|
Provided
by: Access Group
A graduate education represents a major investment in yourself.
As the cost of that investment has grown, so has the need
to rely on student loans. According to U.S. News and World
Report, nearly 60 percent of master's students, 50 percent
of Ph.D. candidates and 85 percent of students in professional
degree programs now put themselves through school with borrowed
money.
When you borrow student loans, you really are paying for
your education with your future income. Since you can't be
certain what that income will be, it is important to borrow
the minimum amount possible to achieve your goals, and to
understand all of the details of the loans you are borrowing.
As with any other financial transaction, you should read the
literature provided carefully and be sure you understand "the
fine print." Tedious? Yes, but it's worth it to prevent
surprises that come with a high price tag.
For example, did you know that the fine print for a Federal
Stafford Loan states that you must repay your student loans
even if you withdraw from school and never complete your degree
program? "Yes, students must repay any funds they've
already received, plus any applicable interest and fees,"
explains Dr. Jeff Hanson, Access Group's Director of Debt
Management. "There is no money-back guarantee when it
comes to student loans. Even more importantly, unlike other
forms of credit, student loans must still be repaid if you
file for bankruptcy and discharge your other debts. It's the
law." In short, a student loan is a serious obligation,
and students should understand the commitment they're making
when they sign their promissory note.
Promissory Note
What is a promissory note? It's the legally binding contract
between you and the lender whereby you promise to repay the
loan under the terms detailed in the loan document. Because
the note is a legal contract, you should read it very carefully
and make sure you understand it in its entirety before you
sign it. As with most contracts, some of the legal terminology
may be unfamiliar. "If you don't understand something,"
warns Dr. Hanson, "call the lender or your financial
aid officer and ask for clarification. There are no stupid
questions when it comes to your finances." Similarly,
if you think there are errors on the promissory note, contact
the lender before signing it.
Details in the promissory note will include the terms and
conditions under which the loan is made, as well as your rights
and responsibilities as the borrower. The stated terms and
conditions should include the amount you are borrowing, the
interest rate you will be charged, any fees associated with
the loan, the length of the "grace period" you're
entitled to once you leave school and before repayment begins,
the maximum length of the repayment period itself, and the
conditions under which the loan will be considered either
delinquent or in default. These are important details!
For Federal Stafford Loans and Federal Direct Loans, you
will sign a Master Promissory Note (MPN), which covers multiple
Stafford/Direct loans over the duration of your education.
The difference between the MPN and other promissory notes
is that you typically only have to sign one "master"
note instead of applying for a new loan and signing a new
note each year. (If you change schools, you may need to complete
a new MPN, and if you change lenders, you will need a new
one.)
Repayment Options
The promissory note will also spell out how and when you will
have to pay back the loan. The standard method for Stafford/Direct
loans is to pay equal monthly amounts for the duration of
the loan, but other options are available. For example, you
may be allowed to make smaller payments at first and increase
them over time as your income grows. Just remember that the
repayment method you select will affect the total amount you
repay and how long it will take to repay it. "Generally
speaking," Dr. Hanson explains, "the longer you
take to repay a loan, the longer interest will be charged,
so the more it will cost. An equal-payment option requires
the highest initial monthly payment but offers the lowest
cost in total interest paid. But if you need the lower payments
early in your career, the higher interest cost may be worth
it to you. It's a judgment call."
Also note, however, that you have the right to prepay on
most student loans without any prepayment penalty. In other
words, you can make more than the required minimum monthly
payment or make an extra payment, and you'll save the interest
that would have been charged on that amount.
Disclosure Statement
Whichever repayment option you've selected, the facts and
figures associated with it will be covered in your disclosure
statement. This document lists the current interest rate on
the loan, the minimum monthly payment allowed (typically $50),
the maximum number of monthly payments available to pay the
loan in full, and the initial monthly payment amount. It will
also show what percentage of the monthly payment amount is
principal and what is interest.
You should receive this document within 60 days before you
are scheduled to begin repayment. "Each student loan
should have a grace period between the time you graduate and
when your first payment is due. It typically will be either
six or nine months, depending on the type of loan. Count forward
from your anticipated graduation date and mark your calendar
for when your loan repayment is due to start," advises
Dr. Hanson. "You may earn a discount on your interest
rate at some point for making payments on time, but you may
only qualify for this option once and you might lose it unless
you make on-time payments right from the start."
Accrued Interest
The amount you owe when you enter repayment will consist of
the original amount you borrowed, plus any interest that has
accrued on that amount prior to repayment and any applicable
fees. The accrued interest will be added to the principal
prior to repayment. This is called capitalization, and it
increases the cost of the loan to you, since interest will
start accruing on that prior interest once it has been capitalized.
How much interest might accrue prior to repayment if you
borrow Stafford/Direct loans for three consecutive years in
grad school? Let's assume that each year r you borrow $8,500
in subsidized funds (no interest is charged to you) and $10,000
in unsubsidized funds (interest accrues and is capitalized
just prior to repayment if you do not pay it while in school).
The total amount borrowed over the three years would be $55,500.
If we assume the maximum possible in-school interest rate
of 8.25%, the accrued interest could total almost $6,000.
(The actual amount would vary, depending on the timing and
number of loan disbursements each term.)
Remember, interest also will be charged on the loan while
you are in repayment. Thus, depending on how long you take
to repay the loan(s), interest can increase the total cost
of this debt by thousands of dollars. So plan carefully and
borrow wisely.
"Safety Nets"
One of the major benefits of student loans is that they provide
temporary "safety nets" for students who have difficulty
making payments for reasons such as unemployment or economic
hardship. If this happens, you may be able to temporarily
postpone repayment of one or more loans by requesting a deferment
or forbearance. A deferment is a period of time during which
a borrower is not required to make payments. Forbearance allows
you to temporarily lower or postpone payments. Remember, though,
that either of these options may increase the total cost of
the loan. Review your promissory note for eligibility information
on deferment or forbearance; you can also contact your loan
holder or servicer to discuss these options.
Change of Status
One of your most important responsibilities as a borrower
- duly spelled out in the promissory note you sign - is to
keep interested parties informed so that they can reach you
if needed. While you're enrolled, you must inform both your
school and your lender/loan holder if you move or change your
name, address, or phone number, if you drop out of school
or transfer, or if you change your expected date of graduation.
Once you've graduated, you must keep the holder and/or servicer
of your loan informed of your current address, so they know
where to send your bill.
Default
The terms of your loan require you ou to repay the loan in
full and on time, and there are serious consequences if you
fail to do so. You can be considered in default if you fail
to make payments according to the repayment agreement or do
not meet other terms of the promissory note. "Getting
so far behind on your payments that a loan goes into default
can affect your finances for years to come," says Dr.
Hanson. "State and federal income tax refunds may be
withheld. If a collection agency becomes involved, you could
be required to pay all charges, including attorney's fees.
And the default will be reported to the three nationally recognized
credit-reporting bureaus. This will hurt your credit record
and could substantially reduce your chances of getting a car
loan, mortgage, or any other form of credit for quite a long
time."
Plan Ahead
Start comparing loan terms and lenders the year before you
want to attend graduate school. Consider financial aid applications
a part of your admission application process, and plan to
reapply for financial aid every year. And always read the
fine print!
|
