When I tell people that I am attending pharmacy school, their first reaction is usually something like "Great, you are going to make lots of money in the future and have a very comfortable living." I never disagree with them; however, I make sure I mention the amount of student loans that I will end up incurring. This usually results in a couple seconds of silence, and then I proceed to tell them that money is not my main career motivation. My student loan, however, will be what keeps me working very hard for the next 10 to 20 years. I have never doubted my decision to choose this profession, but I always thought I could manage my loan a little better. I wrote this article so that I can help fellow students who might face the same situation. The article is divided into three sections: types of pharmacy student loans, loan consolidation, and repayment plans.
TYPES OF LOANS
Stafford Loan
There are two types of Stafford loans. The Federal Family Education Loan Program (FFELP) is provided by private lenders, such as banks, credit unions, and savings and loan associations. The second types are the Federal Direct Student Loan Program (FDSLP) loans, which are provided by the U.S. Government directly to students and their parents. In order for student to receive a Stafford loan, he or she must demonstrate financial need through their pharmacy school financial aid process (by completing a Free Application for Federal Student Aid) to receive a government-subsidized loan. 1
A Stafford loan can be either subsidized (the government pays the interest while students are in school), or unsubsidized (students pay all the interest, although they can have the payments deferred until after graduation). One good thing about a Stafford loan is the fixed interest rate, which is 6.8% for loans with a first disbursement after July 1, 2006, while the interest rate for subsidized Stafford loans first disbursed on or after July 1, 2008 is fixed at 6%.2
Besides the interest rates, it is also important to know the limits of Stafford loans. In general, there are three limits: a combined base limit for subsidized and unsubsidized loans, an additional limit for unsubsidized loans, and a total limit for unsubsidized loans (TABLE 1). The subsidized loan limit is determined by the combined base limit, while the unsubsidized loan is determined by the additional limit. However, the total limit for unsubsidized loans is what really determines the unsubsidized loan limits (by subtracting the combined base limit). There are also limits to Stafford loans in a school year (annual loan limit) and total lifetime limits (aggregate loan limits).
Private Loans
Private loans are offered by private lenders. This type of loan allows students to bridge the gap when federal loans do not provide enough funds. Since private loans tend to have higher interest rates, they are an option for students once they use up their federal loans. For private loans, credit scores come into play in determining eligibility and interest rates. Private loans typically have variable interest rates. Generally, students will be less likely to be approved for a private student loan if their credit score is less than 650. There are also options such as home equity loans and lines of credit.
Federal Grad PLUS Loan
Parent Loan for Undergraduate Students (PLUS) loans were originally designed for parents. However, since July 1, 2006, graduate and professional students have been able to borrow money through the PLUS Loan Program to pay for their own education; this loan is called a Grad PLUS loan. The loan eligibility does not depend on credit scores, as long as an adverse credit history is not present.3
A Grad PLUS loan is limited to the amount of the cost of grad school attendance minus the other financial aids received (federal Stafford loan), certified by the school. The PLUS loan has a fixed interest rate of 8.5%, which does not depend on a credit score. There is also a loan fee of 4%. Generally, the PLUS loan will be less expensive than most private student loans.3
Interest on the Grad PLUS loan starts to accrue from the date of disbursement. Students can either pay the interest as it accrues or they may allow the interest to be capitalized (added to your loan principal balance) at the end of the deferment or forbearance. It is important to know that capitalization increases the total loan amount that must be repaid, since the interest is added to the principle balance. Also, repayment for Grad PLUS loans starts within 60 days of the final disbursement. However, students can postpone their payments while in school by obtaining a deferment status. Once deferment is granted, the first payment will be due within 45 days after the deferment end date. It is important to know that there is no grace period for this loan. So if students want to consolidate with another loan that has a grace period, they should wait until the grace period of other loans ends before consolidating.3
Federal Perkins Loan
A Perkins loan is a campus-based loan program, with the school acting as the lender using a limited pool of funds provided by the federal government. It is a subsidized loan, with the interest being paid by the federal government during the in-school and nine-month grace periods. The interest rate is 5%, with no origination or default fees. There is a 10-year repayment period. The amount of the Perkins Loan is determined by the school's financial aid office. The loan limit is $6,000 per year, with cumulative limits of $40,000 for undergraduate and graduate loans combined.4
LOAN CONSOLIDATION
Loan consolidation has always been a topic that deserves attention. In general, consolidation is a common way to manage several student loans. It allows students to combine several existing loans with a single lender with one fixed interest rate and a single monthly payment. Consolidation, however, is not for everyone. Here I will discuss a few features of loan consolidation so students have a better understanding before making decisions.
First of all, students can consolidate their loans to any single lender. Most lenders will have a minimum consolidation amount. However, Federal Direct Consolidation Loans do not require a minimum balance, and there is no up-front fee associated with student loan consolidation.
One thing to be noted is that a loan can only be consolidated once. Students cannot switch lenders once the loans are consolidated; however, with the addition of a new loan, students can reconsolidate an existing loan. Also, loans can only be consolidated during the grace period or after the loan has entered repayment, but not before graduation.
The interest rate is the weighted average of the loan consolidated, rounded up to the nearest one-eighth and capped at 8.25%.1 It is important to know that loan consolidation will not lower the overall interest rate if you have multiple loans. The amount of interest paid for a weighted-average interest rate is roughly the same as one paid separately without consolidation. However, students are able to lock in an interest rate by consolidation and protect it from the possibility of the interest rate increasing in the future. On the other hand, consolidated loan interest rates will not drop if the interest rate drops in the future.
One great feature of loan consolidation is that it provides alternative repayment plans beside the standard 10-year repayment term and includes extended repayment, graduated repayment, income-contingent repayment (direct loans only), and income-sensitive repayment (FFEL only). These repayment plans will be furthered discussed in the Loan Repayment section below. Another advantage is that some lenders provide a consolidation loan discount if students can arrange automatic loan debit from their bank accounts and pay on time for the first 36 months. TABLE 2 provides a summary of the advantages and disadvantages of consolidating a student loan.
LOAN REPAYMENT
For this section, I will focus mainly on the repayment plans of federal loans. Repayment starts six months after students graduate (grace period) for Stafford and nine months for Perkins loans.5 For private loans, repayment starts 60 days after the end of the last disbursement, unless the student is in deferment or forbearance status. Payments are usually due monthly. During the grace period on a federal subsidized loan, students do not have to pay any principal and will not be charged any interest. During the grace period on an unsubsidized loan, students do not have to pay any principal, but they will be charged interest. Since interest accrues continuously for unsubsidized loans, students have the option of paying interest periodically or letting the interest be added to the capital. It is suggested to start paying interest of a loan and not to let it capitalize, since the interest will be added to the principle and result in more total interest accrued.
Federal payment plans allow students to pay off their loans before the repayment periods end without a penalty. For loans that are not in default, any excess payment is applied first to interest and then to principal. One thing to be noted is that when an extra payment is made, students should make sure that they indicated that it is to be paid toward the principle; otherwise, it will be considered as advance payment for the next month.
The standard repayment period is 10 years. Loan consolidation can extend the repayment and lower the monthly payment; however, the amount of loan to be paid over the longer period will be more than with the standard 10-year repayment period. The common repayment plans are as follows.
Standard Repayment: Students make a fixed monthly payment toward their principle and interest accrued (the minimum payment is $50 per month).5 Depending on the amount of the loan, the payment period can be shorter. The total amount of interest paid under this plan is considered the lowest.
Extended Repayment: With this plan, the pay period is extended 12 to 20 years.5 It can reduce of the amount of payment each month; however, the total amount will increase due to the greater interest accrued.
Graduated Repayment: This plan also stretches out the payment period 12 to 20 years. It starts with lower payments and gradually increases every two years. The monthly payment must be at least 50% and no more than 150% of the standard monthly payment. Also, the monthly payment must be at least the interest accrued and a minimum of $25.5
It is suggested that students follow the standard repayment plan and do not extend the repayment period, mainly due to the increased amount of interest to be paid. Extending repayment to 30 years may reduce monthly payment by as low as 50%; however, the total amount of loan paid might be as high as 250% of the original loan.5 TABLE 3 shows how extending your repayment years can affect a student's monthly payment and the total interest paid. As the table shows, extending payment plans reduces the amount of the monthly payment; however, the total interest increases significantly as well.
One last thing to remember is that students can make prepayments to any federal loans without penalty, but keep in mind that excess payment will be treated as prepayment for the future if they do not indicate that the payment is toward the principle. In other words, if students want to make a prepayment toward their principle, they should make sure to include a note with their payment indicating this.
Conclusion
In conclusion, the purpose of this article is to help my fellow pharmacy students who are in the same boat as me to better understand student loans. I encourage student to visit the useful Web sites that I have included and consult with their school financial aid office. After writing this article, I have decided on a couple things with regard to my own student loan. First, I will not let my interest capitalize; I will make sure I promptly make my quarterly interest payment so this interest does not go into my principle and accrue more interest in the future. Secondly, I am leaning toward consolidating my loan after graduation, but I will pay closer attention to the loan that has variable interest so that I do not lock-in a high interest rate. Finally, and most importantly, I will budget my spending more carefully so I do not end up with more loan than I need.
REFERENCES
1. FinAid. Student loans. www.finaid.org/loans/
2. Federal Student Aid. Stafford Loans (FFELs and direct loans). http://studentaid. ed.gov/PORTALSWebApp/students/
3. Federal Student Aid. PLUS loan for graduate or professional degree students. http://studentaid.ed.gov/PORTALSWebApp/students/
4. U.S Department of Education. Federal Perkins Loan Program. www.ed.gov/programs/fpl/index.html. Accessed December 27, 2008.
5. Federal Student Aid. Repaying your loans. http://studentaid.ed.gov/PORTALSWebApp/students/
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