Tag: Parent Plus Loan

Federal Loans

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A quick review of federal loans:

-you will need to fill out a FAFSA

-Two federal loan programs.

1. The first is the Federal Family Education Loan Program (FFEL) which was created by the Higher Education Act of 1965.  A bank or Sallie Mae is the usual lender.  The lender is insured by a guaranty agency, which is usually a state agency .  In New Jersey, the NJ Higher Education Student Assistance Authority acts as a guaranty agency for FFEL loans.  If a borrower defaults on a FFEL loan, the lender is paid by and transfers the loan to the guaranty agency.  The guaranty agency attempts to collect the loan.  If the guaranty agency does not collect, it is paid by and transfers the loan to the US Department of Education (ED).  The FFEL program was  discontinued as of July, 2010.  Note, however, that there are still many FFEL loans outstanding.

2. The second program is the William D. Ford Federal Direct Loan Program (commonly known as the Direct Loan Program) which was created by the Student Loan Reform Act of 1993.  With Direct Loans, the lender is ED.  If you received a federal loan after June 30, 2010, it is a Direct Loan.

-Types of loans: Stafford, Perkins, Parent Plus, Graduate Plus

1. Stafford

For undergraduate students, Stafford loans are either subsidized or unsubsidized.  With a subsidized loan, no interest accrues until six months after graduation or six months after you leave school.  A subsidized loan is based on need.  With an unsubsidized loan, interest begins to accrue once the funds are disbursed.  With either type of loan, payments are deferred until six months after graduation or six months after you leave school.  With unsubsidized loans, the accrued interest is capitalized into the principal, so you are paying interest on interest.  Therefore, it is wise to pay down the interest portion of the unsubsidized Stafford loan each year while you are in school.  For graduate students, the unsubsidized loan program has ended; therefore, all new Stafford loans are unsubsidized.

The maximum amount of Stafford loans for dependent undergraduates is $31,000 (with maximum of $23,000 subsidized); for independent undergraduates, $57,500 (with maximum of $23,000 subsidized).  For graduate students, the maximum amount of Stafford loans is $138,000; for medical students, $224,000.

2. Perkins

Perkins loans are based on exceptional need.  The limit per year for undergraduate students is $5,000 with a cumulative limit of $27,500; for graduate students the yearly limit is $8,000 with a $60,000 cumulative limit which applies to both undergrad and graduate loans.  The interest on Perkins loans is subsidized and the deferment period is 9 months after graduation or 9 months after leaving school.

3.  Parent Plus

In this case, it is the parent or step parent of a dependent student who borrows the money.  The parent and student must not be in default of any federal student loan.  The parent must pass a credit check. Moreover, the parent or step parent must be a US citizen or an eligible non-citizen.  The annual loan limit is the cost of attendance less any other financial assistance received.  Beginning on or after October 1, 2016, a 4.276% origination fee is withheld by ED at the time of the disbursement and the remainder is disbursed into the student’s account.  Interest accrues upon disbursement and payments begin 60 days after disbursement (unless the parent specifically requests and receives a deferment).

4.  Grad Plus

The graduate student must be enrolled at least half time in a degree granting program.  The student must pass a credit check  The annual loan limit is the cost of attendance less any other financial assistance received.  Beginning July 1, 2013, the interest rates on Grad Plus loans is variable with a maximum of 10.5% (ouch).  Interest accrues from date of disbursement.  Payments begin six months after graduation or six months after you leave school, and the accrued interest capitalizes into the loan so you are paying interest on interest.  The origination fee is 4.276% and the balance is disbursed to the student’s account.

 

 

 

 

 

Closed School Discharge

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For the most part, you have to pay your federal student loans for an extended period of time before the loan balance is forgiven.  And in most cases, even if the loan balance is forgiven, you will have to pay taxes of the forgiven debt.

However, there are some instances where your federal loan can be administratively discharged.  One such instance is when the school closes.  Nowadays, on a fairly regular basis, we hear reports of “for profit” school going out of business.  In 2013, the DOE reported that of 128 schools that had closed in the prior 5 years, 82 were “for profit schools”.

So, how do you qualify for a closed school discharge?  First, it has to be a federal loan.  That means a Direct Loan, a FFEL (Federal Family Education Loan) or a Perkins loan.  This includes a Parent Plus Loan.  Second, the loan proceeds were disbursed after January 1, 1986.  Third, the student was enrolled or on an official leave of absence on the date of closure, or had withdrawn not more than 120 days prior to the date of closure.  Fourth, you have to file an application for discharge of the loan.

Sounds pretty straightforward, but the closed school discharge, like everything with federal student loans, has its own regulations and internal rules.  So, if you do not follow the rules you may find that you do not get the discharge.

Moreover, there are some pitfalls.  First, if you already graduated, then you cannot get the closed school discharge.  I have heard from more than one student that the school from which they graduated had closed, and they should be reimbursed on payments because the education that they received was a useless waste of money.  That may lead to different issues, but it will not get you a closed school discharge.

Second, if the school has numerous branches, the discharge only applies if the branch that you attend is closed.  If you are taking all your courses online, then the closed school discharge applies if the main campus closes.

Third, if you transfer your credits to another school, and continue with your program at the new school, you are not eligible for the discharge.  This also applies to what is referred to as “teach out agreements”.  With teach out agreements, the closing school works out a deal with another school or with a non-closing branch of the school to accept the student into its program.  However, a school cannot force a student to accept a teach out agreement if the courses are being taught at a location different from where the student was enrolled.

If you received a closed school discharge, you do not have to repay the loan, any accrued interest or any collection or administrative fees associated therewith.  Moreover, the student borrower is entitled to reimbursement for any payments made on the loan.  And, if you qualify for the closed school discharge, the amount discharged is not subject to tax.