Before and During College: Students Should Avoid Extra Borrowing Costs by Graduating Before the 150% Rule Affects Them

Here’s a tale of two brothers. Their father died years ago, and while their mother wanted to help them pay for college, her annual income has always been too low for her to do so. Because they’re financially needy, Dick and Mark are among the postsecondary students who borrow over $20 billion in subsidized debt from the Federal Direct Loan Program (FDLP) every year.

Dick began borrowing these loans when his freshman year began in the fall of 2012. But the family’s finances were so shaky that he had to “stop out” of 3 times to college to work and earn money. And like the majority of undergraduates, Dick changed majors, causing him to stay in school for some extra semesters to complete additional classes his new major required.

Dick’s university defines the educational program for his major as a 4-year program. But it took Dick 6½ years to earn his bachelor’s degree.

Mark, who’s 7 years younger than Dick, begins college next fall. He needs all the financial aid he can get, too, including subsidized FDLP loans. He’ll find that these are the least expensive college loans available but, if he takes as long as Dick to graduate from the 4-year program for his major, his subsidized loans will be more expensive than they were for Dick.

What happened? In 2013, Congress changed a longstanding federal rule that made subsidized loans interest-free until their student borrowers completed the 6-month grace periods due to them after they leave school. The change Congress made created the “150% rule,” which limits subsidized FDLP interest-free periods to timeframes equaling 150% of the length of their educational programs.

The 150% rule affects undergraduates with no outstanding FDLP or Federal Family Education Loan debt on July 1, 2013. Dick owed on Federal Direct Loans he’d borrowed before that date, so he was unaffected. But Mark borrows his first Federal Direct Loan in a few months, so he is affected by the 150% rule.

It’s important for Mark to avoid doing what Dick did – i.e. taking more than 6 years to complete his 4-year educational program. If he doesn’t, he’ll be charged interest on his subsidized loans while still in school and/or during his grace period. At current interest rates, this could add no less than $620 to what Mark, and borrowers like him, end up repaying on their Federal Direct Loans.

The 150% rule makes college less, not more affordable. Today’s student borrowers, almost all of whom are subject to the 150% rule, need to complete their studies, graduate, and get into the workforce so they can afford to begin repaying interest as soon as possible.

Contact College Affordability Solutions if you ever want help figuring out how to keep your student loan borrowing costs as low as possible.

 

Before College: Games Colleges Play With Financial Aid Award Letters

Last spring, we published three articles about games colleges play in making financial aid offers and informing students of their tuition and other costs. Washington plays games, too, with TEACH Grants, which ultimately become expensive loans for most recipients.

Last week, National Public Radio ran a story about “award letters” colleges send students. It focused on a recent report, Decoding the Cost of College: The Case for Transparent Financial Aid Award Letters.

Based on an analysis of 515 award letters that different colleges sent high-need to undergraduates, the report listed seven frequent problems with those letters:

(1) Confusing Terminology: 455 that offered unsubsidized student loans used 134 different phrases and terms to describe them, including 24 that didn’t include the word loan.

(2) Omitted Student Costs: One-third contained no information on the costs students would pay at their colleges, making it impossible to determine whether the colleges were affordable.

(3) No Distinction Between Types of Financial Aid: 70% grouped all aid offers together and provided no guidance about the differences between grants, loans, scholarships, and work-study.

(4) Misleading Parent Loan Information: Almost 15% listed Federal Direct Parent PLUS Loans as awards just like they listed grants and scholarships, thereby making their aid offers appear more generous than they really were.

(5) Not Explaining Work-Study: Work-study offers part-time employment to financially needy students, but 70% of the letters that came from schools offering work-study neither defined nor explained the program.

(6) Inconsistent Bottom Line: Only 40% showed unmet need — how much cost would remain after financial aid offers was applied — and they calculated unmet need in 23 different ways.

(7) Missing and Misleading “Next Step” Information: Only about half told students how to accept or decline the financial aid they offered, and their policies about this were inconsistent.

Not every college sends award letters containing such deficiencies. However, colleges that do are, at the very least, close to being deceptive trade practices.

How should students react to such award letters? If possible, enroll elsewhere. Schools using such letters are either incompetent or underhanded. Either way, they can’t be trusted.

Or, if students must attend an institution supplying such letters, they or their parents should contact its financial aid office and demand to be clearly and fully informed about whatever is confusing or missing.

Students victimized by such award letters may also consider submitting complaints to the Federal Trade Commission. Sometimes it’s investigations result in complainants getting money back.

Financial aid award letters should never trick students into selecting schools they can’t afford without taking on giant debts. So check out these letters from top to bottom. And always beware!

Need help decoding financial aid award letters sent to you or a loved one? Contact College Affordability Solutions for a free consultation!

During College: Caught Up in a Financial Dilemma? Don’t Drop Out Without First Looking Into Micro-Grants!

Last week, Lynne and Michelle almost dropped out. Their roommate had just moved in with her boyfriend, so their basic expenses — groceries, rent, and utilities for the last two months of school — had to be split two ways instead of three. Each of them now needed almost $900 to cover her portion of those expenses.

The only way to get that kind of money appeared to be replacing their part-time jobs with full-time work. Tuition had sucked up all their grants and scholarships. They were maxed out on their annual eligibility for federal student loans. Lynne’s parents were deceased, Michelle was estranged from her family, so neither could call home for help.

But dropping out meant walking away from spring semester having made no progress toward their degrees. Both would need to retake, at full price, courses they were close to completing. And it was too late to get spring tuition refunds.

“There must be another way,” said Lynne, but neither knew how.

Then Michelle visited her academic advisor. She learned that several alumni had funded a “micro-grant” program designed to help students just like she and Lynne.

Not every postsecondary institution has micro-grants. But the numbers that do is growing. Colleges, and even some high schools with graduates in college, are using them to help resolve financial problems that would otherwise push students into abandoning school.

Small wonder. Years ago, research showed that financial difficulties are the top two reasons for dropping out. Now these problems are even more widespread. As many as 93% of postsecondary students average over $4,900 in unmet need — a particular problem for the growing numbers of low-income college students because they typically lack the financial backing of family “safety nets.”

Here’s what students facing even seemingly small financial difficulties should do if those predicaments are undermining their ability to persist and graduate:

• Begin at the financial aid office. It may not administer micro-grants (which sometimes go by other names on different campuses), but it’s staff should be able to point students toward those who do.

• Learn micro-grant limits. How big can they be? How often can students get them?

• Find out how to apply. Many programs require minimal documentation and paperwork so they can deliver needed funds fast.

• Learn what else is required. Some programs oblige grant recipients to undergo financial counseling in order to reduce future financial difficulties.

• No micro-grant program? At least check another possibility — low-interest, institutional emergency loans.

Micro-grants help thousands of students who suddenly can’t afford to get across the finish line. If they’re available and needed, they can stop financial crises from denying students their degrees.

Do financial difficulties stand between you or your loved ones and that postsecondary degree? Let College Affordability Solutions help you with free consultations. Contact us Monday through Friday from 9:00 am to 5:00 pm central time.