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Discussion in 'Financial Aid' started by nh48, Dec 16, 2008.
Would this trickle down to my stafford loans?
No. Fixed 6.8% for grad staffords. Undergrads have a lower rate but it is still fixed.
Why is the rate so high? I mean, if the government really wants to have a more educated populous, why not make the rate 3-4% (to at least keep up with inflation and not lose money)? I don't consider LOANS to be a government handout, since loans get paid back. If they charge just enough interest to cover inflation, then the government comes out even. I don't see how it's right that the government can make profits on things like this...
Within fed lending, the rates are a reasonable 6.8 considering you are pledging no collateral (like a mortgage or car) and to cover the costs of a loan program takes interest payments from borrowers and money from taxpayers to make the whole thing fly and up until recently, made sure the banks made a profit. Recently the feds have introduced a new repayment plan (income based repayment IBRP) with a 10 year forgiveness for those folks electing to go into low paying public service positions. For example, you finish your MS in social work owing $160,000 in fed backed loans and then become a social worker earning $37,000 a year. The feds will take "x" percent of your salary for the 10 years provided you are still social working and if you still owe after 10 years, the rest is forgiven which is a nice way of saying the taxpayers paid back the rest for you since nothing in life is free. There are also a whole host of safety nets as well and there's little to no requirement that you have a credit history, assets or job etc and would be considered a sub-prime borrower (if you look at the mortgage crisis it was due in part to a lot of sub prime borrowers getting lent money they couldn't demonstrate they had the ability to repay and look where that got us all). In short, as an FA person and taxpayer, I'm OK with the rate. I tend to think most borrowers are as well once they have an understanding of how the program actually works and get rid of the notion that the interest paid by the borrower covers the cost to keep it going.
Well as a borrower and a tax payer, I think paying ~7% for student loans is too high a price to pay and is part of the reason why primary care specialties are attracting less and less graduates from medical school each year. And now that we are entering a deflationary environment, the interest burden has only grown even more.
It's just unbelievable where America's priorities lie. When it comes to educating its citizens, they're sold off to indentured servitude, but when it comes to rescuing crooks and executives on Wall Street, $7 trillion in gifts is the least America can offer with no questions asked and no strings attached.
In short, as someone paying that rate, I'm not.
To all those of you who think it is ridiculous to be paying close to 7% for a federally guaranteed loan, I urge you to get in touch with your senator and congressperson and tell them that.
Not only does it cost you significantly more money (I started med school prepared to finance it with loans....back when they were 1.85%!!!!), it also means fewer students going into lower paying specialties and practicing in under-served communities. Not to mention fewer grads going into academia with lower salaries. Who will care for our elderly with their increasingly complex medical needs and decreasing compensation? Who will teach the next generation of physicians? Who will care for those who are unable to pay a conceirge fee to see a doctor???? And who will go into medicine in the future if current doctors can't make a decent living after working their tails off for many years????
(Whether or not you agree that debt influences student decisions is another arguement, but its definately worth mentioning if you are going to e-mil or write to your represantatives!)
I doubt they will do anything. But if you have issues taking out loans at 7% when the prime rate is half a percent, at least take a month to say something to those who make the policies!
abbaroodle, that's great advice. I hope the student organizations and students individually will make their case for lower interest rates on federal loans to medical students. The hope has never been better, now that we have a Democratic president and legislature.
But, unfortunately for me, I've already emailed/called/mailed letters to my congressman (Jeb Hensarling) and senators (Kay Bailey Hutchison and John Cornyn) this past year and they don't give a damn-- they're all Republicans. I've voted for the non-Republican candidates during the election, but my district and my state didn't vote with me. There wasn't even a Democrat running in opposition to Hensarling, so I voted for the Libertarian.
Well, yes and no. What we've seen as that as the federal government increases availability of funding to students, institutions of higher learning astronomically increased their tuition rates. And no doubt states cut budgets of state schools, too.
I'm sorry, but I simply don't buy it. The fact that my undergrad cost me $19,000 per year when I went through and is now charging $37,000 is absolutely absurd. The cost of an education simply did not increase by that margin, and the value certainly didn't.
Frankly, I'm very hestitant to make more money available to students through lenders and financial aid because the universities just use it as a cash cow.
Explain to me why a place with the endowment of Harvard needs to charge as much as it does? Because it's the going rate? Because it can? I'm not impressed.
Just as as aside, the coolest use of financial aid money I've seen was by a med student who was working along with his wife just before starting med school. The two of them bought a house, and the week they closed, they quit their jobs and enrolled in school.
Student loans had an interest rate of 2.7 or 2.9% then. At that point, they just maxed out their loans and dumped them into equity in the house. In the end, they got a house at less than 3% interest and never paid rent in medical school.
Now that's how you play the system!
I just whipped this up to send to one of my senators via web form, and thought others might like to copy/paste it to submit something like it as well. Note the "Your Name/State Here" lines!
Dear Senator XXXXXXX,
As you begin a new session in congress, working with a new and more favorable presidential administration, I would ask you to please consider issues of higher education affordability and student loan policy.
During economic downturns, many YOUR STATE HERE residents return to school for advanced degrees to benefit themselves and their families over the long term, as well as local, regional, and state economies.
As I write this, however, federal policy has created a climate where borrowers with good credit can get rates below 5% for mortgages, while federal stafford loans for graduate and professional students remain at a much higher 6.8%.
Given often very high tuitions, even a 2% difference in rates can mean hundreds of dollars a month in interest charges during repayment.
Please consider working toward better terms for federally-backed student loan borrowers.
YOUR NAME HERE
I realize that the readers of my post may have been a bit miffed by my answer but to understand why the 3% your friend got actually is the reason you are all now at 6.8 and will likely stay there for a while. When the 2.875 fixed consol was in full swing it was based on a market anomoly: Sept 11th and the economic fallout. Previously (this is the simple explanation) the feds had agreed that the banks would make 9.5% on whatever they consolidated and being banks, they figured out how to maximize their profits since that's their job. For every borrower who locked in that rate, the taxpayers were now forced to pick up the 6.3% on that loan for the entire length of repayment (I don't imagine anyone paying it off early). In short: billions of dollars that could have gone to keep the rate lower, increase the sub etc went up in smoke during the 3% consol boom that could have been used to aid future borrowers. Needless to say it was an incredible cash cow for many banks who saw their rates of return plummet after Sept 11 and there was not an investment on the street netting 9.5%. When the feds cut the lenders rate of return you all saw the repayment incentives go away and a lot of lenders dump their borrowers. So much for loyalty to help poor students pay for their education...
As I have stated before a few times: federal education lending is a social program and it was never intended to make banks rich but you all would be astonished at the profits rolling around over those years that paid for junkets, jets, bonuses etc... All of that should have been money used for the purpose I believe any student/taxpayer envisioned it would be for: helping needy students who could not achieve their dreams on their own.
I am not against taxpayer funds going towards helping you all and I hope my posts are not misread as such. The aforementioned reasoning behind the 6.8 also is what caused the eco hardship deferment to be rewritten last year-- as a way to shore up the losses from the 3% fiasco. It's also the reason that only undergrad sub loan rates are being cut (keep in mind the taxpayers pay the interest for the borrower while it's deferred on a sub and the world revolves around kids getting their first degree, besides their parents are more likely to vote: that's also why there's no Pell Grant for grad school etc...).
The other benefit you got was the ability to borrow GradPLUS (and the fed safety net) as well instead of funding the shortfall for your education via alternative loans. Not great but better than the other options.
I don't think there's enough money in the till at the fed level to consider lowering the rates on loans that by in large won't have to be paid back for several years which should allow the economy to start recovering.
The cost of college may go down provided the demand goes down as well but it's amazing what parents will pay (or students will borrow since I've seen their undergrad portfolios--gasp) to go to their "dream school" for undergrad. In the olden days you went where you could afford to go, parents saved for college and kids got savings bonds for presents but over the past 20 years there was a marked change: no one saved and everyone became convinced their kid would get a big scholarship to pay for college. That model also fed the rates as well since parents needed more money from somewhere. My advice to my dental kids as they graduate is when they have children that the day they are born is the day they start saving.
I also contacted my congressman to ask what was going to happen with the 3% fiasco and when it would stop since it would surely cause a huge trickle down effect. I didn't even get a reply...
I guess my democratic Senator felt it appropriate that we all subsidize the 6.2% on that guys mortgage as well since he was a champion of the "sub-prime borrower" fiasco as well.
<Previously (this is the simple explanation) the feds had agreed that the banks would make 9.5% on whatever they consolidated>
Well, perhaps the federal government shouldn't have agreed to guarantee the banks that they would make 9.5%.
< and being banks, they figured out how to maximize their profits since that's their job>
Not to be super argumentative, but I disagree that maximizing profits is the only job of a bank or other business. There should be ethics that govern everything we do, which includes how we conduct ourselves in our business dealings. My parents run a small business (land title insurance company, to be exact) and they would never do anything unethical to make more money, nor do they attempt to grow their business and "maximize profits" to the detriment of other individuals or their community. There is plenty of blame to go around r.e. our recent financial crisis, including individuals/the public who have been borrowing more than they can afford. However, I believe part of our problem is also that we (public and the government) have ceded control of the financial system to a small number of huge banks and financial conglomerates, who felt little if any type of civic/ethical responsibility. I'm not sure I believe this all would be happening if we had more local and regional banks that could still manage to survive and compete...
The only silver lining I can see r.e. the recent credit crunch is that perhaps it will slow the ridiculous inflation of tuition at undergraduate and graduate/professional schools. However, I don't see that happening as many private universities and probably all the medical schools will just charge the maximum that they can get away with (which will be approximately = to value of the max. Stafford loans that people can borrow).
AMDFAO, I have to disagree with you wholeheartedly. If the relatively mild economic downturn of 2002-2003 is what led to student loan interest rates of 2-3%, this extended deflationary depression that we're in now warrants student loan rates of 0%.
The profit motive has no basis for student lending now. If taxpayers are socializing losses and guaranteeing survival of financial institutions, then student loans need to be lent out at principal + administrative cost (.25% or less) at the very least. Education is something very different from buying a car, house or whatever on credit. It has social value that continually repays the government and society as a whole much more than anything else-- and that needs to be reflected by low (less than 1%) or no interest rates.
Seriously...they KNOW we will borrow at 6.8 because we want to be doctors. We are responsible people who pay our bills, for the most part at a higher frequency than the general population. It's total crapola.
The 6.8 fixed is for all grad level students and undergrad unsub loans so it's not just the doctors who are charged that, hairdressers, truckdriving schools etc as well. The taxpayers and the kids that do manage to pay their loans off help cover the losses of the kids that never do (default). There is also the issue of not having employment, a credit history or assets to acquire and if you don't have that, your choices are limited. You are not required to borrow money but have the option to easily to go to whatever school your heart desires.
I don't think the feds are raking in the profits as it was the banks that pretty much lobbied to get a rate of return (the 9.5 fiasco). The countries largest student loan lender actually had more lobbyists on capital hill than the oil industry-- think big money. The slight anomaly in the markets in 2001 was caused by the feds lowering their rates to raise a lot of capital to fight the war cheaply (T-Bills plummeted to 1% and all the variable rates went right down as well). An anomaly that was unexpected after the feds lowered the margins to lower students rates since they kept hitting the 8.25 cap in years prior.
I agree the rate needs to be reasonable but I don't see that happening for quite some time. If you speak to older borrowers, they can tell you horror stories of when their rates peaked at 18%.
My preference would be (and has been for quite some time) that the feds just take the whole mess over. Streamline and eliminate the duplicative programs. If you are suggesting that your education adds value to the society, the same would hold true for a social worker and they earn considerably less than an MD. Do you support their payments be less with the balance forgiven sooner? If so, it's already been put into place. Should dermatologists pay less than PC's and dentists pay more than everyone?
Although I understand your position, I'm not sure it ever made sense that the taxpayers pay more of the interest over 30 years than the borrower as that would have been money that could have gone for their own child's education... It's a bit of a vicious circle that I am suggesting be broken. Businesses need to make a profit to keep investors happy and most businesses are in the business to make money. The leading lender could have given a toss if you got an education contrary to the snazzy brochures, trust me on that one. Do you need snazzy brochures and a 24 hour hotline? All that contributes to the cost. Is it necessary?
I used to think college etc should be free in my earlier years until I realized that if it was (paid for entirely by the taxpayers since nothing in life is free) then only the elite would be allowed to go. Countries with "free" college don't give anyone a second chance, unlike the USA and I would rather have second chance and a free market system instead of a one chance/socialism system. Besides, I'd be out of a job
Wayne state and all of the state of Michigan (I believe) is going to direct loans next year. That is fine, but unfortunately brings a 2% fee with it that was possible to avoid for this year. I doubt many people took advantage of the zero fee loans let alone searched around for it this year.
Loan fees for Direct are 2% for 08/09 but all borrowers receive an upfront rebate of the fees for 1.5% so you effectively only lose .5%. For the 09/10 year the fees drop to 1.5% and with the rebate of 1.5% it becomes essentially no fees. In order to keep the rebate a borrower must make the first 12 payments on time.
Is this for every school participating in direct loans? I've seen some schools only stating a 1% reduction rebate for 09/10 and the fee itself being 1.5%.