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http://www.montereyherald.com/mld/montereyherald/business/13590826.htm
Posted on Tue, Jan. 10, 2006
KANSAS CITY, Mo. - A word to the college-bound: Lock in your funding now, because the cost of money you borrow to pay higher tuition and textbook costs is rising, too.
Exactly how much? Nobody knows.
Based on the latest budget cuts voted in Congress, federal spending to support college loans is scheduled to drop $12.7 billion in the five years beginning July 1, almost a third of the nearly $40 billion in deficit-reduction spending cuts. Lawmakers still must cast a final vote on the changes when Congress returns to work this month.
The cuts will come as college costs continue to rise. Average tuition and fees at four-year public schools next autumn are projected to rise more than 7 percent, to $5,491, according to the College Board in Washington. Brace for an average 6 percent increase, to $21,235, at private schools. Costs already have risen 17 percent to 28 percent in the past five years at many schools.
The expected student-loan changes will most immediately affect borrowing for high school graduates starting college next autumn. Applying for loans and scholarships as soon as possible, starting now, seems the surest way to get the best deal when the government and lenders sort out final details later, authorities say.
"Applying as early as possible is more important than ever, given the uncertainty surrounding July 1," said Joanna Acocella, a senior vice president at College Loan Corp. in San Diego, the nation's seventh-largest lender.
Borrowers who already have college loans face a trickier decision. Should they consolidate existing loans before rates go up?
Probably so, student-loan experts say. But do the math first, because borrowers with good credit scores may fare better doing nothing.
Critics fear the proposed changes, which potentially affect 6 million borrowers across the United States, threaten a 40-year-old federal pledge that no one in America will be denied a college education simply because he or she cannot afford it.
Higher interest rates, complex restrictions, lending caps and other proposed changes that threaten to make federally backed college loans more difficult to get will force more borrowers to turn to private lenders, said Mark Kantrovitz, publisher of www.finaid.org, a free Internet provider of college funding information.
Private lenders are free to charge different rates to different borrowers depending on the risk involved. Students on their own for the first time or from low-income families that do not borrow much tend to fare poorly on the credit-scoring programs lenders use. Wealthier applicants, or at least ones with credit scores higher than 750, would get the best student loans. Many others would simply be priced out of the market, Kantrovitz said.
"This definitely is the Dark Ages of support for higher education," he said.
Others disagree.
"Nothing here suggests that the well will run dry or that qualified students won't be able to get loans," said Fritz Elmendorf, a spokesman for the Consumer Bankers Association in Arlington, Va.
The group had worried that larger previously proposed cuts would destabilize the loan programs that are heavily used on 83 percent of the nation's campuses.
"What it means is that they'll have to borrow a little more money and repay it at a higher interest rate," said Sandy Baum, the College Board's chief economist.
As it looks now, the planned cuts mean that interest rates on the cheapest money students can borrow -- federally backed Stafford loans -- will jump to a 6.8 percent fixed rate in July from variable rates that are as low as 4.7 percent now. Rates for federally backed loans to parents -- which are known as Parent Loans for Undergraduate Student, or PLUS loans -- will rise to 8.5 percent, from 6.1 percent now.
Also, the amounts that freshmen and sophomores can borrow will increase, to $3,500 and $4,500 respectively. Total limits they can borrow for undergraduate education remain capped at $23,000, however. So many who borrow more money in their first two years presumably will have to turn to private lenders or other sources when the $23,000 runs out sooner.
Pell grants, the free federal funds normally reserved for low-income students, remain capped at $4,050 for a fourth consecutive year and now cover half or less of the cost of a state-supported community college or four-year school.
Putting students through college at today's prices is scary, say Steve and Jeanne Stein of Overland Park, Kan.
The Steins have been putting three sons, currently aged 26 through 19, through college since 1997, often two at a time. Their youngest, Brad, will graduate from Kansas State University in 2007. They also are repaying money that Jeanne Stein borrowed to pursue a nursing degree at Johnson County Community College.
Even with scholarships their sons won and extra income from Jeanne Stein's nursing career, the Steins estimate they or their sons collectively have borrowed more than $130,000 in college loans of some kind.
They plan to apply for more during the application season that began Jan. 1, though Steve Stein said that with just one student left at home, it seems doubtful they will qualify for as much help as they'd like.
"We aren't hurting, but we aren't at the upper end of the income range either," he said. "Our major concern is how much more we're going to have to take out as personal loans."
Jeanne Stein said, "I don't believe parents today can possibly save enough to put a child through even a public college without some help."
Many families are similarly worried.
More parents list saving for their children's education rather than their own retirement as their top financial priority, by a 37 percent to 34 percent plurality, according to a recent study commissioned by the Vanguard Group mutual funds company and Upromise Investments Inc.
Lenders insist that students or their families who need college money will get it.
An estimated 8 million students annually miss out on low-cost loans and other aid simply because they do not apply for it, according to Sallie Mae, the nation's largest student lender.
"It would be too bad if the net effect of the higher interest rates and other changes would be to scare away more people who could go to college," said Tom Joyce, a spokesman for the Reston, Va., lender formally known as SLM Corp.
Applying for student aid through the U.S. Education Department's Free Application for Federal Student Aid, or FAFSA, program as soon as possible, is the surest way to avoid that loss, said Paul Schwartz, an assistant financial aid and scholarships director at the University of Missouri-Kansas City.
"We always recommend applying as early as possible, but not because of the proposed loan changes," Schwartz said.
UMKC and most schools have their own internal deadlines, often near mid-March, for making first decisions about handling the first batches of requests they receive. Applying early increases your chance of receiving a better offer, Schwartz said.
If the proposed loans are not changed when Congress votes again, early applicants will have more time to adjust to changed aid offers, said Acocella of College Loan Corp. If the loans are changed again, early birds presumably also would get some of the best deals available then too.
Borrowers who currently have variable rate student or family loans face some more-complicated choices.
Basically, they can choose to continue paying annually changing interest rates on their existing loans even after fixed rates are set on any new loans. Or they can consolidate those existing loans and lock in their own, currently lower, fixed rate for the rest of the life of the loan.
"That sounds like a no-brainer, but it may not be one," said Kantrovitz of www.finaid.org.
Consolidation is a once-in-a-loan's-lifetime deal for most borrowers. Variable rates on existing loans, which are tied to 90-day Treasuries, are likely to pop up to near the same as the new fixed rates when the next changes come in July, he said. Borrowers need to do the math and consider whether it pays to lock in then or wait.
"Usually, if you can consolidate you should, but not always," Kantrovitz said.
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