Gap financing options Presenters: Kathy Facenda & Heather Gaumer 2018 ILASFAA Annual Conference: Saving the Day with Financial Aid
1 2 3 Find free money that doesn t have to be paid back Eplore federal student loan options Fill any remaining gap with other sources
How the Typical Family Pays for College, Average Share from Each Source Student borrowing 19% Parent borro Parent income & savings 23% Scholarships & grants Student income & savings 11% Source: Sallie Mae How America Pays Survey 2017 Relatives & friends Grants and scholarships constitute the largest portion of funding used to pay for college Borrowed money covered more than one-quarter of costs Students and parents covered a similar share (30% and 31%) from their combined income, savings, and borrowing
Who has the gap financing conversation on your campus? Financial aid staff Business office, accounts receivable, bursar, etc. Admissions staff Academic advisors Coaches How do families receive financial aid information? Website In-person, individual appointments Campus visit events Proactive or reactive phone calls When do families receive financial aid information?
Scholarships & tuition payment plan
Private Resource Eamples KFC Scholarships Coca-Cola Scholarships Wal-Mart Scholarships Eon Mobil Scholarship General Electric Foundation Scholarships Target Scholarships Scholarship America Ronald McDonald House Charities Scholarships Eamples of Free Search Engines Scholarship Search by Sallie Mae provides more than 5 million scholarships worth up to $24 billion SallieMae.com/ScholarshipSearch Graduate School Scholarship Search by Sallie Mae provides more than 850,000 scholarships worth up to $1 billion SallieMae.com/GradScholarships
Other Resources Students and families should also research Parent s Employers Church or Synagogue Civic Clubs and organizations High School Counselors Sources based on race, ethnicity and hobbies Outside scholarship resources listed on your school web site Handouts and posters in campus offices
Activities/Sports/Dance/Music/Cheer Travel Epense Uniforms/Equipment Membership fees Groceries Utilities What other items come to mind?
Most schools offer tuition payment plans Pro Con Pay tuition in manageable monthly payments using household income Can provide an interest free funding option. Tuition payment plans help attract and retain students by giving them an additional funding option Some plans have fees or other charges May incur penalties for late payments
Federal Student Loans
Undergraduate Students Subsidized Direct Loan Government pays the interest during school, grace and authorized deferment periods Unsubsidized Direct Loan Borrower is responsible for interest at all times, but not required to pay it during school, grace and deferment PLUS Loan for Parents Graduate Students Unsubsidized Direct Loan Borrower is responsible for interest at all times, but not required to pay it during school, grace and deferment PLUS Loan for graduate students
Undergraduate (subsidized & unsubsidized) Loans First Disbursed 10/1/16 6/30/17 7/1/17-9/30/17 10/1/17-6/30/18 Interest Rate: 3.76% 4.45% 4.45% Graduate (unsubsidized) Fee: 1.069% 1.069% 1.066% Interest Rate: 5.31% 6.00% 6.00% Parent and Graduate PLUS Fee: 1.069% 1.069% 1.066% Interest Rate: 6.31% 7.00% 7.00% Fee: 4.276% 4.276% 4.264% Federal student loan information was gathered September 2017 from https://studentaid.ed.gov. Rates, fees and availability of federal loan products are subject to change by the Federal Government. Check this web site for the most up-to-date information about federal loan products.
Gap financing options
Often addressed in the media as risky, however parents still dip into their retirement funds to help pay for college. Pro Easy access No credit check or lengthy application process Con Investments may be sold at a loss Loss of future investment growth Double taation Early withdrawal penalties Rule of Thumb: You can borrow for college, but you can t borrow for retirement!
Instead of borrowing, pulling funds out of investments is another option parents sometimes leverage to pay for college. Some families plan for long-term investments to supplement retirement income in the future. PRO Parents control the use of funds Easy access CON Depending on economic circumstances, investments may be sold at a loss Loss of future investment growth May incur ta implications Source: This information was gathered 10/2016 from http://www.finaid.org/savings/strategies.phtml and http://www.finaid.org/savings/retirementplans.phtml
Pros Cons Easy access if home equity is available Ta benefits***new ta implications for 2018 and forward Parents control the funds Risk losing your home if you default on your home equity loan Foreclosure risk if financial situation changes drastically May need the the equity for future home improvements/repairs If you sell the home, you must repay the home equity loan Closing costs and other fees Source: Information gathered 9/2017 https: //www.fidelity.com/my money/6-ways-not-to-use-your-home-equity-line-of-credit
Additional borrowing options for parents
PLUS Loans Parent is the borrower and loan can t be transferred or consolidated to the student 7.00% fied interest rate for loans first disbursed on or after July 1, 2017 through June 30, 2018 4.264% origination fee for loans first disbursed on or after October 1, 2017 through Sept. 30, 2018 7.93% Annual Percentage Rate (APR) Can cover the entire gap up to 100% of the school certified cost of attendance Borrower can request deferment of payments while student is in school A credit check is required. To qualify, borrower cannot have an adverse credit history. There is no cosigner release option available Parent PLUS is not eligible for income related repayment plans Any potential loan discharge is taable
Parent or another creditworthy individual is the primary borrower. Most lenders offer zero origination/disbursement fees Borrowers may be able to add a cosigner if needed when applying Lenders may or may not require school-certification or disburse funds to the school Can cover up to 100% of the school certified cost of attendance minus other aid received Repayment typically begins immediately. Some lenders offer borrowers the ability make monthly interest payments while the student is in school. Terms and costs vary widely between lenders
Additional borrowing options for Students
The student is the primary borrower Families can share the responsibility with the student when a creditworthy individual cosigns the loan. The student is more likely to be approved with a cosigner. Cosigner doesn t have to be a parent. Helps student build credit history - especially if making payments while in school Can cover up to 100% of the school certified cost of attendance minus other aid received
Most lenders offer zero origination/disbursement fees Many lenders offer a cosigner release option after meeting certain requirements Some lenders offer the option to defer payments while student is in school (interest accrues during this time and is added to the loan s principal amount when the deferment period ends interest capitalization) Terms and costs vary widely between lenders Each lender will have specific borrower benefits that may be important to the borrower and cosigner Cosigner release, free credit score review, study and tutoring tools, interest rate reductions for specific achievements & repayment behavior, etc.
Graduate or Professional Student is the borrower 7.00% fied interest rate for loans first disbursed on or after July 1, 2017 through June 30, 2018 4.264% origination fee for loans first disbursed on or after October 1, 2017 through Sept. 30, 2018 7.93% Annual Percentage Rate (APR) Can cover the gap, up to 100% of certified cost of attendance minus other aid received Borrowers can not have an adverse credit history Graduate and Professional borrowers can request deferment of payments while in school
Most lenders offer zero origination/disbursement fees Many lenders offer a cosigner release option after meeting certain requirements. Some lenders may not require a cosigner. Some lenders offer the option to defer payments while student is in school and may offer discipline specific grace periods and repayment terms. Terms and costs vary widely between lenders Key items to consider include the frequency of interest capitalization Each lender will have specific borrower benefits that may be important to the borrower and/or cosigner Cosigner release, free credit score review, study and tutoring tools, interest rate reductions for specific achievements & repayment behavior, etc.
Interest rate fied or variable a) Fied Rate = Stability of rate, but could initially be higher than variable rate b) Variable Rate = Can be lower, especially short term Benefit programs offered by the lender a) Rewards for certain activities (paying via ACH, graduating from school) b) Rewards for on-time payment c) Free access to credit scores, other tools d) In school success services Other features of the loan a) Cosigner release, if any, and number of payments required b) Repayment term c) Death & disability waivers
Repayment Options In school payments may: reduce capitalized interest (interest added to a loan s principal balance) reduce total loan cost build credit by making scheduled monthly payments on time Deferred payments may: allow for more fleibility while in school increase the total loan cost due to capitalized interest EXAMPLE: $10,000 loan, 8% Interest Rate, 4 years in school, 10-year term In-School Repayment Option In-School Monthly Payment Post-School Payment Post School Payment Terms (months) Total Amount Paid Deferred Repayment $0 $141.90 144 $20,405.41 Interest Repayment $56.88 $156.68 84 $15,651.13
Final Tips
Many financing options are available to families While there is no one-size-fits-all solution, families should follow the 1-2-3 approach: Start with money you do not have to repay. This can include scholarships, grants and work study. Eplore federal education loans. Apply by completing the FAFSA. Consider borrowing the gap with responsible loan programs Each family may benefit by using different gap financing options. When considering a private loan, families should research their options Apply & Compare Your FICO score considers all inquiries within a 45-day period for a mortgage, an auto loan or a student loan as a single credit inquiry. This same guideline also applies to a search for a rental property such as an apartment. These inquiries are usually recorded by the credit bureau as a type of real estate-related inquiry, so the FICO Score will treat them the same way. You can avoid lowering your FICO Score by doing your apartment hunting within a short period. Source: http://www.myfico.com/credit-education/questions/how-do-inquiries-impact-credit-scores/ September 2017
Recent reports and proposed legislation have encouraged schools to enhance student loan counseling efforts to ensure students and parents are aware of options and encourage responsible borrowing Allows staff to discuss specific terms, conditions, and borrower benefits that meet the individual needs of each student and cosigner Staff can better counsel students when presented with unusual circumstances, such as: Prior year balance Enrolled less than half-time SAP Institution is seen as a helpful resource for all sources of financial aid federal, state, institutional, community and private
Be confident. Your prospective students trust and respect you. Be honest. Admit when you can t provide an answer to a question and assure the student you ll get right back in touch. Have the gap conversation with the key stakeholders. Be positive and don t make assumptions. Determine what questions or concerns still remain after the conversation. Follow up as needed.
Questions?
The information contained in this presentation is not comprehensive, is subject to constant change, and therefore should serve only as general, background information for further investigation and study related to the subject matter and the specific factual circumstances being considered or evaluated. Nothing in this presentation constitutes or is designed to constitute legal advice. MKT12906 September 2017