% of subsidized Stafford loans were awarded to Pell
Grant recipients and 45.2% to students who did not qualify for the
Pell Grant. Students who qualified for the Pell Grant were three times
as likely to receive a subsidized Stafford loan (59.6%
vs. 18.5%). More than two-thirds (69.7%) of subsidized Stafford loan
borrowers had family income under $50,000, compared with a quarter
(24.2%) of students with family income of $50,000 to $100,000 and 6.1%
of students with family income of $100,000 or more. (The Pell Grant
program is better-targeted at financial need, with 95.9% of Pell Grant
recipients having family income under $50,000.) Half (49.8%) of
subsidized Stafford loans were awarded to undergraduate students at
public colleges, a quarter (22.3%) to undergraduate students at
non-profit colleges and a quarter (27.8%) to undergraduate students at
for-profit colleges. A fifth (21.2%) of undergraduate subsidized
Stafford loan borrowers attend colleges that cost less than $10,000,
two-fifths (41.2%) attend colleges that cost $10,000 to $20,000, a
fifth (19.8%) attend colleges that cost $20,000 to $30,000 and a fifth
(17.9%) attend colleges that cost $30,000 or more.

What is the Difference Between Subsidized and Unsubsidized Loans?

The government pays the interest on a subsidized loan during
deferment periods, such as the in-school deferment or the economic
hardship deferment.

The government may also pay the interest on a subsidized loan during
the grace period after graduation. For example, the government pays
the interest during the in-school period and 9-month grace period on
Perkins loans. Previously the government would pay the interest on
subsidized Stafford loans during the 6-month grace period in addition
to the in-school period. However, the government will not pay the
interest on subsidized Stafford loans during the 6-month grace period
for new loans made in 2012-13 and 2013-14.

The government does not pay the interest on unsubsidized loans during
deferment periods and the grace period. If the interest is unpaid as
it accrues, the interest will be capitalized, adding it to the loan
balance. This increases the size of the loan (typically by about
1/6th), leading the borrower to pay interest on interest.

[page]

Impact

The average undergraduate subsidized Stafford loan in 2007-08 was
$3,357. The average undergraduate subsidized Stafford loan debt at
graduation was $9,008 in 2007-08. The average subsidized Stafford loan
debt at graduation for Bachelor's degree recipients in 2007-08 was
$11,329. (For an Associate's degree the average subsidized Stafford
loan debt at graduation was $6,588 and for Certificates it was
$4,726.) The annual limit on undergraduate subsidized Stafford loans
is $3,500 for freshmen, $4,500 for sophomores, $5,500 for juniors and
$5,500 for seniors. The aggregate subsidized Stafford loan limit is
$23,000.

Depending on the amount of debt and the repayment term, one can arrive
at different cost figures for an increase in the interest rate from
3.4% to 6.8%.

The following figures assume that the borrower
does not capitalize the interest during the 6-month grace period.

• For $3,357 in subsidized Stafford loan debt, the increased cost is
$671 on a 10-year repayment term, $827 on a 12-year repayment term and
$1,519 on a 20-year repayment term. That's less than $7 per month.

• For $5,500 in subsidized Stafford loan debt, the increased cost is
$1,100 on a 10-year repayment term, $1,355 on a 12-year repayment term
and $2,488 on a 20-year repayment term. That's less than $11 per month.

• For $9,008 in subsidized Stafford loan debt, the increased cost is
$1,801 on a 10-year repayment term, $2,219 on a 12-year repayment term
and $4,075 on a 20-year repayment term. That's less than $17 per month.

• For $11,329 in subsidized Stafford loan debt, the increased cost is
$2,265 on a 10-year repayment term, $2,791 on a 12-year repayment term
and $5,125 on a 20-year repayment term. That's less than $22 per month.

• For $23,000 in subsidized Stafford loan debt, the increased cost is
$4,599 on a 10-year repayment term, $5,666 on a 12-year repayment term
and $10,405 on a 20-year repayment term. That's less than $44 per month.

The following figures assume that the borrower
capitalizes the interest during the 6-month grace period.

• For $3,357 in subsidized Stafford loan debt, the increased cost is
$761 on a 10-year repayment term, $925 on a 12-year repayment term and
$1,649 on a 20-year repayment term. That's less than $7 per month.

• For $5,500 in subsidized Stafford loan debt, the increased cost is
$1,248 on a 10-year repayment term, $1,515 on a 12-year repayment term
and $2,702 on a 20-year repayment term. That's less than $12 per month.

• For $9,008 in subsidized Stafford loan debt, the increased cost is
$2,043 on a 10-year repayment term, $2,481 on a 12-year repayment term
and $4,425 on a 20-year repayment term. That's less than $18 per month.

• For $11,329 in subsidized Stafford loan debt, the increased cost is
$2,570 on a 10-year repayment term, $3,120 on a 12-year repayment term
and $5,565 on a 20-year repayment term. That's less than $24 per month.

• For $23,000 in subsidized Stafford loan debt, the increased cost is
$5,217 on a 10-year repayment term, $6,335 on a 12-year repayment term
and $11,299 on a 20-year repayment term. That's less than $48 per month.

The President's Proposal

President Obama is proposing to extend the 3.4% interest rate for an
additional year.

President Obama and Senate Democrats propose to pay for the cost of
the extension by ending a loophole in the tax treatment of S
corporation income. House Democrats would pay for the cost by cutting
oil subsidies. House Republicans announced their own proposal for
extending the 3.4% interest rate on 4/25/2012, which they would pay
for by tapping into the health care prevention fund established by the
Health Care and Education Reconciliation Act of 2010. The House
Republican bill passed the House on 4/27/2012 by a vote of 215 to 195,
along party lines. President Obama has threatened to veto it. On
5/8/2012 the
Senate Democratic bill failed to achieve the 60-vote supermajority
necessary to prevent a filibuster, falling short by 8 votes. Both
parties now support keeping the interest rate on new subsidized
Stafford loans to undergraduate students at 3.4% for an additional
year, but disagree on how to pay for it. Each side is proposing a
funding mechanism that is unacceptable to the other side. If a
compromise is reached, it will most likely occur at the last minute,
toward the end of June 2012.
[Updated 5/14/2012.]

The cost of one additional year of 3.4% rate loans is approximately
$5.6 billion on a net present value basis, assuming 7.4 million
borrowers of an average of $3,357 in subsidized Stafford loans,
with interest capitalized during the 6-month grace period, a
12 year repayment term and a 2% discount rate. The Congressional
Budget Office (CBO) estimates a higher $6.7 billion cost, perhaps by
assuming a higher average loan amount or a longer repayment term.

For nearly 17 years, Fastweb has worked to become the leading online
resource for paying and preparing for college, and recently, our site
soared to new heights with the EIFLE Award!

Fastweb was named 2012 Organization of the Year by the Institute for
Financial Literacy on Wednesday, April 18, 2012. The Institute for
Financial Literacy announced the winners of the 2012 Excellence in
Financial Literacy Education (EIFLE) Awards during a ceremony at the
Annual Conference on Financial Education.

The EIFLE Awards recognize the innovation, dedication and commitment
of individuals and organizations that support financial literacy
education worldwide. Fastweb won the award for creating the first free
online scholarship matching service, for helping more than 50 million
students and parents understand how to pay for college and for
developing novel insights, rules of thumb and tools that are used by
many financial literacy organizations and educators.

"This year's EIFLE Award winners have distinguished themselves from
their peers with the depth and breadth of their accomplishments in
promoting effective financial literacy education in the communities
they serve," said Leslie E. Linfield, Executive Director and Founder
of the Institute for Financial Literacy. "They are a shining example
for those whose quest it is to make financial literacy education
available to all segments of society."

In addition to Fastweb, other winners of 2012 EIFLE Awards include
AARP Social Security Benefits Calculator,
Applicant Background Investigation Drill (ABID),
Cash Flow Navigator,
Cha-Ching: Money Smart Kids,
Consolidated Credit Counseling Services, Inc.,
Don't Be Jack,
Financial Fitness for Life,
Fostering Hope: Preparing Today's Youth for Tomorrow's Future
Money Habitudes: How to be Rich in Life and Love,
MoneyIsland and
Real Money Talk for Women.
Mike McHugh of the Real Sense
Prosperity Campaign (United Way of Northeast Florida) was named
educator of the year.

Six authors won book awards:

• Alisa T. Weinstein for Earn It, Learn It: Teach Your Child the Value of Money, Work, and Time Well Spent
  
• Jim Randel for Street Smarts: Beyond the Diploma
  
• Robin Y. Yang for Enchanted Collar, Series 1-5
  
• Jennifer S. Matthews for 12 Ways to Put Money in Your Pocket Every Month Without a Part-Time Job: The Skinny Book That Makes Your Wallet Fat
  
• Tony Steuer for The Questions and Answers on Life Insurance Workbook
  
• Julie Jason for Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad
  

The Institute for Financial
Literacy is a nonprofit tax exempt organization whose mission is
to promote effective financial education and counseling.

We're so proud of our accomplishment, but we couldn't have done this
without you! Thanks for supporting Fastweb and helping us make this a
better site that helps you!

As a guidance counselor, I have many families asking me if there's
any downside to taking out a federal unsubsidized loan. They need loan
money either way and the rates for the private loans are much higher
than the government loans. Most advice sites and articles are very
general in nature. Can you provide any specifics on what would be the
downsides to accepting a federal student loan vs. a private student loan?
— Michelle B.

Generally, students should borrow federal first because federal
student loans are cheaper, more available and have better repayment
terms than private student loans. But there are a few drawbacks to
federal education loans.

Downsides to Federal Education Loans

The most significant downsides to federal education loans occur when a
borrower defaults on the loans. The federal government has much
stronger powers to compel repayment from defaulted borrowers than do
private lenders. For example, the federal government can garnish up to
15% of disposable pay without a court order, while private lenders
must get a judgment before they can get a wage garnishment
order. (Disposable pay is defined as gross wages minus amounts
required by law to be withheld.) The federal government can intercept
federal and state income tax refunds, while private lenders
cannot. The federal government can garnish up to 15% of Social
Security disability and retirement benefit payments, while private
lenders cannot. Collection charges of up to 25% of each payment are
deducted before the rest of the payment is applied to accrued interest
and the principal balance of the debt. The federal government can
prevent renewal of a professional license. Borrowers who have
defaulted on federal education loans can't enlist in the military and
are ineligible for FHA and VA mortgages.

Another difference between federal and private student loans is the
lack of a statute of limitations on federal education loans. Private
student loans, on the other hand, are subject to a statute of
limitations. The statute of limitations for promissory notes,
including those of private student loans, varies from 3 years to 15
years, depending on the state, with 6 years as the most common
length of a statute of limitations.

Federal education loans are also not subject to the defense of laches,
which argues that a debt is unenforceable because of an unreasonable
and harmful delay in demanding payment. Borrowers also have an
affirmative obligation to notify the holder of a federal education
loan about changes in the borrower's address.

Federal student loans are not subject to a defense of infancy, unlike
private student loans. Accordingly, private student loans require a
prospective borrower to have reached the age of majority for his or
her state of residence. This is age 18 in most states, except for
Alabama and Nebraska, where it is age 19, and Indiana, Mississippi,
New York and Puerto Rico, where it is age 21.

Federal education loans, except for the PLUS loan, have lower annual
and aggregate loan limits than private student loans. But if a
borrower has no choice but to borrow from the federal PLUS or private
student loan programs, that may be a sign of over-borrowing.

The federal government is exempt from the
Fair Debt
Collection Practices Act (FDCPA), unlike the lenders of private student
loans. However, any private collection agencies employed by the
federal government to collect defaulted federal education loans are
subject to the FDCPA.

Private student loans are subject to better disclosure requirements
under the Truth in Lending Act (TILA) than federal education loans.

[page]

Benefits of Federal Education Loans Generally Outweigh the Risks

But the benefits of federal education loans as compared with private
student loans generally outweigh the risks. Federal education loans
have numerous advantages over private student loans.

Federal education loans have fixed interest rates, which will not
increase during the term of the loans. Most private student loans have
variable interest rates which usually are adjusted on a monthly or
quarterly basis. (Some state loan programs offer fixed rates, and a
few private lenders have started offering fixed rate options.) Given
that interest rates are extraordinarily low right now, variable
interest rates have nowhere to go but up. Most lenders do not cap the
interest rates on variable-rate private student loans.

Most variable-rate private student loans will ultimately be much more
expensive than fixed-rate federal student loans. Assuming that
variable interest rates remain low for another two or three years and
then return to historic norms, the equivalent fixed rate for a
variable-rate loan involves adding 3 to 4 percentage points to the
interest rate on a 10-year term or 4 to 5 percentage points to the
interest rate on a 15-year term.

Eligibility for federal student loans, such as the federal Stafford and
federal Perkins loans, is not based on the credit history of the borrower,
while most private student loans are credit underwritten. (The federal
PLUS loan has a modest credit check, looking for the absence of
an adverse credit history, but it does not depend on credit scores or
debt-to-income ratios.)

Federal education loans do not require cosigners and do not base the
interest rate and fees on credit scores. More than 90% of new private
student loans require a creditworthy cosigner. Most students are
unable to qualify for a private student loan on their own because they
have a thin or nonexistent credit history, or if they happen to have a
credit history, it is usually a bad one. Even if a student satisfies
the credit criteria, it may be beneficial to have a cosigner, since
the interest rates and fees on private student loans are usually based
on the higher of the two credit scores.

(Stepparents who have not adopted the student may borrow from the
federal Parent PLUS loan only for as long as they are married to the
student's biological or adoptive parent. Aunts, uncles and siblings
cannot borrow from the federal Parent PLUS loan program. Most lenders
allow stepparents and other relatives to cosign a private student
loan, if they satisfy credit criteria.)

Some parents prefer private student loans over the federal Parent PLUS
loan despite the higher cost because the student is obligated to repay
the private student loan but not the federal Parent PLUS
loan. However, a cosigner is a co-borrower, equally obligated to repay
the private student loan. When a parent cosigns a private student
loan, the parent is putting his or her credit score at risk. If the
student is late with a payment or defaults on a private student loan,
it ruins the credit history of both the borrower and cosigner. Even if
the borrower makes every payment by the due date, serving as the
cosigner on too much private student loan debt may prevent the
cosigner from obtaining other loans or refinancing a mortgage.

[page]

Federal Education Loans Offer More Options for Financial Relief

Federal education loans offer economic hardship deferments for up to
3 years and forbearances for up to 5 years, while private student
loans typically offer forbearances for at most one year, and may
charge a quarterly fee per loan for a forbearance.

The federal government pays the interest on subsidized federal
Stafford loans and federal Perkins loans while the student is enrolled
in school (and in some cases, during the 6 or 9 month grace period
after graduation). The federal government also pays the interest on
subsidized loans during the economic hardship deferment.

Federal student loans offer income-based repayment and public service
loan forgiveness; private student loans and federal Parent PLUS loans do
not. All or part of the interest on subsidized loans may be paid by
the federal government during the first three years of income-based
repayment. Federal student loans also offer a variety of up-front
teacher loan forgiveness programs and forgiveness for military
service.

Federal education loans also offer other flexible repayment terms,
such as graduated repayment and extended repayment.

Federal education loans provide for a death and disability discharge
if the borrower (or in the case of a federal Parent PLUS loan,
the student on whose behalf the parent borrowed) dies or becomes totally and
permanently disabled. Four private lenders — Sallie Mae, NY
HESC, Discover and Wells Fargo — offer similar benefits, but
other private student loan programs do not.

Federal education loans include discharges for identity theft, false
certification of ability to benefit, unpaid refunds and closed schools
in certain circumstances.

Differences Between Education Loans and Other Types of Consumer Credit

Other aspects of both federal and private student loans distinguish
them from other forms of consumer credit. Some of these differences
are beneficial and some are not.

Federal education loans offer a 0.25% interest rate reduction for
borrowers who repay their loans through automatic monthly direct debit
from a checking or savings account. Most private student loans offer a
similar interest rate reduction, typically either 0.25% or 0.50%. Most
other forms of consumer credit do not offer auto-debit discounts.

Federal and private education loans cannot be discharged in bankruptcy
unless the borrower demonstrates undue hardship in an adversarial
proceeding. This is a very difficult standard, requiring a "certainty
of hopelessness" in the words of one bankruptcy judge. Borrowers are
more likely to die of cancer or in a car accident than to get their
loans discharged in bankruptcy. Credit card debt and other types of
consumer debt can be discharged in bankruptcy.

Both federal and private student loans are unsecured. If you default
on a home equity loan, you can lose your home. But if you default on a
student loan, the lender can't repossess your education.

Borrowers of federal and student loans can defer repayment while the
student is in school and for a 6 or 9 month grace period after
graduation. (Interest continues to accrue during the deferment. If the
borrower does not pay the interest as it accrues, the interest is
capitalized at the end of the deferment, increasing the size of the
loan.) Home equity loans, mortgages, auto loans and credit cards do
not offer similar flexibility to delay the start of repayment.

Ask Kantro is written by Mark Kantrowitz, an expert on paying for
college and publisher of Fastweb.com and FinAid.org, the leading free
web sites for information about student financial aid, student loans
and scholarships. Write to Ask Kantro at AskKantro@Fastweb.com.
Follow him on Twitter at @mkant.