Penn State answers your questions about federal student loans
03/15/2008 12:00 am
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Penn State answers your questions about federal student loans
Saturday, March 15, 2008
As Penn State moves toward becoming a participant in the Federal Direct Loan Program offering students a secure source for federal student loan funding, a number of critical questions from parents and students have come to light.
On March 10, Penn State officials announced that instability in the national credit markets, which raised concerns about the accessibility of federal student loan funding, prompted the University to consider entering the Direct Loan Program. As a participant in the program, Penn State — rather than a bank or other lender — will disburse student loans each semester. The Department of Education secures the funding directly from the U.S. Treasury, so instability in financial markets does not affect this source of funding for student loans. With about 44,000 Penn State students receiving federal loans, the total federal loan volume at the University is $276 million.
“Parents and student borrowers have understandably been concerned about reports of turmoil in the national markets that have prompted some lenders to halt their federal loan lending services or to scale back their operations,” said Anna Griswold, assistant vice president and executive director of Student Aid for the University. “Given these circumstances, we believe this is a good solution — the responsible solution — to help our students.”
Below is a list of questions related to the Direct Loan Program that should help families understand how this program will serve their student.
Q. Why did Penn State enter the Direct Loan Program?
A. Federal Direct Lending provides the most stable source of loan funding available because the funds are provided by the U.S. Treasury. The instability of the debt markets and uncertainty strongly influenced our decision to find the most secure solution possible. This same instability and uncertainty in the markets is what led to PHEAA’s decision to suspend its function as a lender. While there are many private lenders still in the Federal Family Education Loan Program (FFELP), we were concerned about future developments that could negatively impact students.
Since approximately 40,800 Penn State students receive their FFELP loans through PHEAA, those students will now need to select a new lender and sign a new promissory note. By entering the Direct Loan Program at Penn State, students will not have to shop around for a lender or worry that the lender they chose may not still be in the program in future years. The Direct Loan Program provides certainty that access to student loans will not be a problem in the future.
Q. What are the primary differences between Direct Loans and the Federal Family Education Loan Program (FFELP)?
A. The primary difference is the source of the loan funding. Direct Loans come straight from the U. S. Department of Education using funds obtained from the U.S. Treasury. This program offers students one single source of contact since these federal loans are made, guaranteed and serviced by the U.S. Department of Education. In the FFEL Program the lender, guarantor and servicer can involve any combination of banks and agencies across the country. It is often the case that the student’s lender will sell their loan to another lender or loan servicer. This can add complexity for students, especially in the event an error or problem in the processing of their loans should occur. Under Direct Loans, there is a single point of contact for students and their school to turn to with any problems that might arise.
Q. What is the interest rate and fees charged in Direct Loans compared to FFELP?
A. See Chart below for 2008-09 interest and fees:
Direct Loan FFELP
Interest Fees Interest Fees
Federal Subsidized Stafford 6.0% .5% 6.0% 0-2%
Federal Unsubsidized Stafford 6.8% .5% 6.8% 0-2%
Federal Parent PLUS 7.9% 2.5% 8.5% 3%
Federal Graduate PLUS 7.9% 2.5% 8.5% 3%
NOTE: As you can see, students in the Direct Loan program will have a .5 percent fee deducted from their loan amount. (Example: If you borrow $4,500, you will actually receive $4477.50, or $22.50 less.) Another 1.5 percent fee will be deferred until a student goes into repayment. After making the first 12 loan payments, the 1.5 percent will not be applied to the loan balance. There may be a few lenders in the FFELP program who are still able to offer a zero-fee loan, but not likely for longer than the next year. Many banks will start charging the full 2 percent fee. Congress is phasing out the loan origination fee, so by the year 2010-11, no federal loans will have this fee. Banks are allowed to charge up to 1 percent in a default fee and that will likely continue. The Direct Loan program will not charge more than the .5 percent default fee. We know that many students who borrowed through PHEAA over the past several years are accustomed to a loan with no fees. It is important to know that the current crisis in the financial markets limits the ability of lenders to offer these discounted fees. Thus, the loan fees in both programs will become comparable in the next two years.
Q. How do I apply for the Direct Loan?
A. The process is similar to what students have used in the past. Students complete the federal application (FAFSA) and check the area on the application indicating they wish to be considered for a loan. Penn State will review the application and notify a student of eligibility for the loan and the maximum amount they can receive. Before the semester tuition billing cycle, Penn State will notify the student to sign a promissory note, which can be done electronically. This time, the U.S. Department of Education will be the lender. Students only need to sign once; as a student requests loans for subsequent years, the loans will be added to their Master Promissory Note. After the note is signed, Penn State will request the Department of Education to send the student’s funds for the semester and those loan funds will be placed in the student’s account.
Q. What are the benefits in the Direct Loan Program?
A. There are several benefits in the Direct Loan Program:
1. A guaranteed source of funding for student loans.
2. The option of an income-contingent repayment plan or an income-based repayment plan when a student enters repayment. This means a student has the option of ensuring that the loan repayment amount will always be affordable based on what the borrower’s income will allow.
3. Students in the Direct Loan Program who enter into public service jobs can have any remaining balance on the loans forgiven after 10 years of repayment while in public service work. (While this option does not exist in the FFEL Program, students who borrowed in that program can consolidate their loans into the Direct Loan Program in order to take advantage of this forgiveness.)
4. The PLUS loan for parents and for graduate/professional students through the Direct Loan uses a more liberal credit assessment. More parents and graduate students may qualify for these programs under the Direct Loan Program than in the FFEL Program.
5. The interest rate for the parent loan and for the graduate student loan is 7.9 percent in the Direct Loan Program compared to 8.5 percent in the FFEL Program.
6. Most lenders offer benefits during repayment after a student makes payments for two to four years. Very few students end up receiving those benefits. In the Direct Loan Program, students earn benefits after only one year.
7. Should a student make payments late under the Direct Loan Program, the late fees charged are less than the late fees charged by lenders in the FFEL Program.
Q. What if I find a lender that offers a better loan than the Direct Loan?
A. The interest rates and fees in Direct Loan are comparable to, or better than, those in the FFELP. The University believes that the simplicity and stability in the Direct Loan Program outweigh the uncertainty and possibility of a slightly lower fee in the FFEL Program.
Q. Why can’t I have a choice in which lender to use for my student loans?
A. Most students tell us that they just want to know that their student loans will be there for them and are not too concerned with who the lender is. Since fewer banks will continue to offer any discounts or benefits while a student is in school, the best time for students to exercise a choice is when they enter repayment. A student can always choose to consolidate their loans with any lender they wish during repayment. That’s the time for students to shop around for the best deal.
Q. What happens if some of my federal student loans are from PHEAA or another lender and now part of my loans will be through the Department of Education?
A. The source of the loan application and funding is semester- and year-specific. The combination of FFELP and Direct Loan funding is not unusual. Since the choice to participate in either FFELP or Direct Loan Program is a decision that each school must make, it already happens that a student could have loans in both programs. This is the case for students who begin their education at a school that uses the Direct Loan Program and then transfers to a school using the FFEL Program; that student would have loans with each program. Many of our transfer and graduate students already have this combination. In order to make repayment to one source once repayment starts, many students take out a consolidation loan which combines both types of loans into a single loan.
Q. How does the consolidation process work?
A. Once a student graduates or chooses to no longer attend school on a half-time basis, the student can contact the Direct Loan Program for an application for a Direct Consolidation Loan, which will combine the FFELP and Direct Loan loans into a single loan. When it comes time to begin repaying the loans, the borrower will be provided with several options concerning consolidation and will be able to choose which one has the greatest advantage. Students can move all their loans to Direct Loan or they can move all loans to FFELP. The choice will be up to the student.
Q. I have heard that private lenders such as banks can do a better job than the federal government in processing and servicing my loans. Is this true?
A. We do not believe this to be the case. In fact, the U.S. Department of Education uses private contractors to help administer and service direct student loans. Some of those contractors could be the same ones that a bank might use in servicing its student loans.
Q. Will other student aid programs such as federal and state grants be affected by what is happening with student loans?
A. No, those programs are not affected. In fact, students who qualify for the Federal Pell Grant program will see an increase to their grant awards in 2008-09. As for the PHEAA Grant, for students who are residents of Pennsylvania, the awards can go up or down in a given year depending upon the amount of funds appropriated by the state legislature and the number of students who apply for those grants.
For additional information on the Direct Loan Program or for questions about student financial aid, contact Penn State’s Office of Student Aid at (814) 865-6301 or online at http://www.psu.edu/studentaid/.
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