Obama Wants to Help You with Your School Loans, by TBird

President Barry Obama says Republicans want to raise your school loan interest rates. Bad Republicans! If you vote for him, he’ll lower your interest rates! What a bargain! Only a stupid person would disagree with him, and you aren’t stupid!

Actually, the interest rate for subsidized Stafford loans is scheduled to double from 3.4% to 6.8% for next school year 2012-13. During 2007, President George Bush passed the College Cost Reduction and Access Act of 2007 (remember who was in charge of Congress, which writes the laws, after 2006?), which gradually lowered Stafford loan interest on new loans from 6.8% to 3.4% last year, returning to 6.8% in 2012-13. There are at least two sets of federal school loans, those in the students’ names (Stafford loans) and those in the parents’ names (PLUS loans). The Stafford loans are divided into two groups, subsidized, for which interest is “paid” by the government during the time a student is in school, and unsubsidized, in which interest accrues from the time the loan is disbursed. The Staffords are limited in amount (total for unsubsidized and subsidized is currently $5500). Parents can take out PLUS loans to cover what the Staffords (and scholarships and grants) don’t cover. The lower interest rate of 3.4% applies only to subsidized Stafford loans. While our kids were in school, we made interest payments on all the other loans so that the interest wouldn’t be capitalized and added onto the loan amounts.

In 2010, Obama passed the Health Care and Education Reconciliation Act of 2010, which means Direct Lending does all federal school loans starting in 2010, and PLUS loans went from varying rates dependent on T-Bill rates up to 8.5% to a fixed rate of 7.9%.

When my oldest child started college, I was told that although we (meaning my husband, the money-maker of the family) took out the PLUS loans each year, our son would be consolidating his school loans and paying the money back to the government once he graduated. They did not tell us that the PLUS loans stay in the parent’s name until they are paid off, including the consolidation of the PLUS loans, which they also don’t tell you, roll subsequent consolidation loans of subsequent children all together.

Our son graduated, got his degree, and almost a year later got his job, which is a great job in his field. His school loans went into repayment six months after he left school, each on a ten year repayment schedule, and we actually made the payments on his five PLUS loans until we got them consolidated, by which time he had started his job and was also making payments on his five Stafford loans, which are held by two separate agencies. We could afford to carry the loans for a few months. By the time we started the consolidation process, those five loans had been passed around from agency to agency while our son was still in school, not together, and one of them was mislabeled “in repayment” unbeknownst to us, who didn’t make any payments because we had placed all the loans in forbearance so that we wouldn’t have to make payments while he was in school. We didn’t know until several months later when we started getting nasty letters claiming we were in default and we better pay up NOW. I called every agency that ever had anything to do with the PLUS loans, including the state agency that had originated this loan, but nobody knew nuthin. The agency that had notified the credit reporting companies that we had defaulted on a federal loan said they couldn’t do anything, because they had no records anymore that the loan was ever in default. Voila, credit ruined. Luckily, at consolidation, the suspect loan was paid off and although it is still on the credit report, it is no longer wreaking havoc (we replaced an old car with a new one two years ago and couldn’t get a loan based on my husband’s credit score, so we used my perfect score, perfect although I made $00.00, go figure).

The consolidation loan came in at 7.25%, much higher than any interest rate for anything else we could have bought, other than credit card rates (which skyrocketed due to another law Congress passed and the President signed). Because the amount was high (over $30,000), it was automatically set for thirty years (thirty years for a school loan!!), and the payment was about $250 a month, most of which goes to interest, which compounds daily. After a year of payments, some a little more than required, he had paid down $1000, and most of that was due to payments we made before consolidation but credited to the new consolidated loan.

When our daughter graduated a year later, we did the same thing. She had four PLUS loans, which we wanted to consolidate into one loan so she wouldn’t have to make four separate payments, each on a ten year payment schedule. Her consolidation loan came in at 8.25% for thirty years (!!), even worse than her brother’s. And the government put both those consolidation loans into one loan, still in two parts with two interest rates, and although we can tell them how to apportion them, we would have to do so in writing each month after the payment was made. The kids cannot make separate payments with any assurance they will be sent to the right part of the loan, as we found out when they made payments (one made a bigger payment than the other) to the agency that held the loans until it sent them to another agency. The single payment coupon even had a section for “specific instructions”, but when we checked online, they had split them randomly anyway. Record keeping is nearly impossible. We are taking out a cash-out refinance mortgage loan to pay off the consolidated consolidation multi-interest rate, multi-principal, multi-payment at less than 3% and the kids will pay us directly, and we will be able to track how much each owes. Plus, the loan is a fifteen year, and the payments will be about the same or less than the current payment on the thirty year loan.  When our other children eventually graduate with degrees and loans, mortgage loans will be a lot higher than 3.0%, and we won’t be able to refinance their loans like we can with our first two kids’ loans.

I just heard on the radio that there is a new agreement to keep the subsidized Stafford loan rate at 3.4% for now, but I don’t know any details.

In addition to interest rates that don’t make economic sense, PLUS loan interest cannot be deducted on one’s income taxes. PLUS loans, by definition, are in the parent’s name. If the child pays back the PLUS loans, he cannot deduct the interest because it is not his name on the loan, and the parent cannot deduct the interest because he is not making the payments. Remember, the interest rate is so high that most of the first several years’ worth of payments are interest. Also, student loans cannot be discharged in bankruptcy (because they would be the most likely cause of a recent student’s bankruptcy, especially when the economy is as bad as it is now).

School loans sound like a good idea if a student goes to a school with relatively low tuition or he gets lots of scholarships and picks a major that will get him a good job that will provide him an income high enough to support himself and pay off his loans. Obama should never have signed a law that messes with the market interest rate. He did, and students get stuck with a much higher interest rate than they would otherwise. After all, someone has to pay for Obamacare, and student loans now top one trillion dollars. Government should not mess with the market, period. They make decisions based on politics, not common sense and realistic markets. How else would interest rates for student loans be over 7 or 8 percent, and home loans be around 3 percent? And Obama wants us to thank him for fixing student loans.

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