Why do you still have so much interest in my interest?

Hello all!

Just a quick note to share some information that may be of “interest” to you, specifically great news on student loan interest rates for 2020-21.

Interest rates going down, down, down…

You may know (or you may not know) that Federal student and parent loans (Subsidized, Unsubsidized, Parent PLUS and Grad PLUS) have interest rates that are fixed for the life of the loan. Each year when you borrow a loan, your interest rate for that particular annual loan is based on that fixed rate (and it will not change during the time that you pay that loan). This does mean that if you borrow one loan each year of your four year undergraduate career, you could have four different loans with four different interest rates.

Well, the interest rate is set annually based on (wonky stuff coming) the auction rate for 10 year Treasury bills in early May. And, guess what? We are in a tough economic time, so the T-bill rate is at an historic low, so that means student loan rates will also be at an historic low in 2020-21.

How low?

Subsidized Student Loan and Unsubsidized Student Loan interest rates for undergraduates will be 2.75% (down from 4.53% in 2019-20). Parent and Graduate PLUS Loan rates will be 5.3% (down from 7.08% in 2019-20). And Graduate Unsubsidized Student Loans will be at 4.3% interest rate (down from 6.08% in 2019-20).

Of course, remember that currently Federally held student loans have an interest rate of 0% through September 30 anyway, but this is a major reduction in rates which will leave this year’s borrowers feeling some economic impact from the pandemic throughout the lifetime of their repayment.

More information on these rates can be found at CNN or Forbes.

Puzzled about Student and Parent Loans

I am a logic puzzle fan. I enjoy solving puzzles like The Lady or the Tiger, or figuring out Nonograms. So when I logged into my browser this morning and this article popped up (“The Logic Puzzle You Can Only Solve with Your Brightest Friend”), I was happy to waste spend a few minutes playing my way through it. Go ahead; try it. I’ll be right here waiting for you when you get back.

Have fun figuring out the puzzle!

So, did you solve it? I admit, I needed a little help on that one. Just like you might need a little help with today’s blog post – all about Parent and Student loans and the impact of your credit history on them.

Let’s start with some definitions. There are two main types of loans for education: parent loans and student loans. As you might guess, the main difference between them is who is defined as the borrower. For parent loans, the parent (or parents) borrow for the student (and sometimes, depending on the loan, the student may be a co-borrower). For student loans, the student borrows (although for many private loans, a parent or other “adult” must be a co-borrower). So you can see, often the main difference is simply who’s name is listed as the main borrower.

The second important piece to know is who is doing the lending: is this a Federal or Private loan? In the case of Federal loans, the Federal government is the lender; these are called Direct Loans (Direct Subsidized Loans, Direct Unsubsidized Loans and Federal PLUS Loans). For Private Loans, the lender could be a bank, a credit union, or a state financing agency; Private Loans come under various names and have lots of different terms and conditions.

Federal Direct Student Loans (Subsidized and Unsubsidized) have loan limits, depending on a students grade level (the farther along in your career, the more you can borrow per year). For Graduate Students, the only Federal Direct Student loan available is Unsubsidized. The main difference between Subsidized and Unsubsidized Loans is who pays the interest while the student is in school or in grace period: if Subsidized, the Federal government covers the interest payments during the in school, grace and deferment periods, while for Unsubsidized Loans, the student is charged the interest and can either pay the interest off each month while in school or can defer the interest until payments start, but the interest will be added to amount owed at that point. Students borrow these loans with no cosigner. In addition, note that to qualify for these loans you must complete the FAFSA,

The other kind of Federal Loan is the Direct PLUS Loan. There are two types of these: Undergraduate PLUS Loans for Parents, and Graduate PLUS Loans for Students in graduate degree programs. These loans are available up to Cost of Attendance minus other aid. The interest rate for these programs is higher than the rate for Direct Student Loans, and interest charges begin immediately; there is no interest subsidy.

So what about credit? Does your credit history matter when it comes to Federal Loans? There is no credit check for Direct Student Loans (Subsidized or Unsubsidized). As long as a student has not defaulted on a previous Direct Loan, and does not owe back an overpayment for a Federal grant, then she can receive a Federal Direct Loan. Even a student in default on a previous loan can make a limited number of payments to rehabilitate their loan and qualify for future loans.

For PLUS loans (both for parents of undergraduate students and for graduate students themselves), a credit check is run, but as long as the applicant does not have “adverse credit history” they will qualify for the loan. Adverse credit history basically means being 90 days or more past due on a current obligation, or having other more serious examples of repayment difficulty (see the link above). Note that nowhere above does the definition refer to credit scores; and any student who is approved gets the same interest rate and terms. There is no reward for better credit history from the Federal government, but neither is there any punishment for lower credit scores (as long as you do not meet any of the definitions above). If you do have an adverse credit history, you may be able to add a cosigner or explain the situation that caused your adverse credit history and still qualify.

Private loans on the other hand absolutely look at your credit score. The better your credit score, the better interest rate will be offered to you (and sometimes the rate could be better than the Federal government’s interest rate on their loans), the more flexibility you will have around length of repayment, and the less likely you will need a cosigner. Private loans may also look at your ability to repay (using a debt-to-income ratio) to ensure that you can afford your monthly obligations (and they will likely use your credit report to determine what loans and other obligations you currently have).

So, long story short, most Federal loans don’t require perfect credit, and if you have significant credit issues you can work through them; however interest rates can be higher than private loans, and terms aren’t generally as flexible. Private loans can be a better choice for student or parent borrowers with excellent credit, but these loans don’t have as many benefits as Federal Loans (more about these in a later post), and for student borrowers will generally require a cosigner.

So what did I miss? What questions do you have? Let me help you solve this puzzle!

Extra Credit

So let me be VERY clear from the beginning: nothing in the process of qualifying for financial aid (specifically grants, scholarships, or work awards) have anything to do with your or your parents’ credit history. When it comes to qualifying for these types of financial aid, we don’t care if your parents have declared bankruptcy, if there is a 90 day delinquency in payment in your past, or if you have a tax lien.

BUT… your credit history is really important for lots of other reasons (including some student and parent loans, qualifying for some jobs, renting an apartment, buying a car, or qualifying for a credit card…). So we are going to spend some time talking about credit.

Who wants extra credit?

I am going to begin this week with an assumption that you may know nothing about credit or your credit history. What is a credit history? And where does it come from?

Your credit history shows a record of your payment of loan or debt obligations. Whenever you take on a debt, an entry is made in your credit history showing how much you borrowed, your current balance, and your history of payments. There are three main credit bureaus (organizations that track your credit history). Each company has a slightly different way of reporting your history, and while generally banks and lenders report your information to all three of the bureaus, they may have different reporting schedules (and some lenders may not report to all three companies).

The three major credit bureaus in the US are Equifax, Experian, and TransUnion. While there are not worldwide credit bureaus, other countries around the world have their own companies providing credit history.

Every consumer is allowed for free – once a year – to obtain a copy of their credit history from the three bureaus. This site allows you to receive them. You can also obtain a copy for free if you are declined credit, or you can pay the three bureaus to have regular access to your credit history.

While you can get a copy of your history for free from the bureaus, you are never able to get a copy of your credit score for free. What is a credit score? In 1989, the credit score was introduced as a way to provide an easy way to measure an individual’s creditworthiness. The credit score is a three digit number (usually from 300 to 850) with the higher the number representing a more creditworthy individual.

Whether or not you qualify for a loan can be based on your credit score. Your interest rate, how many months you are allowed to repay your loan, any fees you are charged, all can be based on your credit score. Your credit score is an important indicator of how much you will spend on credit.

You can pay to get access to your credit score, or (better yet) you can get a copy of your free annual credit bureau report (CBR) and make sure the information is correct. You can dispute information that is wrong on your CBR, and the credit bureaus are required to correct any errors.

So we are going to spend a lot more time this month talking about credit — how credit impacts loans, how to improve your credit score, and how credit cards work (among other personal loans).

But for now I have an extra credit assignment for you! Was this information helpful? What didn’t we cover about credit that you want to know? What questions do you have about credit that I can answer?