Before You Sign for That Student Loan, You'd Better Consider This!

Right now, college-bound students in Florida (where I live)
and across the country are getting bombarded with ads for
student loans from companies such as Monticello and
Astrive:   "$40,000 in Two Days!"  "Better Rates if Your
Parents Co-Sign!"

This coincides, of course, with college acceptances.  Many
parents and students are opening letters telling them
they've been admitted to the college of their choice, only
to have that brief elation met with the harsh reality of
having no clue about how the heck they're going to afford
college.

One such option is applying for financial aid.
Unfortunately, the "rules of the game" behind how to
maximize the money you're eligible for are complicated, to
say the least.  Most families (78-90% , according to some
industry estimates) fill out the FAFSA and other forms
incorrectly.  This results in the student receiving less
aid than he or she would have normally qualified for, or,
sometimes, no aid at all.

All too often, the student turns to alternative means of
college funding:  private student loans.  However, you need
to think twice if you're planning on financing your college
education this way.

Before you sign your life away, take a deep breath and
consider what you might be getting yourself into.

Most parents and college-bound students do not realize that
student borrowers are not-so-distant cousins to
headline-making borrowers with subprime mortgages. Many
experts, present company included, believe that the student
loan market is poised to experience the devastation
currently affecting the subprime mortgage industry.

Granted, I don't know too many folks up at night thinking
about the commonalities shared by college students and
subprime mortgage holders. I am and, let me tell you, the
similarities are alarming.

For starters, student borrowers and subprime mortgage
holders are ill-advised on financial matters (present
company excluded, of course) - specifically, the
consequences of their borrowing decisions.

It is not exactly news that that adjustable-rate mortgages
(ARMs) resetting to high interest rates are the main
culprit behind late payments, defaults, foreclosures and
ruined credit.

Here's how it works - mortgage companies offer low teaser
rates to get homeowners in the door, but frequently, the
initial required payments are not even enough to pay the
interest on the loans. It gets worse.

Next, when the ARM adjusts upward, homeowners are forced to
refinance to try and make their monthly payments. This
worked for years, because it was relatively easy to qualify
for new mortgages, but this rosy scenario screeched to a
halt simultaneously with the collapse of the secondary
mortgage market, slumping real estate values and a slowing
economy.

The result: subprime borrowers were denied credit, were
forced to stay in their unpayable loans and pushed into
default or, unfortunately, foreclosure. Right here in
Florida and across the country, college graduates burdened
by student loans face similar problems. Just like the
mortgage companies, student lenders offer a low teaser rate
which adjusts upward (it's almost always up, not down,
unfortunately!) after the introductory period.

Next comes the inevitable late payments, non-payments,
defaults and ensuing credit problems.  It's a slippery
slope! The result - payments get jacked up a few years
after the loan originated. And the new spiked payment
almost always catches the borrower by surprise.  Just like
their subprime borrower counterparts, student loan holders
are unable to make payments once the loan adjusts upward.

In most cases borrowers of both student loans and subprime
mortgages claim that they were misled about the terms of
their loans.  They cry that the lenders withheld vital
information, or glossed over important information.

To their credit, and in response to these claims, lawmakers
are starting to call for increased disclosures and
information from the student lending industry.

Don't hold your breath, however.  This could take years.
Your best bet to protect yourself is using your own brain -
asking the right questions, listening to the answers.
"What is the interest rate?"  "When can the loan adjust, if
at all?"  "What happens if I can't make a payment?"

To be fair, many student lenders offer this information
voluntarily, which helps borrowers make better choices. But
this is the exception, not the rule.

Another favorable trend is that many colleges and
universities have become more proactive and supportive in
educating students about all the details surrounding
student loans. Many schools have made available a
"borrowing consultation" offered by their financial aid
advisor.  And in some instances, particularly among the
elite higher education institutions, the financial aid
packages feature little or even no loans, opting instead
for "free" money awards - scholarships and grants.  Harvard
is one such institution leading the way.

It's clear that there is no easy solution for this problem.
However, it's imperative to be mindful of the example set
by the subprime mortgage meltdown, and avoid the
consequences that accompany irresponsible and borrowing and
lending.

College Pete and I are extremely debt-adverse and strongly
urge you to do anything possible to minimize, or flat-out
eliminate, borrowing for college. Think twice before you
sign for that loan!


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Andrew Lockwood, J.D. and Peter "College Pete" Ratzan,
M.B.A. own and operate College Planning Specialists of
Florida.  For a schedule of their free workshops, or other
information about "How to Pay for College Without  Going
Broke" visit their website,
http://www.CollegePlanningAdvice.com or call directly,
954.659.1234.