Student Loan Landmines
As quick as I am to recommend student loans as a safety net for most college educations, it’s also important to mention a few holes that could put you at risk of hitting the ground at full speed. Time and again, students and parents not aware of the risks associated with student loan refunds, private loans, and casual drug usage find themselves in major trouble with no real options.
The Student Loan Refund
It’s a simple question that can lead to complex consequences. When applying for financial aid, you’ll be asked a simple “Yes or No” question about whether you want to apply for the maximum aid allowable. If you’re only going to need a few thousand dollars in loans, saying “Yes!” might lead to an extremely large refund check that might be all too easy to spend—and a nightmare to repay.
When more money is received than a college can apply to future classes within a certain window of time, it is required to be refunded to the student. Part of the government’s intention behind requiring the refund is that many students might need some or all of this money to pay their living expenses while in college.
Unfortunately, receiving a check for thousands of dollars in the mail is just too tempting for many students to handle responsibly. Money that should have been spent on tuition, room, and board often is spent on other items that suddenly become necessities, like a new wardrobe, paying off a credit card, or spring break.
To keep this money from burning a hole in anyone’s pocket, consider the following tips:
• Ask your school to hold the money—Some schools will hold refund checks in the accounts of their students upon request. Where possible, it usually requires a written letter of instruction signed by the student and sent to the school’s student accounts department. If this can be done, the money will simply sit in the student’s account until the next tuition bill comes due.
• Send the money back to the school—There is nothing that keeps a student from turning around and re-depositing a refund check as soon as she receives it. This money will then sit safely with the school, which will apply it to tuition when it comes due.
• Repay the money—If you’re pretty sure that the money is not going to be needed at all, there’s no reason to hold onto it and have it accumulate interest. Because none of the major loan programs charge an early repayment penalty, consider sending it back to the lender and getting a leg up on the eventual repayment of your student loans.
• Stick it in savings—If you know you are going to need the money and you trust yourself not to spend it, stick it in a savings account and let it earn some interest. Better yet, stick it in a certificate of deposit (CD) that is timed to pay out when your next tuition bill is due.
Private, Nongovernment Loans
A few years ago, Gary Coleman of Diff’rent Strokes fame attempted to recapture some of his former glory by doing commercials for payday lenders. Unfortunately for Gary, payday lenders are the legalized version of a mob loan shark, and many networks weren’t too excited about the bad press they were getting. Thankfully (please note my sarcasm and disdain), private student loan lenders stepped up to fill the cheesy and dishonest void in the advertising world.
Although many federal loans are made with the help of private lenders, private student loans are a different animal. These types of loans are made by corporations who choose not to be subject to federal regulations, in large part because they restrict the amount of profit they can wring out of students. As opposed to federal student loans, which charge between 3.4 and 8.5 percent, these private corporate lenders typically charge 10 to 15 percent. Even worse, lenders often jack up their rates at the first opportunity after a student has graduated, which leaves him little hope because these loans cannot be consolidated under a federal program.
Because there is really no reason to use these loans for most students, they should be avoided like the financial plague that they are. If someone other than your school’s financial aid administrator offers to arrange a federal student loan for you, don’t believe them.
WORLD WIDE WISDOM
Due in part to the incredible number of students borrowing money and the relative ease with which huge amounts are handed out, both student loan errors and fraud are skyrocketing. It’s important that students review their account statements and credit history for unrecognized loans at least every six months while in college, as well as check their free credit history on a regular basis. To protect yourself, visit www.annualcreditreport.com to get free copies of your credit report.
Drugs and Student Loans
Without passing judgment on those who choose to indulge in chemically altered living, let me give you some fair warning. Selling or getting caught in possession of illegal drugs can and does lead to a loss of federal financial aid, including student loans.
If you didn’t pass on the grass in your past and got busted for it, don’t panic. The following drug-related “incidents” should not affect your financial aid eligibility:
• Arrests or convictions that did not occur while you were a student
• Arrests or convictions as a minor
• Convictions that were not in a federal or state court
• Convictions removed from your record
The Least You Need to Know
• Virtually everyone can qualify for federal student loans of some kind, regardless of how much money they earn.
• Filling out the FAFSA application is relatively simple and something every student should do regardless of whether he thinks he’s eligible.
• Between Stafford, Perkins, PLUS, and state loans, students should be able to get all the low-cost loans they need.
• Students should avoid taking student loan refunds, opting instead to leave the money in their accounts or return it to their lenders.
• Avoid private student loans at all costs.
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