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View Full Version : How do student loans make a profit and are making repayments longer feasable


Wesley Clark
03-29-2004, 08:26 PM
Student loans only charge about 3.5% interest, and take 10 years to repay. Also consider that they are taken out about 1-4 years before you even start repaying them, so how do banks make a profit on them?

Also, with the cost of college going up are there any plans to make student loan repayment plans longer? Right now you pay about 1% of your total each month for a 10 year repayment plan, but with a 15 year repayment plan you'd pay 0.7%, which would help some people afford college.

RealityChuck
03-29-2004, 08:39 PM
Student loans only charge about 3.5% interest, and take 10 years to repay. Also consider that they are taken out about 1-4 years before you even start repaying them, so how do banks make a profit on them? Student loans are guaranteed by the government. The banks aren't stuck with bad loans, so they can make a profit with a lower interest rate.

MsRobyn
03-29-2004, 09:27 PM
Actually, the student loan interest rate is lower than 3.5%. I'm currently paying a little less than that. I'm too lazy and stupid to do the math, however. (There are reasons I'm a communications major.)

And as for the longer repayment schedule you propose, keep in mind that college increases your income potential. So you wouldn't be looking at paying off loans at a wage of, say $10 an hour. Some employers also pay some loans back as a benefit of employment. I do know that in PA, where I live, there is a bill pending before the legislature that would repay some loans if the person lives and works in PA for two years. I forget how much, and it hasn't passed or been signed yet.

As always, YMMV.

Robin

Logical Phallacy
03-29-2004, 09:41 PM
Here in Ontario student loans are interest free while one is in school.

works for me.

Wesley Clark
03-29-2004, 09:43 PM
Actually, the student loan interest rate is lower than 3.5%. I'm currently paying a little less than that. I'm too lazy and stupid to do the math, however. (There are reasons I'm a communications major.)

And as for the longer repayment schedule you propose, keep in mind that college increases your income potential. So you wouldn't be looking at paying off loans at a wage of, say $10 an hour. Some employers also pay some loans back as a benefit of employment. I do know that in PA, where I live, there is a bill pending before the legislature that would repay some loans if the person lives and works in PA for two years. I forget how much, and it hasn't passed or been signed yet.

As always, YMMV.

Robin

Well yeah, but if you go to an in state college where the state doesn't pay a whole lot and you use loans for personal expenses you can run 60-70k on a bachelor degree, and i've read/seen alot of students having to run up loans that big. Thats 600 a month/7200 a year. Even on a 30k gross income 7200 a year is a huge chunk for 10 years.

Wesley Clark
03-29-2004, 09:49 PM
Here in Ontario student loans are interest free while one is in school.

works for me.

That reminds me, how much is college in Canada?

Logical Phallacy
03-30-2004, 01:39 PM
ooops...good point! Because all universities get a lot of public funding, each year doesn't cost more than 5-8 thousand canadian or roughly $4000-$6000 (undergraduate, not including residence).

we're damn lucky.

Wesley Clark
03-30-2004, 03:09 PM
ooops...good point! Because all universities get a lot of public funding, each year doesn't cost more than 5-8 thousand canadian or roughly $4000-$6000 (undergraduate, not including residence).

we're damn lucky.

Thats about what ours charge, around 4-6k a year for in state college. community college is closer to 2-3k a year. However you have to attend in state to get those costs, but thats usually not a problem.

MsRobyn
03-30-2004, 03:38 PM
Well yeah, but if you go to an in state college where the state doesn't pay a whole lot and you use loans for personal expenses you can run 60-70k on a bachelor degree, and i've read/seen alot of students having to run up loans that big. Thats 600 a month/7200 a year. Even on a 30k gross income 7200 a year is a huge chunk for 10 years.

I don't know where you're getting your information, but it's pretty inaccurate.

My university is a public, state-supported college in Pennsylvania. The state contributes something like four grand per person per year, leaving me to pay approximately $5600 a year in tuition and fees. I'm permitted to borrow no more than $7500 per year. It'd be a pretty expensive school for a student to have to borrow that much. I can see having to do that for a private school, but between borrowing limits and other aid, it'd be hard to do at a public school, unless the student is from out-of-state and does not establish residency. These details are important.

Also, keep in mind that most students get grant aid, scholarships, and work study that contributes to the expense of tuition. My own financial aid for last year was $7500 in loans and $1400 in grants. I saw a little over two grand of that for living expenses. This will increase as I am now eligible for state grants that I couldn't get last year due to residency issues.

Moreover, students have the option of paying interest on any loans that charge it while they are still in school. I took this option because I can handle paying $20 a month. Paying the interest now means interest won't accumulate over the two years I have left. It can be a significant savings.

An anecdote: My brother borrowed heavily to go to college and law school. His maximum loan payment is around five hundred bucks a month for all his loans. Of course, he is a lawyer, and is making significantly more than $30,000 a year.

As always, YMMV.

Robin

Wesley Clark
03-30-2004, 03:58 PM
I don't know where you're getting your information, but it's pretty inaccurate.

My university is a public, state-supported college in Pennsylvania. The state contributes something like four grand per person per year, leaving me to pay approximately $5600 a year in tuition and fees. I'm permitted to borrow no more than $7500 per year. It'd be a pretty expensive school for a student to have to borrow that much. I can see having to do that for a private school, but between borrowing limits and other aid, it'd be hard to do at a public school, unless the student is from out-of-state and does not establish residency. These details are important.

Also, keep in mind that most students get grant aid, scholarships, and work study that contributes to the expense of tuition. My own financial aid for last year was $7500 in loans and $1400 in grants. I saw a little over two grand of that for living expenses. This will increase as I am now eligible for state grants that I couldn't get last year due to residency issues.

Moreover, students have the option of paying interest on any loans that charge it while they are still in school. I took this option because I can handle paying $20 a month. Paying the interest now means interest won't accumulate over the two years I have left. It can be a significant savings.

An anecdote: My brother borrowed heavily to go to college and law school. His maximum loan payment is around five hundred bucks a month for all his loans. Of course, he is a lawyer, and is making significantly more than $30,000 a year.

As always, YMMV.

Robin

that 60/70 mark was for someone who attends in state and uses loans (and nothing else) to pay for both residence and school. Its not unrealistic if you consider 6k a year for school and 10k a year for household.

I dont know about financial aid. Unless you qualify as independent and/or can get your EFCs down to 0 or so you may not get that much.

hajario
03-30-2004, 04:41 PM
They aren't actually interest free. The Federal Govenment pays the interest while you are still in school and for the first six months after you graduate. The bank is getting interest for one to five years during which time the principle stays the same.

As others have said, the risk is zero for the bank because the Feds guarantee the loan if you don't pay. If you default, the Feds have to come after you and the bank doesn't have to worry about it. The Feds will garnish your pay check and/or withold your income tax refunds to pay off the debt. (A friend of mine married a gal who neglected to tell him about her several thousand dollar student loan debt. He found out when their $2000 plus income tax refund didn't arrive.)

By the way, student loan debt is one thing that can't be wiped clean in a bankruptcy. You'll owe it forever no matter what.

Haj

Markxxx
03-30-2004, 07:56 PM
I know someone who collects for defaulted student loans. She said it is extremely easy as the loans can't be part of bankruptcy and they have the social security information and the SSA works with them to attach the wages if you don't pay up.

So it would be very useful for a bank to make such loans. I wonder how many credit cards that are being used now to stimulate the economy, will never be paid.

Abbie Carmichael
03-30-2004, 09:49 PM
You can also take a heck of a lot longer than 10 years to pay off your loans.

Wesley Clark
03-30-2004, 10:21 PM
You can also take a heck of a lot longer than 10 years to pay off your loans.

Howso?

hajario
03-30-2004, 10:30 PM
By the way, my student loans were at 8% which was a great deal in the days of 12-15% mortgages. By the time I finished my payments, I had a car loan and a mortgage that were at lower interest rates than my student loans!

I paid mine off in about three years but the term was ten years. You can have them wholly or partially deferred by going back to school, joining the military in certain cases or proving hardship.

Haj

jweb
03-30-2004, 10:39 PM
Wesley,
IIRC (It's been a couple of years since I had to fill out the forms), about 4 months after you graduate (2 months before you have to start paying off the loan, you get a packet in the mail. In there, they list your principal, the current interest rate, and several different repayment schedules. The standard one is a 10-year repayment plan, which is recommended in most cases because you'll end up paying less interest over the life of the loan. There are several other repayment schedules, I beleive there were 15 and 20-year options as well. The packet did a good job of listing the total amount that you'd pay over the life of the loan and how much your payment would be per month for each of the schedules.

In cases of extreme economic situations, I believe there was even a set-your-own-repayment plan. I'm not exactly sure how it worked, but IIRC you could pay as much as you were reasonably able (depending on your income and a few other factors) over the course of up to 30 years. And, if after 30 years, you still didn't have the loan paid off, the govm't would pay it off for you and you'd recieve the repayment amout as taxable income.

You can also get a 6-month forbearance on your loans if necessary (you get to stop making payments although the interest continues to build during the forbearance period). You can only do this once, so it should only be considered in an extreme emergency (losing a job, etc).

I also know some states have programs to help repay student loans for certain high-demand fields like teaching. And, as hajario said, the military also has loan repayment assistance options, and pretty good ones at that.

As an added bonus, most student loan interest is 100% tax deductable (as in, it's subtracted straight off your gross income), which makes it an even better deal then the mortgage interest deduction.

Please correct me if I'm wrong, but I think I have most of the details correct.