There is bad news for federal employees whose children will be attending a

college this fall. The cost of attending several colleges or universities --

this includes tuition, room and board and other higher education fees -- for the

2010-2011 academic year could be approaching $50,000.

While the cost of attending most colleges and universities will be less than

$50,000 and scholarship money is available for qualifying students, many

employees with children attending college this upcoming academic year may find

it difficult to pay their children's college expenses solely from their salaries

and savings. To fill in any gap between what their children's college education

will cost and what a parent can afford to pay, a parent and/or student will

likely have to borrow in the form of student loans. But employees with children

attending colleges or universities this fall should discover that as a result of

a recent law change, the student- and parent- loan borrowing process has

changed, making the process easier and most important cheaper for both parents

and students .

In the past, many college students and their parents who applied for student

loans did so through the Federal Family Education Loan (FFEL) program. Since

most colleges and universities participated in the FFEL, students applying for

student loans through the FFEL would receive federally guaranteed loans through

banks or other lending institutions. Colleges that did not participate in FFEL

instead participated in the federal government's run Direct Loan program with

loans coming directly from the federal government.

As an unlikely part of the new health care legislation (the Patient

Protection and Affordable Care Act of 2010) that was passed into law in March

2010, effective July 1, 2010 all lending programs from the bank-based FFEL will

be transferred to the Direct Loan program. Private banks will no longer market

government-backed loans to students and all federal government-backed student

loans will originate in the Direct Loan program.

Any college or university that wants its students to have access to federal

government-backed student loans is required to participate in the Direct Loan

program. But the loan process will be streamlined, resulting in less confusion

and an easier process to obtain loans with lower interest rates. In addition,

the repayment rules will be better for student borrowers for loans made after

June 2014.

Perhaps the best result of the new law will be that students will not have to

"shop around" for a student loan with the lowest interest rate and best loan

repayment terms as they have in the past. The FFEL program required that the

student and parents had to deal with different "entities" - including a lender,

a loan guarantor, and a loan service. Many families had to decide which lender

to use. Some families ended up choosing a lender from the college's "preferred

list". Unfortunately, in some cases the lenders on the college or university's

"preferred list" did not offer the most competitive rates and terms resulting in

higher than expected borrowing costs for parents and students. By eliminating

the "middleman" and using the Direct Loan program, the Congressional Budget

Office estimates that the government will save $68 billion over the next 10

years

Parents and students will nevertheless have to go through the same

application process for their student loans as they have in the past. They will

have to fill out the Free Application for Federal Student Aid (FAFSA) form

(application process may done online at href="http://www.fafsa.ed.gov">http://www.fafsa.ed.gov) if they hope to

qualify for Stafford loans. Unsubsidized Stafford loans, which come directly

from the federal government, will be made to students with no credit checks.

These loans are available to any student no matter which college or university a

student attends - this includes both private and public colleges and

universities. For the academic year 2010-2011, unsubsidized Stafford loans come

with a fixed interest rate of 6.8 percent, the same rate on unsubsidized loans

during the 2009-2010 academic year. Subsidized Stafford loans, which have lower

interest rates and easier repayment terms, are based on financial need. Most

students will likely receive unsubsidized Stafford loans.

Unsubsidized Stafford loans have academic year and lifetime borrowing limits.

Freshmen can borrow no more than $5,500, sophomores can borrow no more than

$6,500, and junior and seniors can borrow no more than $7,500 per academic year.

There is also a $31,000 cap on lifetime borrowing.

Once the FAFSA is completed and accepted, the student or parent will inform

the college or university that they want access to a federal education loan. The

college or university will provide a Master Promissory Note for the parent or

student to complete and sign. The loan will then be funded through the federal

government.

For most students, the cost of a four-year college or university education

will far exceed the $31,000 lifetime cap on Stafford loans. Additional loans may

therefore be necessary. Through the Direct Loan program, there are the Parents'

Loans for Undergraduate Students (PLUS). PLUS loans are for parents of

undergraduates or for graduate students. A parent or graduate student may be

eligible to receive a PLUS loan that can fund the difference between the cost of

attending a given school and the amount of financial aid the school offers the

student. For example, if Jeff attends a university where the total cost of

attendance - this includes tuition and fees, room and board, and miscellaneous

fees - during the 2010-2011 academic year is $45,000 and Jeff gets a $20,000

financial aid package from the university, then Jeff's parents can borrow up to

$25,000 using a PLUS loan.

But unlike unsubsidized Stafford loans, PLUS loans require borrowers to

demonstrate credit worthiness. In fact, to qualify for a PLUS loan a borrower

may not have an adverse credit history. A potential PLUS loan borrower must not

have had any derogatory elements such as a personal bankruptcy filing or a home

foreclosure in the prior five years.

PLUS loans have a fixed 8.5 percent interest rate in the FFEL program, while

PLUS borrowers through the federal government's Direct Loan program have a fixed

interest rate of 7.9 percent. This means that all PLUS loans issued after June

1, 2010 will be through the Direct Loan program and parents will be paying less

in interest for their PLUS loans. Note that a PLUS borrower who "barely"

qualifies under the PLUS loan borrowing requirements will pay the same 7.9

percent interest rate as a potential PLUS borrower with a superlative credit

score.

Would there be any circumstances in which a parent would choose a private

loan rather than a federal PLUS loan? In some cases, a parent prefers that their

children do the borrowing through a bank-funded private - even if the parent has

to co-sign for the loan. In this way, the student will be the one who is

primarily responsible for repaying a student loan.

There may also be parents who want to borrow money from a bank in which they

have a "personal" relationship in order to pay for their children's higher

education expenses.  If parents are creditworthy, they may get a better

interest rate than the 7.9 percent interest rate currently charged on PLUS

loans. Private student loans usually have variable interest rates, with rates

currently ranging anywhere from four to 12 percent. Some banks will reduce their

interest rate for borrowers who pay promptly and who use automatic payments from

their bank accounts. On the other hand, some parents may not qualify for PLUS

loans because of poor credit history. These borrowers may be able to obtain a

private student loan by agreeing to pay double-digit variable interest rates.

The recent changes to the student loan program will hopefully ease employees'

anxieties about being able to pay for the cost of their children's higher

education. With these changes, employees who may have been focusing on saving

for and paying for their children's higher education may now instead focus on

saving sufficiently for their retirement. For most federal employees, maximizing

contributions to the Thrift Savings Plan and to IRAs should be a primary goal in

order to sufficiently save for a retirement that could last for as many as 30 to

40 years. On the other hand, a college education usually lasts for a far shorter

period of time and with more funding options.

About the Author

Edward A. Zurndorfer is a Certified Financial Planner, Registered Health

Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in

Silver Spring, MD and the owner of EZ Accounting and Financial Services, an

accounting, tax preparation and financial planning firm also located in Silver

Spring, MD.  He is an instructor at federal employee retirement

seminars throughout the country for the National Institute of Transition

Planning, Inc. and writes numerous columns and books on federal employee

benefits.

Posted on 7/15/2010