Jonathan Hughes: [00:00:00] You’ve probably heard by now that the federal government has pulled back on educational lending. The amount that parents can borrow through the PLUS Loan Program used to be whatever college cost minus whatever financial aid was granted. Now, for the first time in decades, there are caps for new borrowers: $20,000 per year and $65,000 per student total.

We talked about this a few episodes ago when we were discussing the Graduate PLUS loan being eliminated for new graduate students. Again, another example of the federal government pulling back on lending. And the Parent PLUS Loan is a very popular loan, and there are good reasons for that. It’s easy to apply for.

It’s easy to be approved for. There’s one interest rate for all, and you can defer the monthly payments while the student is in school with no change to the interest rate. But there are other things that may make the Parent PLUS not as attractive as other options. There’s a 4.228% [00:01:00] origination fee when most other loans don’t charge one at all.

The parent is solely responsible to repay that loan without the student. And of course, many parents who end up borrowing a Parent PLUS loan may have qualified for a lower interest rate with another lender But the fact is that many parents who end up choosing the PLUS Loan do so because it was offered by the federal government.

And that makes sense. Parents have just filed federal financial aid forms. They see their financial aid offer that has Federal Pell Grants, federal work study, and federal student loans. So it’s easy to see why they would think that borrowing a federal parent loan is the logical final step in their process of paying for college.

And again, it’s easy to do it. The application is sometimes linked to the college financial aid webpage, so just a few clicks and you’re done. And sure, many parents may think they might be able to find a lower interest rate somewhere [00:02:00] else, but who knows about these other actors, banks, for-profit lenders.

Now, I think that the federal government, as much as people may be cynical or skeptical about it, offers a sense of continuity, of security that I think really speaks to people in a time of high vulnerability or uncertainty. And so over the years, the Parent PLUS Loan has become a sort of standard for parents, so much so that some colleges even list a suggested PLUS Loan amount on their financial aid offer for whatever aid the student didn’t receive.

Now, this is a controversial practice to be sure. Most colleges don’t do this, as it tends to confuse some parents, but it does show you the unique position that the PLUS Loan occupies as a federal loan. But with these new limits, some parents may be looking for options. And what I’m telling you today is that’s not necessarily a bad thing.

New limits or no, there may be a loan out [00:03:00] there that fits you better than the Parent PLUS Loan. You may be eligible for a lower interest rate, lower monthly payments. You’re certainly likely to find a loan with a 0% origination fee So there may have been better options for you all along. But if you’re worried about borrowing away from the federal government, what I’m telling you today is that not all of your options are the same.

It’s not the federal government on one side and the big for-profit lenders on the other. There’s a third class of lenders that have been here the whole time, the states. And just as you may look at your financial aid offer and see Federal Pell Grants and federal work-study, you may also see state grants and state scholarships, or maybe you participated in your state’s 529 plan.

And I’m here today in Washington, DC to talk all about these state-based agencies and what makes them different than for-profit lenders. My guest is Gail daMota. She’s the president of the Education Finance [00:04:00] Council, a member organization of these very state-based agencies. So who better to tell us all about them?

Gail, welcome to the MEFA podcast.

Gail daMota: Thank you for having me.

Jonathan Hughes: So tell me about EFC.

Gail daMota: Sure. Education Finance Council is the national trade association of nonprofit and state-based higher education finance organizations. That’s a mouthful. What it means is our members provide a lot of free services for students and families in their states, things as college planning services, financial literacy FAFSA completion help, and they also offer scholarships, grants, five manage 529 savings programs, as well as offering low-cost student loans.

Jonathan Hughes: We’re having this conversation in large part because of the new federal Parent PLUS loan caps, and so many parents are going to be looking for alternatives. So [00:05:00] what would you want them to know?

Gail daMota: First off, I think it’s really important to understand that the Parent PLUS loan, while it’s a federal loan, is very different than the student loans, the federal student loans.

So for example, and I’m gonna use my little cheat sheet here, the federal direct student loans, their interest rate is 6.52% with a 1.057% origination fee. The Parent PLUS Loan is significantly higher. That is at 9.07% interest with a 4.228% origination fee. So for that Parent PLUS Loan, if you look at the APR, maybe for a 10-year repayment, that is over a 10% interest rate for the parent loan.

And often you’ll hear that there’s lots of benefits for the student loans. Many of those benefits are not available for the [00:06:00] parent loan. The parent loan is the debt of the parent, not the student, and there is no statute of limitations on this loan, so it can go on in for the rest of the parent’s life.

So that’s the big difference between the student loan and the Parent PLUS Then you want to look at the Parent PLUS Loan in comparison to private student loans. And again, they’re very different. The private student loan is made from the private sector or from a state agency, and the, again, the parent loan is a federal loan.

But again, the interest rates are very different, with the parent loan being the loan of the parent. A private loan could be the loan of the student, it could be the loan of the parent, it might be a parent loan, or it could be both. It could be a student loan where the parent is the cosigner. So there’s different forms that it can take in terms of who is obligated to repay that [00:07:00] loan.

The other difference is the Parent PLUS Loan doesn’t really look at ability to repay. It looks at a little bit of the parent’s credit history, but not if the parent really is gonna be able to repay that loan in the long run. Whereas the private sector generally looks at your credit criteria, and the the higher your credit score, the lower the interest rate you’re going to be charged.

The lower your credit score, the more interest you’re going to be charged. And if you don’t have great credit, or they determine that you don’t meet their credit criteria, the private lender may not give you a loan at all. It could also require a cosigner- Yeah … in which case if the student doesn’t have the credit but the parent does, then the parent can become a cosigner for that loan, and it could help lower the interest rate for that student as well.[00:08:00]

Jonathan Hughes: So one of the things you mentioned in your earlier answer that I want to circle back to is the extent to which these state-based lenders do other things other than lending, right? So can you talk about that a little bit more?

Gail daMota: Sure. We we do a study every year, it’s called our National Impact Report, and we poll the EFC members to see just how many types of services that they offer students and families in their state.

So this is for the ’24, ’25 award year. We’re gathering the data for last year, so this is the year before. And let me give you some stats. EFC members provided 26.2 billion in managed savings for post-secondary education. So these are things such as the f- 529 college savings plans, which MEFA manages for the state of Massachusetts.

They also helped 1.95 million families with free college access and success [00:09:00] programming. That could be the financial literacy, college planning, FAFSA completion, et cetera. They also provided 3.4 billion in funded or administered grants and scholarships, so either they provided the scholarships themselves, or they provided it f- on behalf of the state that they represent. And their average lowest fixed interest rate on their private student loans was only 4.37%.

Jonathan Hughes: So what about the loans themselves? What makes a loan from a state-based agency different than a loan from a for-profit company?

Gail daMota: The state-based loans Are exactly that, state-based. So they have what they call a state nexus. So in many cases, they either make the loans to residents in their state or to students attending the school in their state. So a lot of their loan programs are geared towards the [00:10:00] needs of the state, so they may have forgiveness if there’s a field that is high-need in the state, for example, first responders, nursing.

They may have loan forgiveness options for some of those, or lower interest rates for some of those fields. And the other thing is that the state-based and nonprofit lenders, they have a yield restriction because of the way they raise the funds to make the loans, and so anything over a 2% net yield on these loans has to go back into reducing the cost to the students.

They’re mission-based, and they’re focused on a public purpose, so their focus is lowering the cost to help increase access for students. The for-profit lenders, of course, have to focus on profit. They have to focus on it for their shareholders, for their board of directors, and there’s no cap on the yield that they want to make for [00:11:00] their shareholders.

They also are more nationalized in terms of the types of programs that they offer, so they’re not geared necessarily for the state that the school is or that the student is. So those are some of the big differences, but the interest rates can, as a result, can be quite different between them.

Jonathan Hughes: Before we go on, I just wanted to pause here and say that if what we’re talking about today might resonate with somebody that you know, feel free to go ahead and stop this, send it to them, and if it means something to you, then you can follow the show.

Okay, now back to it. So let’s talk about the interest rates a little bit. What is different when it comes to interest rates from the state-based agencies to the for-profit?

Gail daMota: So I did a quick little study, and I went out to the websites of four of the largest for-profit lenders, and I took the average of their lowest interest rate that they advertised and their highest.

And then I went out [00:12:00] to all of the EFC members’ websites and did the exact, the same thing. And here’s a little range for you. The not-for-profits the spread of their interest rates was on average 4.31% to 8.51%.

Jonathan Hughes: Okay.

Gail daMota: On the for-profit side, the low was 3.05% average, but on the high side, it was 16.74%. So if you really look at that, that higher interest rate, those are for the lower FICO scores, and those folks are going to be paying almost double in interest on a for-profit loan than they are for a not-for-profit loan.

Jonathan Hughes: And where do most people tend to fall in those- … in that spread?

Gail daMota: That’s a great question. American Action Forum just released a study this spring that compared the [00:13:00] for-profit Sallie Mae company from the not-for-profit state-based loans, as, as well as the Parent PLUS loan. And they chose Sallie Mae because they are a publicly traded company, so the data is publicly available- to them, and also, they’re one of the largest. They probably have almost 50% of the market share in the private student loan segment. So they looked at how, what percentage of students were receiving different interest rates. So let me give you a little stat on this. Yes. They found that 69% of the borrowers were receiving an interest rate over 9% through the Sallie Mae loans 61% were paying over 10% for interest rate for those student loans.

Jonathan Hughes: Wow.

Gail daMota: On the not-for-profit sector, there was only 9% of the loans that were over 9%, and only 2% were [00:14:00] over 10%-

Jonathan Hughes: Ah …

Gail daMota: of the loans. So where did they fall? So the not-for-profit loans, 88% of those loans were between 4, 5% and 8.99%, much lower. The Sallie Mae only had 19% of the, their loans fall in that range.

So that’s why we tell people to be very careful about advertised rates, and look at what you’re actually going to be charged, what your rate is going to be.

Jonathan Hughes: Do you want to talk about what that means in actual dollars?

Gail daMota: This was a study that we a investment banker did for us, and they took the average student loan of about $25,000 roughly, and they assumed a 10-year repayment.

So if you take out that loan at 6.5%, which is the average rate that the not-for-profits were charging, and you would pay $9,081 [00:15:00] in interest.

Jonathan Hughes: Okay, this is the not-for-profits. Okay. So yeah.

Gail daMota: This around 6.5% interest rate. Yeah. If you took that same amount out for a Parent PLUS loan- … at the Parent PLUS interest rate, which was 9.96% roughly, you’re gonna pay $15,721 in interest.

Jonathan Hughes: Okay, so that’s more than double.

Gail daMota: Yep. And if you take an 11.39%, which was the average interest rate of the Sallie Mae loans- … if you take out that loan at that interest rate, you’re gonna pay $17,022 in interest. So if you’re going to a four-year program and you take out a loan each year- those numbers become incredibly significant. With the PLUS loan, you would be paying approximately $26,522 [00:16:00] more in interest than you would for that nonprofit loan-

Jonathan Hughes: Okay …

Gail daMota: at the 6.5%.

Jonathan Hughes: Following you.

Gail daMota: Yeah. Okay, and on the, that private loan that’s at 11.39%, or any loan that’s 11.39%, you’re gonna pay over $31,762 more in interest than you would for that 6.5% loan. So this is a s- we’re talking significant money based on the interest rates that you’re being charged.

Jonathan Hughes: So bearing all of that in mind- When you’re thinking about a parent or parents who are about to send their first student to college, and they’re looking at all these different loans, what should they be keeping in mind?

Gail daMota: Shop. For many people, paying for a higher education, especially if you’re gonna go on to obtain a graduate degree or a professional degree, this is gonna be [00:17:00] your largest investment outside of purchasing your home. And unfortunately, too many people make very emotional decisions about their student loans.

“Okay, I got my loan. That’s it.” And they’re not looking at the interest rates or wh- how- or different types of repayment plans. So we suggest that you look at least three lenders, and make sure one of them is a non-profit or state-based lender. And some of them, if there’s not one in your state, some are national.

So MEFA’s a national program. They do make loans outside of their state. So there … We can find somebody for you, regardless of what state you’re in. There is somebody out there for you. And you should ask for a soft credit pull or a preapproval. That won’t hit your credit score. It won’t lower your credit score, but it will tell you what interest rate they will charge you.

So that’s [00:18:00] key. Now you know what you’re going to be charged, not what the advertised rate is. So for example, if you do a Google search or an AI search for your best lender Companies pay to be placed higher on those search lists, so what you’re going to get is not necessarily the lender that has the best loan for you.

It’s just a lender that has optimized that search the best. Same with the shopping sites. Many of the shopping sites where they’ll l- list your lenders, not all, but most, charge based on the number of hits or loans that are made. So the more they’re paid, the higher up on the list that lender is. So again, it’s not necessarily the best rate for you.

And then those news articles that you see where they write an article [00:19:00] about the best lenders or the best private student loans, if you look at the very top of the article, there’s a fine print that says that they may get commission from the lenders. That is a paid advertisement. It’s not a real article.

It’s actually the lender is paying for it to be placed in that publication. So you really can’t rely on those as being the go-to source. Sure, it can help you find some lenders, and you can include them on your list, but again, what’s most important is what rate you’re going to get. So we caution you for the as low as rates or the best loan products as well.

The other thing that we would suggest is only borrow what you need, okay? So you get packaged and they’re telling you may need $20,000. [00:20:00] In that could be for room, board, et cetera, but you’re living at home, and maybe your parents aren’t charging you. You might not need all of that debt, so only borrow what you need to cover your costs because in the end it would cost you more.

Jonathan Hughes: I’m going to throw you a bit of a curveball here and ask you about a resource, if the shopping sites, you wanna bear some things in mind, AI you wanna bear some things in mind in how they present you your options, what is a resource that you would recommend that parents go to see their options?

Gail daMota: I think you can use them to find some lenders. I- you can come to our website to find the not-for-profits that you can choose. And I think the school might have a preferred lender list. Many schools do not offer that. Some do, but again, that shouldn’t be your only option. So they may only have a couple lenders on [00:21:00] there but you want to make sure one of them is a not-for-profit. So that’s what I would do. I would start with those.

Jonathan Hughes: And what is the website for EFC?

Gail daMota: It’s EFC, for EducationFinanceCouncil.org, and then click on Students and Families, and then you can find the affordable student loan finder there.

Jonathan Hughes: If somebody is listening to this and they like what they hear about state-based lenders, and they look and they don’t have an agency that is, a state-based agency that they can borrow from, what would you suggest?

Gail daMota: Again, you can come to our website, and we list the state agency by state that– or the nonprofit for that state on our website. And if there’s a state that doesn’t have one, all the national lenders are listed there. So there’s about six of them that do lend nationally. So even if there is a nonprofit in your state, one of those national lenders can also be a second option to look at as well.

Jonathan Hughes: Is [00:22:00] there anything else that I haven’t asked you about that you think parents, especially ones who are looking to borrow and they may be facing one of these cap situations from the PLUS loan is there anything that, that we haven’t asked about that you think it’s important for them to know?

Gail daMota: Sure. I think start early, and take your time, and plan for college. For example, shop for your school as well, and esp- particularly if you know what you want to study. And don’t be afraid of the sticker price, because sometimes the school with the highest sticker price may have the best financial packaging, where you’re getting the most tuition discounting, and you’re getting the most scholarship money, and your out-of-pocket expenses is actually less than that cheaper sticker price school.

Or the opposite can be true. So you do really need to look at the financial aid awards that you’re receiving from those schools, and do a comparison, [00:23:00] and understand what your out-of-pocket actual expense is going to be and what it’s really gonna cost you. And then when you’re thinking about borrowing, you also want to think about your career path.

Are you going to go for your master’s degree? If yes, maybe you want to pay a little bit less for your undergraduate degree so that you can get more federal student loans. Again, they’re still your best option, is your federal student loans first before you have to go to the private sector, and you won’t hit that cap for your graduate program.

Take care of your FICO scores, so when you go into the graduate program, you won’t need a cosigner. Take care of your credit. Pay your bills on time. The other thing you might want to look at is the US Department of Education has a website called the College Scorecard. You can just Google “US Department of Education Col- College Scorecard.”

That will come up for you. And you can search by school, by program of [00:24:00] study, and they’re going to give you the median earnings based on the different degrees, the cost of the college, default rates. It gives you a lot of information about the school that you’re attending. So it helps you make a really informed decision, and then combine that with shopping for the student loan.

You’re making a very educated, informed decision that can save you tens of thousands of dollars, and you will be able to manage your debt when you come out of school.

Jonathan Hughes: As you’re talking, it strikes me that this holistic approach that you’re talking about is exactly what the state-based agencies are all- Exactly about.

Gail daMota: So- Exactly.

Jonathan Hughes: All right, Gail. Thanks so much for being here. I had a great time. And folks, remember, the federal government may have pulled back on education lending, but the states have not. Once again, my name is Jonathan Hughes and this has been the MEFA [00:25:00] podcast.