Fed-loan limits force higher rates on some
Nelly Perry went to massage school convinced she could avoid the tens of thousands in loans her friends amassed at traditional universities.
She followed the advice of counselors at two schools, borrowing more than $12,000. The process was so easy that she applied for one loan over the phone. But, unlike her friends' loans from the federal government, Perry's came from private lenders charging interest rates of between 8.5 percent and 13.5 percent. Plus, the loan terms required repayment while she was still in school.
"I got overwhelmed," said Perry, 27. When loan collectors began harassing her about missed payments, she moved back home to Milwaukie, Ore., and sought help from a credit counselor. "You feel like there's a ton of bricks on you. You feel like you can't breathe."
With the cost of higher education skyrocketing and federal student loans capped at 1992 levels, more students are turning to private loans to pay for trade schools and even traditional colleges. The loans are the fastest-growing type of student aid, and lenders are scurrying to cash in on the highly profitable products, offering easy online access or jockeying to get on a school's list of preferred lenders.
The trend alarms financial aid advisers who fear students are unwittingly taking on too much debt. Some, like Perry, eventually fail to repay the loans on time. That trend could worsen if interest rates continue to rise.
In addition, regulators are investigating allegations that some trade schools and their lenders have not adequately informed students about the high interest rates and extra finance charges. Authorities in Oregon, California and Pennsylvania this year probed the recruiting and financial aid practices of trade schools owned by Illinois-based Career Education Corp. The investigations follow complaints from students who said they did not know they were taking out loans with 15 percent interest rates.
Career Education Corp. has said it is cooperating with Pennsylvania investigators but calls allegations by California regulators "grossly exaggerated." Lenders say they follow federal disclosure laws and maintain students simply aren't carefully reading loan disclosures. Nonetheless, the loans worry educators and regulators.
"I've seen interest rates as high as 26.5 percent," said Deborah Godfrey, head of the closed schools and student-tuition-recovery-fund unit at the California Bureau for Private Postsecondary and Vocational Education. "Unfortunately, students are very, very, very poor consumers."
Students are resorting to private loans partly out of necessity. Since the early 1980s, college tuition has risen twice as fast as inflation, yet Congress has not changed the maximum a first- or second-year student can borrow since 1992.
As a result, private loan activity grew nearly eightfold between the 1995-96 and 2003-04 school years, according to a College Board survey, from $1.3 billion to $10.6 billion. Private loans now represent about 9 percent of all student financial aid, the College Board says.
Lenders say a growing number of students don't fit traditional molds that the federal loan program envisions. Forty percent of students attend school part time, up from 28 percent in 1970, said Melissa Bassett, executive vice president of Student Capital Corp., a company launched in June to market private student loans. Other students borrow to attend trade schools that either don't qualify to receive federal aid or charge more than $30,000 per program, far in excess of the annual federal loan limits.
But alternative loans differ significantly from federally backed Stafford and Perkins loans and can carry significantly higher risks.
Federal student loans currently carry interest rates of between 4.7 percent and 6.1 percent. The government can raise them in the future, but never higher than 9 percent.
Federal loans are typically more flexible, offering students a chance to postpone repayment if they return to school, lose their job or fall into financial trouble. They also can be consolidated, after borrowers graduate, into one payment. And federal rules require that applicants be verbally counseled about the loans' interest rates and terms of repayment.
Private student loans, on the other hand, carry adjustable interest rates with no caps. Their finance rates usually start at prime rate, now 6.5 percent, and add zero to 6 percentage points or more, depending on the student's credit rating and whether a relative will co-sign for the loan.
Showing posts with label credits and students. Show all posts
Showing posts with label credits and students. Show all posts
Tuesday, August 14, 2007
Monday, August 13, 2007
College Kids and Credit
If your teenager headed off to college this fall, you probably already knew many of the new experiences that awaited him or her on campus. New friends, classes, all night cram sessions and stale pizza–all the staples of college life. You probably went shopping for dorm essentials and talked to your child about the importance of getting good grades and regularly attending classes. But another topic that you should discuss is that of money and credit card management.
Today’s college students can be overwhelmed with credit card offers when they walk onto campuses. On many campuses there are booths offering free food, school supplies and T-shirts to persuade students to apply for a credit card. For credit card companies, visiting college campuses is a sound investment–most college students with credit cards will remain loyal to their first credit card company for several years.
When you consider that credit card companies tend to make their profits from long-term customers that carry a revolving balance, college campuses are the ideal location for credit card solicitors.
Many college students are not yet responsible enough to manage credit and have their own credit cards. But, by educating your children in advance, you will help them act responsibly when they do receive a credit card. If you’ve been preparing your child to handle credit, the transition to independence will be reasonably painless. Here are some simple tips to share with your child:
• One card is sufficient.
• Make sure when applying for a credit card that tuition and allowances are not included as “income.”
• The higher the income level, the higher the credit limit will be.
• Pay all your bills on time! The quickest way to damage your credit history is by not making timely payments to creditors.
• Don’t let anyone borrow your credit card–even your best friend. You will be held responsible for all charges.
• Record all transactions so you’ve got an idea of how much the bill will be at the end of the month.
• Keep the card active by periodically charging (and then paying off) small purchases.
• Create a spending and budget plan–monthly credit card payments should never exceed 20% of your monthly income.
• If credit card debt occurs, ask for help. Don’t wait until the accounts have been sold to a collection agency before seeking help.
• Don’t forget that credit is a serious matter. If debt is unavoidable and bankruptcy is the only alternative, it will remain for up to 10 years on your credit report.
If you haven’t talked to your teenager about credit, or if you have younger children still living at home, here are some simple ways to begin teaching them about good credit:
• Consider making your teenager an authorized user on one of your credit cards. S/he will receive a credit card with his/her name on it, but s/he will be tied in directly to your account. You will be held liable for any charges s/he makes on the card, but it is a good learning tool. Make sure s/he keeps a record of what they spend and that s/he can afford to pay you for the items purchased on credit.
• If your teenager is older and has demonstrated good financial responsibility in the past, consider cosigning for a credit card. This card will be in your child’s name, but again, you are ultimately liable if s/he cannot pay for his or her purchases. However, this card, unlike the authorized user card, allows your child to begin building his own credit history, because s/he is the primary user on the account.
Most importantly, remember that learning to use credit is a new experience for many college-bound students. While it may seem nerve racking to let your child open credit cards in his/her own name, it is an invaluable learning tool for the real world. Talk to your child about using credit responsibly and about the consequences of collecting a lot of debt. Make your child comfortable when s/he is asking for advice regarding good money management. By doing so, your child will be more at ease and possibly inform you of credit problems before they get out of hand.
Today’s college students can be overwhelmed with credit card offers when they walk onto campuses. On many campuses there are booths offering free food, school supplies and T-shirts to persuade students to apply for a credit card. For credit card companies, visiting college campuses is a sound investment–most college students with credit cards will remain loyal to their first credit card company for several years.
When you consider that credit card companies tend to make their profits from long-term customers that carry a revolving balance, college campuses are the ideal location for credit card solicitors.
Many college students are not yet responsible enough to manage credit and have their own credit cards. But, by educating your children in advance, you will help them act responsibly when they do receive a credit card. If you’ve been preparing your child to handle credit, the transition to independence will be reasonably painless. Here are some simple tips to share with your child:
• One card is sufficient.
• Make sure when applying for a credit card that tuition and allowances are not included as “income.”
• The higher the income level, the higher the credit limit will be.
• Pay all your bills on time! The quickest way to damage your credit history is by not making timely payments to creditors.
• Don’t let anyone borrow your credit card–even your best friend. You will be held responsible for all charges.
• Record all transactions so you’ve got an idea of how much the bill will be at the end of the month.
• Keep the card active by periodically charging (and then paying off) small purchases.
• Create a spending and budget plan–monthly credit card payments should never exceed 20% of your monthly income.
• If credit card debt occurs, ask for help. Don’t wait until the accounts have been sold to a collection agency before seeking help.
• Don’t forget that credit is a serious matter. If debt is unavoidable and bankruptcy is the only alternative, it will remain for up to 10 years on your credit report.
If you haven’t talked to your teenager about credit, or if you have younger children still living at home, here are some simple ways to begin teaching them about good credit:
• Consider making your teenager an authorized user on one of your credit cards. S/he will receive a credit card with his/her name on it, but s/he will be tied in directly to your account. You will be held liable for any charges s/he makes on the card, but it is a good learning tool. Make sure s/he keeps a record of what they spend and that s/he can afford to pay you for the items purchased on credit.
• If your teenager is older and has demonstrated good financial responsibility in the past, consider cosigning for a credit card. This card will be in your child’s name, but again, you are ultimately liable if s/he cannot pay for his or her purchases. However, this card, unlike the authorized user card, allows your child to begin building his own credit history, because s/he is the primary user on the account.
Most importantly, remember that learning to use credit is a new experience for many college-bound students. While it may seem nerve racking to let your child open credit cards in his/her own name, it is an invaluable learning tool for the real world. Talk to your child about using credit responsibly and about the consequences of collecting a lot of debt. Make your child comfortable when s/he is asking for advice regarding good money management. By doing so, your child will be more at ease and possibly inform you of credit problems before they get out of hand.
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