Student Fedloan follies and fables

[fatboy]

As a general rule, I'm one that feels that if you take out a loan, you should expect to pay it back. I'm not in favor of "Student Loan forgiveness", the most important thing with any post secondary education that will cost money is will the education or training offer a future job that pays? The only exception being if the student has the time and money to take classes for "personal enrichment" with no expectation of a financial reward.

Ok, we took out a Parent Plus loan for our daughter, total $21,000 which was dispersed in August 2012. The date she left school was August 2017, 4 years undergrad plus 10 months internship. We started paying the loan back in March 2018, the suggested payment $358.00 for 120 months. Every month we would get a paper bill from Fed Loan Servicing, we then paid by personal check using USPS.

I really didn't think a whole lot about this until all Fed Loans went into forbearance in March 2020. At that point we had made (22) monthly $400 payments. Once in forbearance, we decided to take advantage of the 0% interest and made two $400 payments per month, which we did without fail until April of 2021 when we started sending in either $1,000 or $2,000 per month.

What the government did was apply most of the payments to interest prior to March 2020 so in that year we paid over $4,000 in interest. Once we got past that all of that, the payments went to principle, that is what spurred us on to increase our payment amount.

There is very little chatter about this but with student loans, the interest clock starts ticking once the money is dispersed so by the time most students start payments, usually 9 months after leaving school, there is already a lot of interest applied to the loan, the government labels this as principle and only interest added once the 9 months grace period ends is considered interest.

So, my point. The Education Dept will add the months loans were in forbearance to the payoff period, that will be 22 months so officially our loan isn't due to to paid in full until 2029. While interest is not currently being factored in, come Feb 1, 2022 it will and it will be added to the principle amount owed which is the amount dispersed to the student and all of the interest while the student was in school plus the grace period.

Our loan $21,000 plus interest before we started paying the loan back amounted to $27,730 ($21,000 plus 5.5 years of interest). The total amount of interest we paid on the loan is $4,545 (this is the amount we borrowed plus the interest while she was in school). We started payments in March 2018 and we made the last payment this week, the total we paid for a $21,000 loan paid off in about 3.5 years with two of those years in interest free forbearance is $32,275.00

Imagine the plight of a student (or parent) with $100,000 student loan who either has a "stupid" degree or one that left college prior to finishing a degree. Interest rates on federal student loans is roughly 8%. I do not understand how this could be considered "Financial Aid". Our loan is smaller than average and my daughter has a good STEM degree and the associated well paying job that goes with this kind of degree. I have read that the numbers of student loan borrowers that have not made any payments since March of 2020 is very high, I think about 90%. I think this is going to become a very big political issue once payments resumed Feb 1, 2022

Thoughts?

[RebelTXRose]

I can’t remember what made me ck it out- maybe a notice in the mail about 6 months after first disbursement. Delinquent interest/fees had me paying monthly much sooner than I thought I would be.

[moovova]

Both of our kids did the FAFSA thing but didn’t qualify for “free money”. Instead, they were offered loans. When we saw the interest rates...we ran. It was pure usury.

Instead, we put their tuition/other expenses on our air mile MasterCard and paid it off the following month. We’d already been putting money away for their college expenses. Still, it was tight sometimes. We traveled quite a bit on the air miles though.

[PeterPrinciple]

As a general rule, I’m one that feels that if you take out a loan, you should expect to pay it back.

---

Well, there is the problem, most don’t. In their mind it was free money.

Political? Most likely background noise..................

[ConservativeMind]

So the interest is, or isn’t accruing during this time?

I thought all excess monies beyond the simple interest require in that month was always put to principle. You describe paying a huge amount of interest, first.

Could you explain further?

[fatboy]

Additional interest is not a accruing now.

If you take out a student loan as a first semester freshmen and don’t start paying the money until you leave school, which could be many years later, then the interest that has accrued while you are in school plus the grace period becomes added to the principle not interest. Interest is calculated based on principle which is now much more than the amount borrowed.

As another poster stated, start paying back the loan as soon as the money is dispersed.

The reason we took out the loan was because we had a lot of money that was gifted to my daughter for her education but it wasn’t available to us until her second semester so the loan got us through the first semester and we basically put it out of our minds. Big mistake.

[AppyPappy]

We paid for our daughter to go to school to get an Art degree and she has a STEM job. Go figure.

[RinaseaofDs]

I just received an education, and for that accept my gratitude.

How can this be legal? This is as big a scam as any I’ve heard of. Interest is interest, not principle.

[fatboy]

If the federal government was interested in providing loans to help students finance their education then they would offer the loans without any interest while the kid is in school and once out at an interest rate of a few percent. I think the average interest rate on fed loan is 8%

The Dept of Education uses outside service providers to service the loans, much like homeowners with mortgages. In our case, our loan is serviced by the Pennsylvania Dept of Higher Education under the name FedLoan Servicing. This company is not just for PA borrowers, they currently service about 9 million loans and is considered one of, if not the largest service provider. FedLoan announced last summer that once their contract expires in December they were going to stop doing this, our loan would then be assigned to another provider. This is one of the reasons why I pushed very hard to pay off the loan because I don’t want to be caught up in the turmoil that will result in the transition.

I do not know why FedLoan is getting out of this. I do know that there have been legal issues and misbehavior but I think the big problem is the sheer number of non-payers out there. It takes weeks for a payment to be processed by them, sometimes a month or more.

[fatboy]

One other point I want to be clear on.

Any borrower who (like me) made payments during the time while in forbearance, those payments, while voluntary, went to repay the amount that was added to the original loan (interest while the student was still enrolled) before any of it went to the original principle. In effect, student loan borrowers (Fed Loan) are actually paying compound interest to the government.

I would speculate that many borrowers that continued regular payments during the pandemic while appreciating that no additional interest was applied, are none the less at least slightly pissed off that their principle has not really been reduced very much. To some this might seem a small issue but most of us are used to seeing a percentage of our payments for say a car loan go to the principle right from the start. For example if you have a car loan and you send in an extra $100 that $100 goes to principle reduction not interest.