LOAN REFLECTION. Directions: Complete the handout below individually and share your answers with your small group.

Transcription

1 LOAN REFLECTION Directions: Complete the handout below individually and share your answers with your small group. Have you ever heard the word loan before? In what context? What comes to mind when you hear this term? When might someone decide to accept a loan? What should they know or ask before taking a loan? You may have heard of the term interest in the context of a savings account. How is interest related to a loan? Given what you now know about loans, how would you define it? Page 1

2 FEDERAL VS. PRIVATE LOANS Directions: Review the Venn diagram below comparing federal and private loans. Then assess how a federal loan is more preferable to a private loan. FEDERAL LOANS PRIVATE LOANS Federally funded Complete FAFSA to apply Financial need is a key eligibility criteria Money is borrowed and must be repaid with interest Must be a U.S. citizen or other eligible resident to qualify Can be issued more than one loan at a time Privately funded by a bank or other financial institution Complete a loan application to apply Credit history is a key eligibility criteria How might a federal loan be more advantageous than a private loan? Page 2

3 BEFORE YOU BORROW Know the following information before taking a loan. Remember to accept loans only after you have accepted free money (e.g. grants, scholarships) and earned money (e.g. work study). What is the interest rate? What other fees or costs are associated with the loan? Is the loan subsidized or unsubsidized? What are the repayment terms? How much should you borrow? What happens if you are unable to make payments? Are there deferment or forbearance options? Loans can have varied interest rates (the percentage of interest changes annually) or fixed (constant) rates. In general, federal loans offer lower, fixed interest rates (i.e. Perkins Loans at 5%) while private loans may be more expensive and varied. Pay attention to other fees associated with the loan (e.g. application fee, early payment penalty fee, etc.) Subsidized Loans: Loans awarded based on financial need; the government pays the interest of the loan during college enrollment and the grace period. Unsubsidized Loans: These loans do not consider financial need. The borrower is responsible for paying all interest that is earned on the loan during college and the grace period. Repayment can begin anywhere from during or immediately after college to nine months after graduation. Federal loans often have a year repayment period. The amount you pay each month depends on the size of your loan, your repayment term, and interest rate. Consider how much you can afford to pay each month with your expected salary after graduation when the time comes to select a repayment plan. Borrow only what you need and what you can afford to repay in the future after accepting all other financial aid (grants, scholarships) you qualify for that does not need to be repaid. Talk with your lender to understand the repercussions of failing to make loan payments. The borrower is responsible for repaying the full amount of the loan plus interest even if he/she does not complete their college education. BORROWING TIPS: 1. Subsidized Loans > Unsubsidized Loans: Always accept subsidized loans before unsubsidized loans so you can avoid paying interest on your loan while in college and during the grace period. 2. Federal Loans > Private Loans: Always exhaust federal loans before accepting private loans. Federal loans generally offer lower interest rates and more favorable repayment terms. 3. Ask Questions: Talk to your lender if you are unclear about any loan terms and conditions. Page 3

4 EVALUATING LOAN OPTIONS SCENARIO: You have been offered a $2000 Federal Perkins Loan and a $2000 Parent PLUS Loan. You need to accept one of these two loans in order to attend a state school. Work with your small group and use the information on the Federal Loan Comparison Table and Loan Repayment Table to answer the questions below: 1. Which loan would you prioritize taking? Why? 2. You decide to select a 10-year repayment plan. What would be: a. Your total loan payment (principal + interest) $ b. Your monthly payment: $ c. The total amount of interest you would pay: $ 3. If you had decided to select a 25-year repayment plan, what would be: a. Your total loan payment (principal + interest) $ b. Your monthly payment: $ c. The total amount of interest you would pay: $ 4. How would you reduce the amount of interest you pay for the loan? 5. If you had been offered a Direct Subsidized Stafford Loan for the same amount, would you select the same loan? Why or why not? Page 4

5 FEDERAL LOAN COMPARISON TABLE Source: Federal Perkins Loan Direct Subsidized Direct Unsubsidized Parent PLUS Loan (Subsidized) Stafford Loan Stafford Loan Borrower Student Parent of dependent undergraduate student Eligibility 1. Meet basic eligibility requirements for federal aid 2. Demonstrate financial need 3. Be enrolled at least part-time 1. Meet basic eligibility requirements for federal aid 2. Demonstrate financial need 3. Be enrolled at least half-time 1. Meet basic eligibility requirements for federal aid 2. Be enrolled at least half-time 1. Meet federal aid and credit eligibility requirements 2. Student must be enrolled at least half-time Application Process Maximum Loan Amount $5,500 (for undergraduates) Submit FAFSA Dependent Undergraduate: Year One: $5,500 (up to $3,500 subsidized, $2,000 unsubsidized) Year Two: $6,500 (up to $4,500 subsidized, $2,000 unsubsidized) Year Three and Beyond: $7,500 (up to $5,500 subsidized, $2,000 unsubsidized) Submit FAFSA; Parents complete a Federal PLUS Loan application Parents can borrow up to the cost of attendance minus any financial aid the student receives Independent Undergraduate: Year One: $9,500 (up to $3,500 subsidized, $6,000 unsubsidized) Year Two: $10,500 (up to $4,500 subsidized, $6,000 unsubsidized) Years Three and up: $12,500 (up to $5,500 subsidized, $7,000 unsubsidized) Interest Rate 5%; fixed 4.66%; fixed 4.66%; fixed 7.21%; fixed Grace period Nine months after graduation or dropping to less than half-time enrollment Six months after graduation, leaving school, or enrolling less than half time Six months after graduation, leaving school, or enrolling less than half time. Interest or loan payments can be made before this time 60 days after the last loan disbursement; payments can be deferred until six months after graduation or postenrollment Subsidized Loans Loans awarded based on financial need; the government pays the interest of the loan during college enrollment and the grace period Unsubsidized Loans Interest accrues during college enrollment and the grace period Page 5

6 Amount Borrowed $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Loan Term LOAN REPAYMENT TABLE Source: Interest Rate 5% 6% 6.80% 7% Monthly Total Monthly Total Monthly Total Monthly Total Payments Payments Payments Payments Payments Payments Payments Payments 10 $10.61 $1, $11.10 $1, $11.51 $1, $11.61 $1, $7.91 $1, $8.44 $1, $8.88 $1, $8.99 $1, $6.60 $1, $7.16 $1, $7.63 $1, $7.75 $1, $5.85 $1, $6.44 $1, $6.94 $2, $7.07 $2, $5.37 $1, $6.00 $2, $6.52 $2, $6.65 $2, $21.21 $2, $22.20 $2, $23.02 $2, $23.22 $2, $15.82 $2, $16.88 $3, $17.75 $3, $17.98 $3, $13.20 $3, $14.33 $3, $15.27 $3, $15.51 $3, $11.69 $3, $12.89 $3, $13.88 $4, $14.14 $4, $10.74 $3, $11.99 $4, $13.04 $4, $13.31 $4, $31.82 $3, $33.31 $3, $34.52 $4, $34.83 $4, $23.72 $4, $25.32 $4, $26.63 $4, $26.96 $4, $19.80 $4, $21.49 $5, $22.90 $5, $23.26 $5, $17.54 $5, $19.33 $5, $20.82 $6, $21.20 $6, $16.10 $5, $17.99 $6, $19.56 $7, $19.96 $7, $42.43 $5, $44.41 $5, $46.03 $5, $46.44 $5, $31.63 $5, $33.75 $6, $35.51 $6, $35.95 $6, $26.40 $6, $28.66 $6, $30.53 $7, $31.01 $7, $23.38 $7, $25.77 $7, $27.76 $8, $28.27 $8, $21.47 $7, $23.98 $8, $26.08 $9, $26.61 $9, $53.03 $6, $55.51 $6, $57.54 $6, $58.05 $6, $39.54 $7, $42.19 $7, $44.38 $7, $44.94 $8, $33.00 $7, $35.82 $8, $38.17 $9, $38.76 $9, $29.23 $8, $32.22 $9, $34.70 $10, $35.34 $10, $26.84 $9, $29.98 $10, $32.60 $11, $33.27 $11, $63.64 $7, $66.61 $7, $69.05 $8, $69.67 $8, $47.45 $8, $50.63 $9, $53.26 $9, $53.93 $9, $39.60 $9, $42.99 $10, $45.80 $10, $46.52 $11, $35.08 $10, $38.66 $11, $41.64 $12, $42.41 $12, $32.21 $11, $35.97 $12, $39.12 $14, $39.92 $14, Page 6

7 LOAN TERMINOLOGY 1. Eligibility Requirements: Specific criteria that need to be met in order to apply for financial aid (examples: financial need, minimum GPA). Each aid program has their own requirements. 2. Fixed Interest Rate: An interest rate that remains constant month-to-month. Interest is a small percentage of the principal (initial amount borrowed or invested) that is added on a regular schedule. With a savings account, interest is added to the principal and the account holder acquires that difference in funds. With a loan, interest is also added to the principal. In this case, the borrower needs to pay that additional amount as it is part of the cost of borrowing the funds. 3. Federal Loan: Borrowed money that is repaid with interest. Funding comes from the federal government. Financial need is one of the eligibility requirements. 4. Grace Period: An amount of time in which the borrower is not expected to make payments on his/her student loan. With federal student loans, the grace period is generally 6-9 months after graduating or once the student enrolls less than half-time. 5. Principal: The total amount of money borrowed not including interest or service charges 6. Private Loan: Borrowed money that is repaid with interest. Funding comes from a bank of other private institution and the applicant credit history is considered. 7. Subsidized Loan: Loans awarded based on financial need; the government pays the interest of the loan during college enrollment and the grace period 8. Term: A period of time during which the loan is repaid 9. Unsubsidized Loan: Loans are not based on financial need and the borrower is responsible for paying all the interest that accrues on the loan during college and the grace period Page 7

8 STUDENT REFLECTION In today s workshop, I learned: The most helpful piece of information I learned was: After today s workshop, I plan to: HOMEWORK Share two things you learned about loans with your parent(s). PRE-WORK FOR WORKSHOP ON: Page 8