Surprise Scholarship = High interest debt payment

[randymarsh]

On Friday, I found my checking account balance had unexpectedly increased by over $1,000, even after accounting for Friday being payday. As I looked closer I saw that the deposit was from my university, listed as a refund. Weird, because financial aid goes through at the start of a semester, not 2 months later, and I'd already received a refund from a student loan.

I logged into my university account and found a new scholarship had appeared. Not just for the $1,250 that had appeared in my account, but for $2,500. The other half gets paid in the spring.

This is perfect timing. During the summer I was working full-time for an IT internship taking home ~$1,600 a month. Combine that with no living expenses and I was seemingly floating in endless money. I could easily send at least $800 a month towards my student loans (at 7.9%!), make my car payment (I know), and go out for fun while also saving up cash.

Now I'm only working part-time and I've been frustrated I can't pay as much on the student loans as I was. Frustrating because I had almost paid off all the accrued interest before my hours went down due to school.

Right now there's $600 of accrued interest and thanks to this surprise refund, I can pay it all off and get rid of some principal!

[Zamboni]

Congratulations on your scholarship!

My friends and I used to go to the bursar's office near the end of every term and ask for a printout of our account.  There would invariably be something double or incorrectly billed which we could point out, so then they'd give us a little slip we could take to the cashier's office to get cash money back.  My University had all sorts of little money making scams, like "optional" season football tickets that they autobilled to all students with the tuition bill (and didn't clearly mark as either football tickets or optional) so then you had to contact them to waive it every single year. 

I'm totally confused now because I thought student loans were interest free as long as you are enrolled full time in the Fall/Spring terms.  They are not all like that now?  Granted, it's been a couple of decades since I was in school.

If interest is accruing WHILE you are still in school, I'm starting to see how folks end up with such huge student loan debts.

[randymarsh]

I'm totally confused now because I thought student loans were interest free as long as you are enrolled full time in the Fall/Spring terms.  They are not all like that now?  Granted, it's been a couple of decades since I was in school.

If interest is accruing WHILE you are still in school, I'm starting to see how folks end up with such huge student loan debts.

I have Stafford loans, part of which are subsidized (do not accrue interest during school). These are in the student's name and are limited based on what year of school you're in. Freshman can only borrow I believe $4,500. As a senior, I can borrow $7,500. Obviously even at a state school this won't cover 100% of tuition. So then people usually turn to Parent PLUS loans which are in the parent's name only and do accrue interest during school. This is where people can get in trouble because there's effectively no limit. It's "total cost of attendance" but at a state school that can still be $20,000+ because of room and board.

At the beginning of the summer, my accrued interest on the PLUS loan was $4,XXX. Crazy to think that would pay tuition for an entire semester! And Congress just lowered the PLUS rate to 6.41%, but only for new loans. I pay 7.9%. If you have good credit, I think you should be able to refinance these loans whenever the gov drops the rate.

[Zamboni]

Wow that is just usury.  Shameful.

My mortgage interest rate is only 2.85%, and the interest rate on my piddly bank CD's for emergency money pays only 1.5% out.  But the banks can charge you over 6% WHILE YOU ARE IN SCHOOL and can't possibly work enough to be paying even the interest?  Shameful, absolutely shameful.  Please tell me this is not part of the "financial aid" package offered by your school.  Because if it is, I'm going to start writing letters.

Parents, let this be a lesson to all of us to start 529 plans.  I know some of you don't believe you should pay for college education, but do you want your child to end up with this?  It's ridiculous.

[grantmeaname]

I disagree.

[randymarsh]

It's not even the banks. All my loans are 100% federal. As of 2010, there aren't bank middlemen like their used to be. They even renamed the program to "Direct Loan". Now you get 100% federal loans or you can get private loans from banks like Chase and Discover.

I understand on one hand why a student loan would cost more than a mortgage or auto loan. There's no asset backing it - you can't take away my education. But on the other hand, I can't file bankruptcy. You can garnish my wages and social security. They can collect my tax refund. In some cases they can even revoke professional designations (CPA, law license, etc.).

[Zamboni]

I disagree.

With what?  529 plans?  That asking students to accrue relatively high interest on loans while they are going to school FULL time is usury?  College education in general?

Disagreement without making any cogent points is not even an argument . . . not even according to Monty Python.  You are welcome to disagree, but won't convince anyone simply by being contrary.

[grantmeaname]

I think rates are reasonable, not extreme, and that if they were lower it would decrease the amount of loans offered and impede access to higher education and raise the bar for people hoping to better themselves and improve our nation's productivity. There's a lot more room for nuance here than for pearl-clutching and manufactured outrage. If you want to explore the reasons that providing unsecured debt is risky or explore ways to improve college access, that's one thing. This is another, in my opinion.

[Zamboni]

You can garnish my wages and social security. They can collect my tax refund. In some cases they can even revoke professional designations (CPA, law license, etc.).

Sounds pretty secure to me.

Was this part of your financial aid package?

[grantmeaname]

I understand on one hand why a student loan would cost more than a mortgage or auto loan. There's no asset backing it - you can't take away my education. But on the other hand, I can't file bankruptcy. You can garnish my wages and social security. They can collect my tax refund. In some cases they can even revoke professional designations (CPA, law license, etc.).

All of which are extremely expensive, even compared to foreclosing on and then reselling a house. Plus there's less information on which to screen borrowers (you won't get rejected for low income for example), and opportunities to discharge the debt through alternative programs (PSLF/IBR), or refinance it, or extend the maturity dramatically (IBR/forbearance). I don't think student loans are terrific, but from the lender's perspective there are good reasons they cost 6% and a mortgage costs 3.5%.

[randymarsh]

Sounds pretty secure to me.

Was this part of your financial aid package?

Yeah, everyone (AFAIK) is offered Stafford loans (no credit check). Parent PLUS if you apply. If your parent(s) can't pass the credit check, then your Stafford limits go up a bit.

Grant, I don't necessarily think the rates are outrageous. I see both sides. But they have no problem offering some loans at 3.4% - like a few of my Stafford loans. I could argue loans in the student's name are much risker than the loans in a parent's name. Congress lowered the PLUS rate to 6.41% for new loans while I'm stuck paying 7.9%. Why can't I get that rate? If I took out a mortgage for X rate and then lower rates were available, I could refinance. Not the case here.

[Zamboni]

I guess the thing that irks me is that you look at the school reports in US News and World reports, and many schools say that 100% of the students have 100% of their financial aid needs met.  And so I've heard rich students say things like "but the poor people get 100% aid, so why are they working?  They should just focus on studying like me."  But to me a 6-8% loan that accrues interest while you study full time is not ideal and they shouldn't be allowed to "count it" as aid.  I mean shit I have a credit card with a five figure credit limit that is 9.99%.  Is that aid now too?  At least that one gives me cash kickbacks on my purchases.

Interesting that the limits on Stafford loans haven't gone up much since I was in school 20 years ago, but the cost of attending my college has more than tripled (and a $4500 loan is no longer even 10% of the annual pricetag for said institution.)  They've plugged the gap with these more profitable products and then have the gall to advertise that "anyone can go here because we offer everyone 100% financial aid." 

[Bruised_Pepper]

I think rates are reasonable, not extreme, and that if they were lower it would decrease the amount of loans offered and impede access to higher education and raise the bar for people hoping to better themselves and improve our nation's productivity. There's a lot more room for nuance here than for pearl-clutching and manufactured outrage. If you want to explore the reasons that providing unsecured debt is risky or explore ways to improve college access, that's one thing. This is another, in my opinion.

Exactly.  Reducing interest rates and funding for loan programs would mean significantly less people would be able to go to school.

Interesting that the limits on Stafford loans haven't gone up much since I was in school 20 years ago, but the cost of attending my college has more than tripled (and a $4500 loan is no longer even 10% of the annual pricetag for said institution.)  They've plugged the gap with these more profitable products and then have the gall to advertise that "anyone can go here because we offer everyone 100% financial aid." 

It is financial aid though.  It's not the best way to finance your education, but it allows you to do so.  It's either "take some loans" or "don't go to school at all."  The government can't just give its money away all the time.  Poorer students do have access to better types of federal aid, though, like the Pell and FSEOG grants and the Perkins loan.  And everybody can get outside scholarship help. 

The real issue is that 18 year-old students don't understand the ramifications of taking out larges amounts of loans.  I'm all for having the traditional college age upped to about 22.  Personally, I feel like I would've gotten more out of school if I waited until then to attend, plus it gives students time to understand money a little better. 

[randymarsh]

The government can't just give its money away all the time.

I don't think we should confuse aid that is a gift like Pell grants with student loans that must be paid back with interest. I'm giving it all back and then some.

[Bruised_Pepper]

The government can't just give its money away all the time.

I don't think we should confuse aid that is a gift like Pell grants with student loans that must be paid back with interest. I'm giving it all back and then some.

I'm not.  I'm just saying that offering loans lets the government give out more dollars in financial aid than if they only offered Pell, FSEOG and Work-Study.  By receiving money back on loans, they ensure funding continues into the future.

[Zamboni]

A loan with 6-8% interest that accrues during a time that borrowers are probably not yet able to pay (true not just for full time students, but also for parents who are facing at least 3 more years of college bills) is not "aid," it is a profitable business venture.  Especially when the lender is oh-so-powerful when it comes to recovering the money later.

I'm all for having the traditional college age upped to about 22. 

That's an interesting idea.  Just think:  prospective students could work, save their money, and then go to college WITHOUT so many loans.  Or we could have mandatory military service like a few other countries.  It would be somewhat like going to college, but without the tuition bill.

[Bruised_Pepper]

A loan with 6-8% interest that accrues during a time that borrowers are probably not yet able to pay (true not just for full time students, but also for parents who are facing at least 3 more years of college bills) is not "aid," it is a profitable business venture.  Especially when the lender is oh-so-powerful when it comes to recovering the money later.

Again, disagree.  The "aid" part comes from access to further education, which many could not afford otherwise.

Look at it this way: if there were no loans, students would not be able to afford school until their mid-20s (and knowing the consumer suckas of the world, 30s or 40s).  While this saves them interest on their loans, it also denies them access to higher-paying jobs until a more advanced age.  Is it really worth it to save $10k in interest while losing $100k in potential earnings over the course of your 20s?

[Zamboni]

if there were no loans, students would not be able to afford school until their mid-20s

And why is this the case now, exactly?  Why could my parents' generation work hard enough in the summer break to knock out their state university tuition bill, but now it's not even a dent?

It's because the price tag for going to many colleges has gone up ridiculously in 20 years.  There was government intervention (which initially started with the GI bill, but has turned into "oh look you can have these loans!") and colleges responded with administrative bloat and jacking up the price of everything from tuition and fees to room and board.

http://nces.ed.gov/fastfacts/display.asp?id=76

http://washingtonmonthly.com/magazine/septemberoctober_2011/features/administrators_ate_my_tuition031641.php

http://www.ajc.com/news/news/opinion/colleges-feeding-administrative-bloat/nQjgt/

The more opportunities there are for people to borrow, the more colleges are going to cost.  So college administrations feather their own nests on the backs of loans taken out by their students.  You will not change my mind about this fundamental fact:  these loans that accrue interest while someone is studying full time are NOT a good idea.  Period.  I'm on the inside and I see how families struggle with the burden of this "aid."

[beltim]

The real issue is that 18 year-old students don't understand the ramifications of taking out larges amounts of loans.  I'm all for having the traditional college age upped to about 22.  Personally, I feel like I would've gotten more out of school if I waited until then to attend, plus it gives students time to understand money a little better.

Ugh, this would be awful.  It'd mean people pursuing Ph.D's wouldn't finish until about age 32, and wouldn't get their first faculty job until after age 35 or later.  And it'd mean MDs couldn't start their own practice until age 32-40, depending on specialty.

No thank you.

[Bruised_Pepper]

if there were no loans, students would not be able to afford school until their mid-20s

And why is this the case now, exactly?  Why could my parents' generation work hard enough in the summer break to knock out their state university tuition bill, but now it's not even a dent?

It's because the price tag for going to many colleges has gone up ridiculously in 20 years.  There was government intervention (which initially started with the GI bill, but has turned into "oh look you can have these loans!") and colleges responded with administrative bloat and jacking up the price of everything from tuition and fees to room and board.

http://nces.ed.gov/fastfacts/display.asp?id=76

http://washingtonmonthly.com/magazine/septemberoctober_2011/features/administrators_ate_my_tuition031641.php

http://www.ajc.com/news/news/opinion/colleges-feeding-administrative-bloat/nQjgt/

The more opportunities there are for people to borrow, the more colleges are going to cost.  So college administrations feather their own nests on the backs of loans taken out by their students.  You will not change my mind about this fundamental fact:  these loans that accrue interest while someone is studying full time are NOT a good idea.  Period.  I'm on the inside and I see how families struggle with the burden of this "aid."

I'll see your articles and raise you this one:

http://www.acenet.edu/news-room/Documents/Anatomy-of-College-Tuition.pdf

You can read it if you like, but I'm not going to try to convince you.  You have your opinion and I have mine.  Since we are both in "the biz", we must have good enough justification for ourselves. 

Since you did specifically mention loans that accrue interest while a student is studying full-time, may I ask how you feel about the Direct Subsidized and Federal Perkins loan programs? 

[Zamboni]

Obviously any program that defers interest accrual is better than what the OP is talking about.  I'm not saying it's great, but at least it gives people a reasonable chance to get a job before the interest starts to rack up.

The source of your article is entertaining when you consider the content.  Pray tell, how does ACE raise it's money?  Wait, nvm, I already know that, because my institution has paid them to accredit specific courses.  It kind of reminded me of reading a 1965 white paper authored by the Tobacco Council on the inaccuracy of scientific studies regarding the detrimental health effects of cigarettes.

[grantmeaname]

The source of your article is entertaining when you consider the content.  Pray tell, how does ACE raise it's money?  Wait, nvm, I already know that, because my institution has paid them to accredit specific courses.  It kind of reminded me of reading a 1965 white paper authored by the Tobacco Council on the inaccuracy of scientific studies regarding the detrimental health effects of cigarettes.

Do you have any specific assertion in the paper that you would like to dispute, or do you find it easier to disparage it based on its source than actually read it and consider the arguments?

[Zamboni]

The source (and source of funding) is of great importance whenever a study is completed and conclusions are drawn.  That is a first principle. 

It's basic premise seems to be that yes, the cost of college has gone up faster than many other things, but that's because college is a service industry.  Therefore, technology doesn't impact the costs of college the same way as it does other goods.  This is false on many levels.  For example, the use of online systems for homework (and even testing) has automated grading for many subjects while allows feedback and has dramatic decreased the amount of time I need to spend on things like that per course.  Technology has also been shown to be effective as a mechanism for automating and calibrating peer review.  Papers can be checked for plagiarism more simply by submitting to an appropriate program.  Students can register for courses and housing online, and computer systems can model best fits for class sizes with classroom space on big campuses, therefore theoretically dramatically decreasing the need for paper shuffling personnel in those office.  The list goes on and on.  This is NOT a one-on-one enterprise, like cutting someone's hair or personal training.  It is not a luxury good service either, like a golf caddy.  Costs have not risen because of the "personal nature of service" in academia; costs have risen disproportionately because of administrative bloat.

Anyway, I congratulate the OP on her new found scholarship, and wish it was going towards actual education costs and not loan interest.

[grantmeaname]

The source (and source of funding) is of great importance whenever a study is completed and conclusions are drawn.  That is a first principle.

No, it's a logical fallacy. Do you believe that the authors falsified their analyses, or that the publicly available and publicly disclosed observational data that they used is fatally biased?

It's basic premise seems to be that yes, the cost of college has gone up faster than many other things, but that's because college is a service industry.  Therefore, technology doesn't impact the costs of college the same way as it does other goods.  This is false on many levels.  For example, the use of online systems for homework (and even testing) has automated grading for many subjects while allows feedback and has dramatic decreased the amount of time I need to spend on things like that per course.  Technology has also been shown to be effective as a mechanism for automating and calibrating peer review.  Papers can be checked for plagiarism more simply by submitting to an appropriate program.  Students can register for courses and housing online, and computer systems can model best fits for class sizes with classroom space on big campuses, therefore theoretically dramatically decreasing the need for paper shuffling personnel in those office.  The list goes on and on.  This is NOT a one-on-one enterprise, like cutting someone's hair or personal training.  It is not a luxury good service either, like a golf caddy.  Costs have not risen because of the "personal nature of service" in academia; costs have risen disproportionately because of administrative bloat.

The whitepaper argues that costs haven't risen as dramatically as sticker price, that the cost of the inputs to higher education have risen faster than inflation, and that cost disease is a significant contributor, supporting the cost disease hypothesis with publicly available observational data of the last forty years rather than anecdotes. Your anecdotes aren't sufficient evidence to say that cost disease isn't a driver of the increase, and they're certainly not enough to convince me that the culprit is administrative bloat (and the authors directly address your argument multiple times, but it seems you didn't skim that far).

[Nords]

Or we could have mandatory military service like a few other countries.

Speaking for the military:  worst idea ever. 

Serving in the military is hard enough when you want to be there.  If you don't want to be there then it's impossible.  The military version of the Pareto Rule is that 80% of supervisory time is wasted on the 20% who've decided that they don't want to be servicemembers after all.  When you add draftees to the mix then the U.S. military would cost three times as much to do half the mission.

[Zamboni]

^I wasn't being serious about that suggestion, Nords.

I do think the military is a great deal for many people who have the right attitude.  My Dad looks back fondly on his service and still wonders how his life would be different if he had stayed in for his 20.  I suggest it as an option for students who are motivated to attend more school but don't want debt.