How’d they find out? The girls’ father suggested to one of them that she learn about her credit, so he suggested that she pull her credit report online. That’s when she found out about the student loans that were taken out in her name nearly 18 months prior, according to fox4kc.com.

Cynthia, who suffers from a gambling addiction, was was sentenced Monday to five years in prison. The loans have been cleared from her daughters’ credit reports, but surely the emotional stress will take some time to pass.

Lesson of the day: Pull your credit report annually!

See also: What NOT To Do With Your Pell Grant

‘Generation Debt’ is going deep into the red, by Vanessa Richardson at msnbc.com, highlights the financial frustrations facing Generation Y, including heavy loads of student loan and credit card debt and an insecure economy with poor job prospects.

The article also offers candid feedback from graduates about how they’re coping with their overwhelming financial obligations and some practical advice from finance experts on how to get off your own hamster-wheel of debt. College and high school graduates alike will find these personal finance tips helpful. (Stay tuned to EducationGrant.com for information on upcoming changes to credit card laws.)

Thanks to Penelope Trunk for the reference to this article.

Unsubsidized Stafford loans are a good deal for undergraduate students whose incomes are too high to qualify for subsidized Stafford loans. The maximum loan amounts may not seem like much, but may in fact cover all or almost all your college costs if you attend an in-state public university or community college.

Annual Stafford loan limits for dependent students are:

• $5,500 for your first year of school (no more than $3,500 subsidized)
• $6,500 for your second year (no more than $4,500 subsidized)
• $7,500 for your third year (no more than $5,500 subsidized)
• $7,500 for your fourth year (no more than $5,500 subsidized)

Annual Stafford loan limits for independent students are:

• $9,500 for your first year of school (no more than $3,500 subsidized)
• $10,500 for your second year (no more than $4,500 subsidized)
• $12,500 for your third year (no more than $5,500 subsidized)
• $12,500 for your fourth year (no more than $5,500 subsidized)

2 Federal Loan Methods: Direct Loan Program vs. Bank-based FFELP

Unsubsidized Stafford loans are currently offered through two federal loan programs, the Direct Loan Program and the bank-based Federal Family Education Loan Program (FFELP). The loan funds for the Direct Loan program are supplied by the U.S. Treasury. Loan funds for the FFELP are supplied by private financial institutions, who get subsidies from the government for making their money available for federal student loans at interest rates and fees set by the government. There’s a good chance the FFELP will be shut down some time next year, however, because the Obama administration believes the Direct Loan program is more cost-efficient.

The Student Loan Market

The administration’s decision to stop the subsidies to private lenders and offer federal loans solely via the Direct Loan program has caused a lot of unhappiness among the financial institutions and financial aid administrators who benefited from the FFEL program. If you read any news stories about their protests, you’ll see complaints about how the federal government is trying to “drive private lenders out of the student loan market” and how the “lack of free market competition” caused by the government’s soon-to-be “monopoly” on student loans will deprive students and families of student loan choice.

But the truth is, the federal government providing federal student loans through the Direct Loan program doesn’t have anything to do with the availability of private (or, alternative) student loans. There is nothing in the FFELP shut-down plan that says that private lenders will be barred from offering their own student loans. Nothing that says college students MUST take out federal student loans and are not allowed to take out private student loans if they wish to. Nothing that says private lenders cannot continue to offer student loans from the private sector, just like they already do.

If the new Direct Loan plan goes into effect, federal loan money will come from a federal source and private loan money will come from private sources, and the two will compete for student loan business. No one is forcing private lenders out of the student loan market— they will still be able to offer all the student loans they want. Just not through the government’s program.

Public-Sector/Private-Sector Competition Benefits the Student:
Federal Unsubsidized Stafford Loans vs. Commercial Lender Student Loans

In fact, the only impact the elimination of FFELP may have on private lenders (assuming they want to stay in the student loan market) is to motivate them to lower their interest rates and fees and increase their borrower rights and protections in order to be competitive with the federal Direct Loan program. Private lenders could even undercut the federal loan program by offering even lower interest rates and fees and even better borrower rights and protections than the federal government does. Then everyone will want a private loan instead of a federal loan.

It remains to be seen if the Obama administration has the right idea about offering only Direct Loans, but the hype about private lenders being driven out of the student loan market is misleading. In the meantime, until private lenders are willing to be more competitive, the fixed 6.8% interest rate, no credit check, and no loan payments until after graduation make unsubsidized Stafford loans the best student loan deal around.

Carolyn Bigda of the Chicago Tribune Online provided a good overview, and some tips, on consolidating private student loans in her Your Money column last month:

Student loan consolidation makes sense, but federal, private debt has different rules

By the way, although consolidating private loans into a federal consolidation loan is not allowable, it sounds as though some students have consolidated, or tried to consolidate, their federal student loans into a private consolidation loan. The Student Loan Borrower Assistance Project at the National Consumer Law Center strongly advises students against doing this:

“WARNING: It is very dangerous to consolidate federal loans into a private consolidation loan. You will lose your rights under the federal loan programs once you choose to consolidate with a private lender. These include deferment, forbearance, cancellation, and affordable repayment rights. Also, federal consolidation loans generally have lower interest rates.”

• For the past 4 years, approximately two-thirds of students graduating from four-year colleges have student loan debt upon graduation
• Nationwide, the average debt for graduating seniors with student loans rose to $23,200 in 2008, an increase of about 6%/year between 2004 and 2008
• At some colleges, average debt soared to as high as $106,000

The good news is that there are ways to minimize and control student loan debt and many personal finance experts who offer tips on how to do this. These tips for affording student loans are not new—just a little dusty from not having been used for a while.

Liz Pulliam Weston, a personal finance advisor at MSN Money, wrote a terrific article with tips for affording college and student loans:

How much college debt is too much?

Two years later, with the country in a deep recession, that question is even more important. In addition to a refresher course on understanding your personal finances and federal loans vs. private loans, Ms. Weston also provides recommendations for student loan limits based on the degree you plan to pursue.

If you’re starting to think about going back to school next year, now is a good time to familiarize yourself with tips for affording your student loans after you’ve graduated.

The information about all these student loans comes from the institutions that loaned or manage the money awarded to borrowers via the FAFSA, including banks, financial institutions, loan guaranty agencies, individual schools, and the U.S. Department of Education (Direct Loans).

The National Student Loan Data System provides you with a convenient way to check on the status of your FAFSA loan yourself, without having to go to a physical location or wait in line or on hold to speak to a bank teller or customer service rep. By logging in to the National Student Loan online database, you can see what your loan status is 24/7 and find information such as:

• the FAFSA grant and loan amounts you were awarded
• how much money was paid out to you or your school, and when
• what your FAFSA loan’s outstanding balance is
• whether you are up-to-date or falling behind on any required interest payments or loan repayments

You’ll need a FAFSA PIN (Personal Identification Number) to check your FAFSA loan status at the National Student Loan Data System site. If you filed your FAFSA online, you already have a PIN. If you mailed in a paper FAFSA, you’ll need to get a PIN before you can check your account status.

You can find more information about getting a FAFSA PIN and checking your FAFSA loan status on the Frequently Asked Questions (FAQ) page of the federal Student Aid website.

Nontraditional Students Depend on the Lower Tuition of Community College

The relatively low cost of community college is a tremendous benefit for nontraditional students, many of whom may be single parents, workers in lower-paying jobs, newly laid-off workers, or the first in their family to attend college. Despite some tuition increases, a recent College Board financial aid report noted that tuition and fees for an average community college are still only about 36% of the tuition and fees of an average four-year college.

Federal Student Loans for Community College: A Problem Revealed

Since community colleges provide a substantial higher education service to nontraditional students, you may be surprised to learn that many community colleges don’t offer their students federal student loans. That’s the discovery of the Project on Student Debt, who reported last month that approximately 900,000 community college students in 31 states could not get federal Stafford, Perkins, and PLUS loans because their schools chose not to participate in the federal loan program. (Download a copy of the user-friendly report here.)

The main reason seems to be the schools’ earlier bad experience with the consequences of high student loan default rates. In the 1990s, schools with very high default rates were penalized by being shut out of ALL of federal financial aid programs, including the invaluable Pell Grants that so many nontraditional students depend on. After a few close calls with losing their Pell Grants, those schools developed a little bit of paranoia about offering any more federal student loans.

The good news is that loan default rates have improved a lot since then and no community college has lost access to Pell Grants in many years. The bad news is that old fears die hard and today, thousands of nontraditional students end up having to take out private loans to cover the last of their community college costs when they can’t get Stafford, Perkins, or PLUS loans.

Private loans typically have higher interest rates, more borrower fees, and less protection than federal loans, and can turn into unmanageable debt for the students who can least afford it.

How to Find Out If Your Community College Offers Federal Student Loans

What can you do if you think you may need a student loan for community college? Before you apply, call the financial aid office of the community college(s) you’re considering and ask if they participate in the federal student loan program (Title IV). Be sure to ask specifically about loans (Stafford, Perkins, and PLUS loans), not just the financial aid program in general. (All eligible colleges participate in the federal grants program, but apparently they don’t all participate in the student loan program.)

If it turns out that the community college you were considering does not provide federal student loans, you may want to talk to other community colleges in your area until you find one that does. Community colleges fulfill a vital mission in the higher education service they provide to nontraditional students. Making federal student loans available to students who need them should be part of that mission.

Here are 5 things you may not know about the new student loan proposal:

1) Federal student loans only. The new changes to the student loan program will not apply to all student loans — only to student loans provided by the federal government. Those are: Stafford Loans (both subsidized and unsubsidized), Perkins Loans, PLUS loans for parents, and PLUS loans for graduate students. If the student loan proposal is approved in the U.S. Senate, then starting in July 2010, students who take out federal Stafford loans, Perkins loans, or PLUS loans will get them solely through the Direct Lending program. (The Federal Family Education Loan program, or FFELP, will stop operating.)

2) Application process won’t change. There won’t be any change to the way students apply for Stafford Loans, Perkins Loans, and PLUS loans. The application process will stay the same as it’s always been: filling out a FAFSA each year a loan is needed. The only difference students may notice is that the FAFSA will be simpler, with fewer questions and pages, and on the online form, the option to transfer financial information directly from the student or parent IRS income tax form.

3) Private banks can still offer private student loans. Free market competition is not being eliminated — private financial institutions and commercial student-loan lenders will still be able to offer all the private student loans they want. They just won’t be middlemen for federal student loans any more, or get the federal government subsidies that rewarded them for offering student loans with the low interest rates, low fees, more inclusive application rules, and greater protection that the federal government required.

4) A few private institutions will help out with Direct Lending customer service. After the FAFSA stage of the loan process, there will probably still be a few private student-loan companies involved in handling the loan agreement and maintenance on behalf of the Department of Education. These companies will be paid a fee for providing this customer service to students, and will be selected by the Department through a competitive bidding process.

5) Don’t worry about the FFELP student loans you have now. If you have any current FFELP Stafford, Perkins, or PLUS loans, just keep making your interest payments or loan repayments as you have been all along. If the new student loan proposal becomes official, the transfer of existing loans from the FFEL program to the Direct Lending program will be handled by the Department of Education and your school(s). If your school’s financial aid office needs you to do anything, it will let you know. (And if you’re about to apply for a federal student loan, check with your school to see if it has signed up for the Direct Lending program. Probably no point in getting a loan through the FFEL program now.)

This shift (if SAFRA or something similar also gets passed in the U.S. Senate) would be the biggest federal student loan reform in more than 30 years. If you’re watching all the developments in the news, it sounds like a very big deal. And it is — to the FFELP private-sector lenders who have been profiting from federally-guaranteed student loans for many years. Except for maybe the opportunity to be a selected loan servicer, commercial lenders will be cut out of the federal student loan picture after July 2010.

But what would this student loan reform mean for you? Will it change the way you get federal student loans, or make them harder to get?

Actually, the system overhaul approved yesterday doesn’t change the federal student loan eligibility rules, application process, or repayment process as far as the college student borrower is concerned — it only changes the source of the money that gets loaned out. If you’re a college student in need of a student loan, you would still apply for federal loans — the best deal you’re going to get — by filing a Free Application for Federal Student Aid, or FAFSA, every January.

It will be up to your school and the U.S. Department of Education to be ready to efficiently process your January 2010 FAFSA through the Direct Lending program. Fortunately, if the SAFRA overhaul is made law, it will include providing you with a simplified FAFSA next January.

Read more about these changes would mean for you: SAFRA: What’s In It For You?

Why undertake such massive student loan reform at all?

SAFRA’s supporters, which include President Obama and education officials in his administration, believe that cutting out the middle-man (the commercial student-loan lenders) will save the government about $87 billion over 10 years. Education officials plan to put $40 billion of that savings directly into the Pell Grant program, boosting both the maximum amount of each Pell Grant and the number of grants available.

Other portions of the savings are targeted towards higher education programs designed to simplify the FAFSA, maintain low student loan interest rates, provide support for colleges that serve minorities, and increase college degree completion, Perkins Loan availability, and student loan forgiveness.

The case for closing down the FFEL Program and changing to all Direct Lending

Commercial student-loan companies, private-sector banks, and student loan trade organizations worked with sympathetic legislators to offer an alternative to the SAFRA, but as yesterday’s vote demonstrated, they were not successful. Their concerns about how much money SAFRA will actually save may not be unreasonable, but the FFEL Program has had more than a couple of strikes against it in recent years.

• CBO Savings Estimates. The Congressional Budget Office estimated that the FFELP supporters’ counterproposal would save the federal government much less money than the SAFRA Direct Lending proposal. It could be that it’s a question of “Whose math is the right math?” but for now, the SAFRA advocates have come out ahead.
• Student Loan Default Rates. In 2007, the rate at which students defaulted on FFELP student loans was actually higher than that of students who got loans through the Direct Lending program. This is a real blow to commercial banking institutions, who have often claimed that the premiere customer service private-sector lenders provide to students results in a lower FFELP default rate. The higher default rate is probably due to the increase in the number of students from for-profit schools getting FFELP loans, but it’s too late now.
• Student Loan Scandal. In 2006-2007, an investigation into the student loan business uncovered extensive and dramatic corruption involving many large and small lenders from the FFEL program. The widespread conflict-of-interest violations and kick-backs between schools and financial institutions forced a federal crack-down on both the private and federal student loan industries.
• Credit Market Collapse. Many Republican legislators and banking industry advocates characterize the elimination of the FFEL program as another example of “government takeover,” but the truth is, the federal government has been the primary funder of federal students loans for over a year anyway. When the credit market collapsed and financial institutions stopped making loans of any kind, students trying to line up money to go back to school panicked. The federal government stepped in and both took on the debt of existing FFEL student loans provided by lenders who fell apart, and increased federal funding in order to increase federal Stafford loans.

The 2009 student loan reform is not official yet. The U.S. Senate has to approve the plan, too, and the two houses of Congress often do a little negotiating to come up with a final plan that will make the majority and the president happy. Education legislators in the Senate are already at work on a plan that looks likely to pass.

Stay tuned to EducationGrant for further developments, and in the comments section, drop in your questions about what this student loan reform would mean for you.

Schools that currently participate in the FFELP will have until July 1, 2010, to shift all their existing student loans over to the Direct Loan system.

The Obama Administration proposed the FFELP shutdown based on estimated cost savings that would come from not having to pay government subsidies to banks and commercial lending institutions in the student loan business. The plan is to funnel the saved money into the federal Pell Grant program.

Although getting 4,000-plus schools ready to handle billions of dollars of federal student loans through the Direct Lending program in a year’s time would obviously be a gigantic tactical undertaking, it offers the appeal of a greatly simplified federal student loan system, in addition to the boosted Pell.