Comparing College Loan Options

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[00:00:00] Hello, my name is Stephanie Wells from MEFA and I'm here today to talk to you about comparing loan options for higher education. A little bit about MEFA before we get started. For those of you who might not be as familiar with MEFA, we are a state authority here based in Massachusetts in Boston, Mass.

We've been in the business of student lending since 1982, so over 40 years. We also do a lot of great work helping families save for college, as well as providing guidance and education for the entire college enrollment process. So today we're really going to focus on the paying for college aspect.

First, let's get started talking about loan terminology, common terms and concepts that Everyone should know if they're considering borrowing for higher education. First and foremost is obviously going to be the interest rate. The interest rate is what a [00:01:00] borrower is charged for the use of a lender's cash or money capital.

So it is important to understand the difference between fixed and variable rates. We'll go through some disclosure statements to show you some of that. Level of detail. Fine detail. But first off, fixed rates are great in the fact that the rate is never going to change. Your payment is not going to change.

So you have a sense of security with that fixed rate. Some folks also like variable rates. So variable rates can ebb and flow with the market, uh, up and down, some, which would also mean that your monthly payment could change, uh, maybe quarterly, monthly, or yearly, depending on the loan that you borrow. So it really is up to a borrower to decide what they're most comfortable with.

As well as comparing the different rates that are out there. So we'll go through that today as well. If you are considering a variable interest rate loan, you do want to make sure that you know what [00:02:00] the cap is on that interest rate. So how high can it go? Most variable rates do have some sort of cap, but the cap can be quite high.

Um, and they're usually tied to an index of some sort. So I'll show you in disclosure statements where you can find that information. If you're considering a variable rate loan. Now, above and beyond the Federal Direct Student Loan, which many students have in their financial aid offers, and they're borrowing that Federal Direct Loan, which is where we always recommend that families start with the Federal Student Loans first, because it is financial aid, but above and beyond that, there are also additional loan options for families um, That can help pay for the rest of what financial aid isn't covering.

So your cost of attendance minus your financial aid offer. That is what we're really trying to cover today and what these loans would be for. So any type of alternative loan, uh, the federal plus loan is a parent loan for students. So we'll talk a little bit about that. The MEFA loan we'll talk a little bit about, and that is [00:03:00] an alternative state based loan, but there are options out there.

So you do want to do your research. Above and beyond the federal direct student loans, most alternative loans are tied to your credit in some way. So for the approval of the loan, we'd be looking at the co signers and the student, their credit and minimum credit scores, for example. Also, The repayment option that you choose might affect the interest rate as well.

So I'm going to get into that in a little bit more fine detail. So really, the further you push out repayment, the more it might increase the cost of that loan as well as maybe a different interest rate. So you do want to pay attention and we'll go over this the full range of the interest rates, not just that lower.

Advertised teaser rate that most families might not get unless they have a very high credit score in the 808 50 credit score range. So you really wanna look beyond just the lowest advertised rate. [00:04:00] The A PR is a good way to compare different loan options, you know, compare apples to oranges, variable rates versus fixed rates, different types of loans from different lenders.

So it's a good way to, a good number to use when you're comparing rates. It is the annual cost of the loan, which could include any fees that the loan has. It's expressed as a percentage, usually right beside the, um, the interest rate when you're looking at loans and it's a good way to quickly compare different loan programs.

The repayment term is the specified time, the maximum term that you have to pay off that loan. So this is a very key, uh, figure and Criteria to look at when you're looking to borrow the repayment term is going to determine the total cost of that loan. So the further you push out repayment, such as going with a 15 year loan versus a 10 year loan, or maybe a deferred loan versus an immediate repayment loan.

That's going to increase your cost because you're pushing [00:05:00] out payments of principle and potentially interest as well. And that might be what you need to do for your family's budget and your affordable monthly payment. But it is good to know that when you're looking at those repayment options, and you look at those deferred loans, that is going to increase the cost of that loan.

And you're probably likely going to be charged a higher interest rate because of that. So the repayment term can provide a lot, a lot of flexibilities for families, such as having deferred options or interest only options while the students in school so that your monthly payment is a little bit more manageable.

Most lenders, when you're looking at different alternative loan lenders, offer a variety of repayment options. So, for example, MEFA has immediate repayment, interest only, and deferred repayment options. We have five. On our undergraduate loan that you can choose from. So it is important to know what's the interest rate, but also what is the repayment amount based on your monthly budget and can you afford that?

That's a key criteria to know. We have a great calculator that I'll show you in a [00:06:00] minute that can help you determine your monthly payments ahead of time before even applying. So when we look at the full range of interest rates, when you're comparing loan programs, you might see a loan comparison tool on a college's website.

A common tool that a lot of schools use is called Elm Select. So you might see that. Credible. com is another website online that compares loans. So you do want to look at that full range. So here on this screen we can see different rates. You might be seeing those lenders A, B, and C. See, Oh, great. They have new rates that are in the 4 percent range.

MEFA in the 5 percent range is where we start, but you want to look at that full range, not just the lowest advertise rate, because as you can see, those rates do go up based on credit and repayment options. So that's a key indicator that you want to look at. Most families, most borrowers fall somewhere in the middle of that range.

You also want to find out, you know, are the rates fixed or [00:07:00] variable so that you know what you can afford per month? And also are there additional fees on that loan? That's a real, that could, you know, increase the cost of the loan. But let's focus here real quick on the, the range of interest rates and how important that is.

So I mentioned most families fall somewhere in the middle and most borrowers fall somewhere in the middle, and you can see up top MEFA has a very narrow interest rate range 5. 75 to 8. 95 for the upcoming academic year. You can see the federal PLUS loan, which is a PLUS loan, a parent loan for undergraduate students.

They don't have a range. They just have a fixed rate that they fix each year and for the upcoming year it's going to be 9. 08 percent. So you can see even the federal parent loan is higher than all of the MEFA loan rates. Even MEFA's highest rate is lower than the federal plus loan. Then you can see some other alternative loan lenders.

So we don't have them named but we'll just call them lenders A, B, and C. Just uh, uh, some examples. [00:08:00] So if we look at that mid range rate for MEFA. It's about 7. 35. So that's right in the middle there. Plus loan is obviously going to be 9. 08 because they don't have a mid range rate or range of interest rates.

What you really want to focus on is some of these, um, for profit lenders or other, other loan types that might have a very wide range on their interest rates. So what is that mid range rate on lender A? They might start at, you know, a little over 4%, but the middle range is 11. 14%. So most families are probably going to be in that range or maybe even higher.

And then you look at lenders B and C, similar concepts. with rates even higher than the federal plus loan at that mid range point. So you do want to look at that full range of interest rates to just get a general idea when you're shopping, uh, what you might be looking at. Another way to determine loan information and to do [00:09:00] your research is by looking at the application and solicitation disclosure statements of lenders.

All lenders are required to have this prior, uh, Alternative state based lenders like MEFA and private lenders. Uh, the Federal PLUS Loan doesn't, uh, have this information, but all the other loans should have this information on their website. It is a, it is a guideline that's required of these lenders, and it provides details about the loan and the estimated total loan cost.

By repayment option. So it's a good way to compare loans. You can look at the interest rates. Are there any fees? So I'll just show you real quick where you can find me for this application and solicitation disclosure right on our loan page. So I'll just scroll down here. You can see the tab where you see all the interest rates of the there's a disclosure tab.

So you just click on that disclosure and you can find general information when you apply for a loan. You'll get a new disclosure. Take care. that has your exact rate based on the repayment option that you [00:10:00] chose that will be a little bit more detailed than this general, um, disclosure that you can look at ahead of applying.

So you can see the ranges of interest rates, 575 to 8. 95, and every lender is required on these disclosure statements to list 10, 000 examples for each of their repayment options you at their highest interest rate. So really showing you the worst case scenario, um, for each repayment option at as far as cost goes.

So it is important to look at that total cost and you can see as loans are deferred, the rates might go up, but also the total cost is going up. Also on this disclosure statement required to show you what the federal, federal options are. And any other loan details.

So let's look at some, a comparison of a MEFA loan disclosure based on this year's rates in lender B, for example. Go through this in a little bit detail. So you can see with MEFA's lowest interest [00:11:00] rate, For immediate repayment. It does start at 5. 75, but it can go up to 8. 5%. So we want to show you that that loan can cost up to a little over 15, 000.

If you take the full 10 years to pay off that loan. So if we look at lender B and their immediate repayment loan. That's over 27, 000 because their highest interest rate is 16. 5%. Now, hopefully, you know, you'll fall below that if you're looking at other lenders, but it is good to know what that total cost would be because that's a big difference there.

Then if you're looking at the deferred option, we'll look at the MEFA deferred option over 15 years. Again, at the highest rate at 8. 75, still well below the Federal PLUS loan at 9. 08%. It's over, almost, it's a little over 21, 200. So that's the maximum you would pay if you made minimum payments. Now most education loans, such as MEFA, [00:12:00] do not have prepayment penalties, so you can pay down the loan sooner.

double up your payments to save some interest. But this just shows you what it could be. Now, if you look at lender B, because of their high interest rates, that total cost is over 47, 300 for the same 10, 000 loan. So just by choosing a different lender for an immediate repayment loan over MEFA, You would be paying almost 12, 000 more for the deferred option.

26, 000 more just an interest for a 10, 000 loan. So you really want to do look at that full range of interest rates. If you have an 850 credit score. Then you might be accessing those lowest advertised rates. But most people are gonna, you know, fall more in the middle range there. So let's look at a couple of other lender disclosure statements.

These are not MEFA disclosures because our rates aren't aren't this high. But we want to show [00:13:00] you You know, just some things to be aware of when you're shopping. So these disclosure statements are going to show you the range of interest rates. We'll look at this fixed rate example. This one can be from 4.

75 to up to 16. 53 percent depending on credit and the repayment option that this person might choose for this lender. You can see the different repayment options they have, interest only, fixed repayment, Principal and interest while they're in school, as well as deferred repayment, you can see as you push out that loan, the cost goes up there and you can see the total cost much different.

So if you look at a variable rate example, you can also see it's always going to show you that range of interest rates. So you can see this one for another lender is, uh, little almost 9 percent to almost 16. 7 percent so 16. 69 percent which is very high comparatively. But you can also see if there's any [00:14:00] loan fees.

Now MEFA does not charge fees on our education loans, but this lender does charge some late fees so it's good to know what those fees could be. So there's no hidden fees. And I mentioned variable rate loans if you want to look at that cap. So here you can see what the cap would be on this loan. 18%. It will never go over 18%.

And it also shows you on this disclosure statement for this variable rate. what that rate is tied to. So what is the index that it's tied to? How do they determine that variable rate? So after you've looked at interest rates and repayment options and, you know, done that consideration, you also want to think about co borrowers.

So the Federal Direct Student Loan, what the student can borrow as a freshman is 5, 500. That's on their financial aid offer for most students. Above and beyond that, most undergraduate students are going to need a credit worthy co borrower. They may not, the student may not have established credit or income to be approved for the loan, so they [00:15:00] usually need co borrower.

Doesn't always have to be a parent, it could be family, friend, or relative, but they are gonna most likely need a co borrower. So the co borrower is equally responsible for the loan as the student. If it's a If it's a co signed loan, like a MEFA loan is a family loan, so students always going to be on the loan, and then they have a credit where they co borrow, maybe even two.

But it is important for you to understand if you are one of those co borrowers that you have equal responsibility. At MEFA, we're really looking at the co borrower as the primary bill payer, although everybody is on the loan. Sometimes families, if maybe mom and dad have, um, some credit issues that have popped up the last couple of years.

So the credit score might not be high enough either for approval or to get a nice low rate. Sometimes they might add on maybe grandma or grandpa has a great credit score and they can be a second co borrower that can increase the chance of approval, but also potentially lower interest rate. So for example, at MEFA, when we're [00:16:00] looking at approving a loan, we're really looking at who has the highest interest.

credit score to give you the lowest rate. We'll choose whichever applicant, even the student on the loan, if they have the highest credit score to determine that rate. So you always get the lowest rate you can get. So this is always a good idea. It's always usually going to be mandatory for a lot of loans for students to have some sort of co borrower.

And there are COBAR release options with some lenders. MEFA has a deferred COBAR release repayment option. Uh, but you do want to, you know, think about how long is it going to take. You might have to do, you know, one to four years of on time payments before applying to have that COBAR released. There are refinance options as well that you can look at to come off of a loan once a student graduates.

has a good job and they're ready to take over the parents, uh, loan payments. But also, you know, with a MEFA loan, for example, everybody has equal access to the loan. We have a great app that you can use through our loan servicer so they can make extra payments [00:17:00] and help maybe help parents, uh, pay down that loan as well.

So once you've done your research and looked at, you know, all the different, uh, line items on the different loans you're looking at and you're, you know, you're getting close, okay, kind of know what, what loan I want to borrow, Then you want to look at your strategy of how much to borrow and really take into consideration a lot of factors.

I like to think of the combination strategy as a good place to start if you don't know where to start. So this is going to incorporate different, different options to pay the bill. So the first thing you always want to look at is past income in the form of savings. Do you have any savings? Whether it be college savings, student working over the summer, Maybe a godparent or grandparent might have a college savings plan as well for the student, and they want to help contribute.

So you really want to take stock of what you have in savings and decide how you want to utilize it. It really is going to depend on how much you have. To determine how you're going to utilize it for some [00:18:00] families. Maybe their savings can get them through the first year or two without borrowing for this family.

They don't they don't have enough saved to cover the full 20, 000 balance. They have 16, 000 saved in a parent 529 plan, for example. So this family is going to use. 4, 000 a year over four years to spread it out for 4, 000 a year for their 16, 000 savings plan. And the student is going to save a little bit working over the summer and contribute some of their savings as well.

So by just by utilizing savings, we've knocked 5, 000 off the bill. Then you can look at payment plans through the college or university. They have budget plans where you can spread out what you owe or part of what you owe. It doesn't have to be your full balance. Over a period of months, interest free.

There usually is a small fee for that, uh, or, you know, it could be 50 to 100. So it might not be so small depending on the school, but you want to look into it because it's a good way to budget and make maximum use of your affordable monthly [00:19:00] payment. So in this example, the family has said, we can afford 600 a month towards college.

So great. They don't need to borrow at all. They're going to use a little bit in savings and then 500 a month on a 5, 000 payment plan over 10 months. So by using savings and payment plan, they've knocked their bill in half before looking at borrowing as a last resort. So they do need to borrow 10, 000 to pay that bill, but it's a lot better than borrowing the full 20, 000 off the top.

We always recommend that students borrow their Federal Direct Student Loan first. Freshman year, they can borrow up to 5, 500. There's no credit check on this loan. It's a good way for students to have a little skin in the game on the borrowing side. The rates for the upcoming year did go up. For 24 25, it'll be 6.

53 percent and these loans could be partially subsidized depending on your family's financials. When you feel that that FAFSA, meaning some of the loan [00:20:00] might be interest free while the students in school and then the rest or maybe all of the loan would be unsubsidized, meaning interest will accrue on that loan.

There is a fee on this loan that's deducted from the loan amount. So that 5, 500 loan. will not be the full amount credited to the bill. The amount credited to the bill is going to be 5, 441. 87 after the feds take out that fee. Students will have to sign a promissory note online and do entrance counseling so that they understand their rights and responsibilities as a federal student loan borrower.

They don't have to make any payments on these loans while they're in school or deferred. Even graduate school deferment, uh, there's lots of deferment options for this type of loan, as well as several repayment options that students can choose when they graduate and go into repayment to make sure that that payment is affordable.

So we always recommend You know, you can borrow up to the cost of attendance minus financial aid, [00:21:00] but try to incorporate savings and payment plans so that you're not borrowing the full amount. Only borrow what you need. Try to maximize it, especially in the first year or two, um, payments, payment plans, and savings to borrow a little bit less.

The way the process works with uh, alternative loans such as loans with the MEFA or the Federal Plus loan, it's an annual process. So you would be applying for this loan each year, it would be a new loan each year, and you would be applying for financial aid each year. So you're still going to have to fill out that FAFSA each year.

So it is an annual process. You want to estimate your monthly payment. Even though it's an annual process, if you're borrowing for the first year. Multiply that monthly payment by four just to get an estimate of what you might be paying after borrowing for all four years to make sure that that final payment is going to be affordable for you.

And then he projected maybe salary increases or things like that. We always recommend apply for the full academic year. That way you have your loan locked in for, you know, the maximum [00:22:00] amount that you think you might need. You can always reduce the loan, Um, you have the school send back money to MEFA, for example, there are ways to change the loan after you apply to reduce it or change disbursement schedules, things like that.

The colleges will be certifying the loan to make sure that you're not over borrowing more than cost of attendance minus financial aid. And with most lenders such as with MEFA, the loans are going to go directly to the college. So typically the college is going to certify the loan and split it 50 50 for the fall and spring.

And if you do need a loan for unbilled expenses such as, you know, books, supplies, um, maybe the students living off campus, you need money from rent and utilities. Because all the money does go is dispersed directly to the college, this college is going to apply that loan to their bill and then you'll be able to get a refund from the college for any Overage to pay for [00:23:00] utilities.

You'll just need to be in touch with the college's financial aid office to make sure that they send you that refund. So, a great tool that MEFA has is our student loan payment calculator. I'll demonstrate this for you real quick that can help you understand. What the payment options are and what the total cost is each year based on the different repayment options that we offer.

So I'm going to use our, uh, let's say a 10, 000 example. Let's say the family might need 10, 000. And the students or freshmen will do four years before graduation. Our credit profile is good, right in the middle there, very good. So I'll just select that. This is just an estimate, a good tool to run some numbers.

So you can see that we have five different payment options to choose from, which shows what your monthly payment will be in school as well as when they graduate. What that total cost of the loan is, because that's very important to know if you make the maximum amount of payments, [00:24:00] minimum payments over the full term of the loan again with any loan, you can make prepayments or larger payments, lump sum payments to pay down the loan earlier and to reduce that total, total, total cost.

loan cost charge. You can see also down here we have the interest rates. So you can see they do go up as you push out repayment for deferring it or doing interest only. So these are all, it's just a good way to run numbers. So we see for a 10 year loan it's about 120 for a 10, 000 loan. Uh, with that 15 year loan by adding on five years to repayment it drops that payment under 100 a month.

So it really depends on what your affordable monthly payment is, what option you might want to choose.

Questions we get all the time from families are how does MEFA compare to the Federal PLUS Loan, the Federal Direct PLUS Loan, which is a parent loan for undergraduate students. So we have it all laid out here. You can see the interest rates plus for the upcoming year is [00:25:00] 9. 08%. You can see the MEFA range 5.

75 to 8. 95 well below the Federal PLUS loan. APR is not disclosed for the federal loans, but the MEFA APR is right there. There's no fees on the MEFA loans, whereas there is a 4. 228 percent origination fee on that Federal PLUS loan that is going to be deducted from the loan proceeds. So you really are paying more.

a lot more on that loan, not just for the interest rate, but also the fees. The student is not on the Federal PLUS loan, but they are a co borrower on the MEFA loan, so it is really more of a family loan. So you can have a transfer of responsibility, um, where the student can be on the loan and help make payments.

With the Federal PLUS loan, it does have to be a parent that is on the loan. MEFA loans have minimum credit score criteria, so you have to have at least a 670 credit score for approval. Whereas the plus loan, the credit standards are a little bit, a little bit looser, uh, [00:26:00] they don't necessarily disclose their credit score, but it is a little bit easier to get than other loans.

So sometimes if a family has had credit challenges, um, you know, maybe they're, they have a low 600 credit score. They don't have another cosine of the plus one might be a good option, even though it is a little bit more expensive. It still is likely less expensive than maybe some of the for profit lenders that you might be looking at.

So it is good to look at all your options. We see the repayment terms, different repayment options. MEFA has immediate repayment, principal and interest to all the students in school. Interest only while the student's in school and you can defer. The PLUS loan is a 10 year loan initially with immediate repayments while the student is in school, but you can apply to have that loan deferred.

And there are additional repayment options where you can extend the PLUS loan to up to 25 years. Students have to be enrolled at least half time for both of these loans. And there are safeguards and for MEFA in the case of student death or disability, uh, that loan would be [00:27:00] forgiven as well as for parent loan for the direct plus loan.

If the parent or student, uh, God forbid, should have death or disability, then those loans are forgiven. Now, you don't have to file a FAFSA to get a MEFA loan, but we always recommend to file that FAFSA, access as much financial aid as you can, And then MEFA is the last resort, but the PLUS loan, you do have to file the FAFSA in order to get a PLUS loan.

Get advice from trusted resources such as MEFA, ask the lenders questions, give them a call, look for transparency. Are the rates easy to find on their website or is it just a lowest advertised teaser rate you're looking at? Can you easily find those disclosure statements so you can look at the fine print before you apply?

work with the college's financial aid office. They are the ones certifying the loan. If you need to make changes to the loan, such as, you know, reducing it, for example, they can help you with that. And they may also have a, you know, a lender list or, you know, lenders that they've worked with in the [00:28:00] past.

But it is up to the family. You can pay your bill however you choose to pay your bill. Whatever is due, you can use a MEFA loan, you can pay in cash, savings, payment plan, a federal plus loan, however you want to utilize, um, your funding. You can pay it however you want, but. Colleges do have some good information about how to pay the bill on their website.

So take a look at what they have and call them if you have any questions. Work with your student accounts office on that payment plan. Typically the Bursar student accounts office is going to be running the payment plan aspect and that's who you're making the the bill payments to. So definitely work with your college.

They're there to help you and to uh, you know, make sure you can help get that bill paid. All right, so last but not least, let's talk about timing. When do you apply? How does this process work? So right now, I'm recording this in June, and uh, bills for the fall semester are going to be going out this month and next month depending on the college, and they'll be due in sometime in [00:29:00] July or August, usually three to five weeks after the bill is sent.

Now, these bills from the college are only going to include the direct costs, such as tuition fees, uh, housing, meal plan. Things like books, laptop, transportation. You would be, you can pay that out of pocket. We always recommend for those unbilled costs to try and pay it out of pocket. If you can, rather than borrowing, it can help reduce your borrowing.

You may be charged for health insurance. In Massachusetts, every student needs to be insured. So the college, if you haven't waived your health insurance by providing your insurance information, they will charge you for that. So make sure. That if the student is insured under your health plan and it's going to be properly insured at whatever school they're attending, that you waive that health insurance because it can be, you know, up to 2, 000 or more.

And that information will be on your bill and how to waive that. Your enrollment deposit, if you have a student who is a freshman, should be deducted from the bill, as well as any [00:30:00] other financial aid or, you know, private scholarships that have come in the door. If you've set up your payment plan or applied for your loan ahead of time before you get your bill, you may even see a credit for that on the bill.

Typically, if your student has work study, that's not going to be a credit on the bill. Work study is an amount that the student can earn up to. In a part time job on campus. So work study, they'll still have to apply for that job, and then they'll get a bi weekly paycheck, usually, to pay for those unbilled expenses, such as books, supplies, pizza money, that kind of thing.

It's a good way for a student to help to contribute towards the bill, so that they're not, you know, then texting for a Venmo payment, uh, you know, to help pay for their pizza bill, yeah, every month to their parents. So it's a good way to, um, You know, pay for pay for school, get a little good time management skills in there as well.

Now you can apply for a loan at any time during the academic year for MEFA, for example, but we do [00:31:00] recommend applying. Give yourself a two week cushion before the bill's due date. That way, if there's a credit issue or anything pops up, you're able to get that taken care of before the bills due. However, this process is electronic.

For example, with MEFA, you can apply, have your loan approved. It's an instant credit decision. Get your promissory note all signed online. You can have this done in, you know, at least a little, less than a half hour. It's really easy, or it should be really easy. Um, But we don't want you to wait till the last minute to apply in case there are any, any issues on credit, for example, that might pop up and set up those payment plans as soon as possible.

If that's something that you're considering doing, uh, that way it'd be credited on your bill and you can get, get those monthly payments started because those payment plans usually start in May, June timeframe. So thank you for listening today. If you have any questions, feel free to call us. Our 800 number is here.

Our email is here. We have MEFA [00:32:00] loan counselors and MEFA counselors here to help you with all aspects of the college payment process, not just loans, but financial aid and college savings, anything to do with paying the college bill we can help you with. So feel free to utilize our free resources here at NIFA and have a great day.

Thank you.