Question

13. Student loan programs are available to students and parents to finance​ college-related expenses. Compare and contrast the programs available to students and parents. How are the interest rates​ determined?

14. What are payday​ loans? Besides the high interest​ rates, what are some of the dangers associated with this type of​ loan?

Answer 1

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Direct PLUS Loans (Parent PLUS): The Direct PLUS Loan, commonly referred to as the Parent PLUS, is federal aid that is funded by the U.S. government and available to eligible parents through schools participating in the Direct Loan Program. It is the only federal student loan for parents. The Direct PLUS program offers a fixed interest rate, which means it will not change throughout the life of the loan. The Parent PLUS Loan can be used for tuition, fees, and room and board—but any loan credit balances can be deposited to the parent or the student to pay for any extra education expenses. All of these options can help you feel more secure about how and where college loan funds are being spent.

Private Loans: Private banks, credit unions and other lenders provide loans to assist college students and parents with key educational expenses. Private school education for K-12 students costs as much as college in some cases, so student assistance is required early-on for some families. Whether financing private education at the primary and secondary levels, or tackling tuition bills for college students, established credit is requred to qualify for most private loans.

All federal student loan rates are set by Congress, according to the Federal Student Aid Office. Congress passes the interest rates set by the Department of Education into law each year. The rates are based on 10-year Treasury notes, plus a fixed increase. Student loan rates are set in the spring for each new school year. They are effective from July 1 to June 30 of the following year. To ensure interest rates don’t rise too high, Congress also includes rate caps for each type of student loan. Here’s the formula used for different types of loans, from the Congressional Budget Office (CBO):

• Direct unsubsidized loans for undergraduates: 10-year Treasury + 2.05%, capped at 8.25%
• Direct unsubsidized loans for graduates: 10-year Treasury + 3.60%, capped at 9.50%
• Direct PLUS loans: 10-year Treasury + 4.60%, capped at 10.50%

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A payday loan is a type of short-term borrowing where a lender will extend high interest credit based on a borrower’s income and credit profile. A payday loan’s principal is typically a portion of a borrower’s next paycheck. These loans charge high-interest rates for short-term immediate credit. These loans are also called cash advance loans or check advance loans. The most obvious problem with payday loans is their extremely high interest rates. The fee for a payday loan can be anywhere from $10 to $30 per $100 borrowed, which works out to an annual interest rate of 261% to 782%. But these loans also have other dangers that are less obvious. These dangers include:

• Renewal Fees. When borrowers can’t pay back a payday loan on time, they either renew the loan or take out a new one. So even though they keep making payments on their loans, the amount they owe never gets any smaller. A borrower who starts out with a $400 loan and a $60 interest payment and then keeps renewing the loan every two weeks for four months will end up paying about $480 in interest – and will still owe the original $400.
• Collections. In theory, a payday lender should never have any problem collecting a debt, because it can take the money right out of your checking account. The problem is, if that account is empty, the lender gets nothing – and you get socked with a hefty bank fee. But the lender usually won’t stop with one attempt. It keeps trying to collect the money, often breaking up the payment into smaller amounts that are more likely to go through. And, at the same time, the lender starts harassing you with calls and letters from lawyers. If none of that works, the lender will probably sell your debt to a collections agency for pennies on the dollar. This agency, in addition to calling and writing, can sue you for the debt. If it wins, the court can allow the agency to seize your assets or garnish your wages.
• Credit Impacts. Payday lenders generally don’t check your credit before issuing you a loan. For such small loans at such short terms, it’s just too expensive to run a credit check on each one. However, if you fail to pay back your loan, the credit bureaus can still find out about it. Even if the payday lender doesn’t report it, the collections agency that buys it often will, damaging your credit score. Yet if you do pay back the loan on time, that payment probably won’t be reported to the credit bureaus, so your credit score won’t improve.
• The Cycle of Debt. The biggest problem with payday loans is that you can’t pay them off gradually, like a mortgage or a car loan. You have to come up with the whole sum, interest and principal, in just two weeks. For most borrowers, a lump sum this size is more than their budget can possibly handle – so they just renew their loans or take out new ones. According to the Consumer Finance Protection Bureau, roughly four out of five payday loans end up being renewed or rolled over to a new loan.