Comparing College Loan Options
Host Jonathan Hughes is joined by Stephanie Wells, Director of College Relations at MEFA, who explains how to compare college loan options, including the differences between Federal Direct Student Loans, the PLUS Loan, and private loans, as well as paying the college bill through a combination of past, present, and future income.
On this episode of The MEFA Podcast, MEFA's Associate Director of College Planning and Content Creation Jonathan Hughes is joined by Stephanie Wells, Director of College Relations at MEFA, and Julie Shields-Rutyna, Director of Training and Education at MEFA. Stephanie Wells explains how to compare college loan options, including the differences between Federal Direct Student Loans, the PLUS Loan, and private loans, as well as paying the college bill through a combination of past, present, and future income. Jonathan and Julie discuss the VaxMillions lottery and how fully vaccinated individuals between ages 12 and 17 can enter to win a college scholarship in a U.Fund 529 account.
Resources Mentioned in this Episode
Jonathan Hughes: [00:00:00] Hi, everyone. Welcome to the MEFA podcast. My name is Jonathan.
Julie Shields-Rutyna: [00:00:14] And I'm Julie Shields-Rutyna.
Jonathan Hughes: [00:00:16] And we have a great show because we have our first repeat guest on the show this week. We're going to welcome back MEFA’s very own Director of College Relations, Stephanie Wells. And why are we doing that? Well, because in addition to being our college relations director, she's our in-house MEFA loan expert.
And now is the time of year when students and families who have a payment due for the fall semester coming up, maybe in September, maybe in August, maybe even in July, are getting ready to apply for loans. And they have a lot of choices and a lot of questions. So if you have a student heading off to college this fall, and this is all new to you, and you have questions, you'll want to stick around because we'll answer those burning questions that you may have.
But first Julie, we have some news to share.
Julie Shields-Rutyna: [00:01:03] We do. So Governor Baker recently announced the creation of the VaxMillions lottery. So, what is this? Basically, if you're a Mass resident at least 18 years of age and were fully vaccinated in Massachusetts, you can register for the lottery and the chance to win a million dollars.
Now there'll be five drawings. So a total of $5 million will be given away to certain lucky, fully vaccinated adults in Massachusetts. If you have questions regarding your eligibility, the rules of the lottery or anything, you can visit VaxMillionsgiveaway.com and there's more.
So the vaccine is now available to children ages 12 to 17. And so there are separate prizes for vaccinated 12 to 17 year olds, who again, are Mass residents and have been vaccinated in Massachusetts. And that scholarship price is $300,000 in a U.Fund 529, which is of course exciting.
Jonathan Hughes: [00:02:09] Very exciting for us. How many scholarships then will be awarded and how?
Julie Shields-Rutyna: [00:02:16] Yeah. So the registration for the lottery began on July 1st and you can register on the website, Vaxmillionsgiveaway.com. And I'm sure you'll put that in the notes, John. So there'll be five scholarships. So a total of 10 prizes will be awarded, $5 million jackpots for adults and five, $300,000 scholarships for children.
The first drawing, according to the website, is on July 26th. And there'll be one drawing per week until the final drawing on August 23rd.
Jonathan Hughes: [00:02:52] Okay, Julie. So what about the minor registering for the $300,000 U.Fund account? What is it?
Julie Shields-Rutyna: [00:02:59] Yeah. So all they would need to [00:03:00] do is register online with their own information.
So not the parents' information, but then they'll have to provide contact information for their parent or legal guardian, and a parent or legal guardian will be required to approve a potential prize and to validate the information submitted by a minor child, if that child or adult under guidance is chosen as the winner.
Jonathan Hughes: [00:03:22] All right. And I wonder if you could, just in case anybody isn't sure, briefly explain what a 529 plan is.
Julie Shields-Rutyna: [00:03:29] Absolutely. So a 529 plan is a tax advantaged college investment plan. Each state offers a 529 plan and the U.Fund is the Massachusetts 529 plan. And this is essentially how it works. Money is put into a U.Fund.
And so in this case, it would be that $300,000 scholarship prize. And then that money is invested and the earnings in the 529. The account grows tax deferred, and then monies may be [00:04:00] used for qualified educational expenses, like tuition, fees, room and board, books, supplies, and equipment. We know a little bit of savings, you know, can go a long way in paying for college.
And so this is a significant prize and, we just know that that's really going to be able to help the chances that the student will go to college and graduate.
Jonathan Hughes: [00:04:25] And so where can this money in the U.Fund be used?
Julie Shields-Rutyna: [00:04:32] Yeah. So, funds in a 529 plan will be available for application for tuition, room and board, all related expenses at any college university or technical or trade school or any post-secondary educational institution of the winners.
Provided the institution is eligible, eligible to participate in a student aid program administered by the Department of Education, and funds will remain available to the prize winner for [00:05:00] qualified expenses until age 28. Also, let's not forget. There's another 529 plan, which is the Attainable Program.
This is an ABLE program and these are 529A accounts, a tax advantaged way to save for individuals with disabilities. And a winner who's disabled in the meaning of the federal ABLE statute may elect to receive, in lieu of scholarship prize, the equivalent award to be held by MEFA in a special needs trust or federally qualified ABLE account to cover qualified expenses.
Jonathan Hughes: [00:05:34] Okay. Julie, where do people register for that?
Julie Shields-Rutyna: [00:05:38] The official website of the program is Vaxmillionsgiveaway.com and that's where you register and find the rules, eligibility criteria, and frequently asked questions. But once again, the first drawing is on July 26.
Jonathan Hughes: [00:05:57] Now let's discuss what you [00:06:00] need to know about college loans with MEFA’s Director of College Relations, and first repeat guest, Stephanie.
Stephanie Wells is the Director of College Relations at MEFA. And you may remember that we chatted a few months ago about MEFA’s After the College Acceptance campaign. And this was back when families were getting their financial aid offers from their students prospective colleges.
And we talked at that point about how they can compare offers and figure out the balance due and make deposits. Well, now she's here to talk about the next step for those families. And that is for those families who are looking to borrow loans in order to finance some or all of their college bill, how they can look at their options and make sense of them and basically how they can compare college loans.
Stephanie, welcome back to the show.
Stephanie Wells: [00:06:57] Thank you. I heard that I'm the first one to [00:07:00] be a repeat guest.
Jonathan Hughes: [00:07:01] So I think you should, you know, I said earlier in the show that I hope you feel very honored to be our first,
Stephanie Wells: [00:07:07] Like a VIP.
Jonathan Hughes: [00:07:09] Well, you are a VIP, of course you are. We all are. Yes, yes. But especially you, Stephanie, you know, I thought it would be good to break down the big questions and the popular questions that parents have and students have. So, if you don't mind, we'll just get right into it here. Yeah. And we'll say, maybe start talking about the first step, what should really be the first step when we're talking about loans for college. And that is talking about the federal loan.
Stephanie Wells: [00:07:41] Yeah, sure. So the Federal Direct Student Loan is something that we tell all families to look at before you do any additional borrowing. So this is the un-subsidized and or subsidized loan that you would have seen on your students financial aid offer. So for a [00:08:00] freshman, the total would have been up to $5,500.
So that rate is very low. Although the rates are just are going up until July 1st, it'll be in the 3, over 3%. It is going up a bit, but it's still a very low rate for those Federal Direct Student Loans. And I want to underline student, because we're really talking about that Federal Direct Student Loan.
That is a great option for students to help contribute towards the bill and take on some of the borrowing responsibility without needing a co-signer. And they can defer these loans while they're in school. There's also lots of great repayment options and federal benefits when they graduate. For example, you may have heard that payments on Federal Direct Student Loans have been frozen during the pandemic.
So students didn't need to make those payments. This is the loan that we're talking about, where they don't need to make the payments right now. So that's one of the many benefits that you could see with a Federal Direct Student Loan. So we always recommend [00:09:00] maximize that loan first. There are limits on what students can borrow, so it might not be enough to pay the whole bill, but it will help contribute towards the bill.
A Federal Direct PLUS Loan, so a parent loan for undergraduate students, is a very different type of loan than the student loan. The PLUS loan is a credit-based loan that parents have to apply for. It's a loan that's only in the parent's name. It's not co-signed with the student.
And we don't necessarily recommend that you go right to that loan. If you need to borrow above and beyond the student loan, we recommend that you look at all your options and that the PLUS loan may be one of them. The rate on that is going up to close to 6.3% on July 1st, and there's over a 4% origination fee.
So it might not be the most cost-effective option. You may be able to get a lower rate with no fees, such as loans through MEFA that we're going to talk about, but it is one to [00:10:00] consider when you're looking at all of your options.
Jonathan Hughes: [00:10:03] When you are looking at a lot of different private loans, and there are a lot of options that you can look at when you're looking at private loans, I know it can be confusing for parents.
What are some of the factors that are important when you're comparing college loan options?
Stephanie Wells: [00:10:20] Well, the first one is obviously going to be the rate, the interest rate, because that's going to directly affect the cost of that loan. So you're looking at not only low interest rates, but different ranges of interest rates.
So don't just look at that very low rate in the range of interest rates that a lender may provide, because rates typically are going to depend on your credit score. So I recommend looking at the range. So with MEFA, the rates range from 3.75 to 5.75, depending on your credit and the repayment option you choose.
But with many [00:11:00] for-profit lenders, that range is much bigger. So it might be a low starting rate if you have an 800 something credit score, but the high rates with a lower credit score might be double digits. We've seen those with other for-profit lenders. So, you know, look at all your options.
If you have an amazing credit score of 830 or 850, then you can probably, you know, shop around and go for the absolute lowest rate. But most people aren't in that situation. Most people are somewhere in the middle. So definitely, you know, look around, there are loan comparison tools out there such as credible.com.
MEFA’s on that site, but many colleges on their websites also have loan comparison tools or lists of lenders that they've worked with. So definitely, you know, look at your options. But just consider that interest rate. That's probably the first thing. And then the second thing I would say is look at, you know, are there fees [00:12:00] associated with that loan. With MEFA, there are no fees. A lot of private loan lenders have gotten rid of fees, but that's something to consider because it's an additional cost.
And if you're comparing it to the federal plus loan with over 4% fee, you know, that is something that you want to think about, but also. Probably right after the interest rate would be the repayment terms in the monthly payment, which go hand in hand. Right? So are you looking to defer? If so you might have a higher rate and when the student gets out of school, the payment might be higher.
But that might be what you need to do to get through the next four years. So it really depends on the family. Are you looking for the absolute lowest rate? If so, that's probably going to require payment while the students in school, it's going to be the lowest cost loan, but you're going to have to make payments while the students in school.
And if you're okay with that, then you might go in that direction. So it really is going to depend on the family, looking at their monthly budget and their [00:13:00] individual situation to determine what's going to be best for their financial situation.
Jonathan Hughes: [00:13:06] Great. Thank you. Now you mentioned fees. I was wondering if you could give what kind of fees, examples of different kinds of fees that might be associated with it.
Stephanie Wells: [00:13:16] Right. Right. So typically the first thing you'd look at is the origination fees. Are there any costs associated with that? So with MEFA, there are no origination fees. And you can find the fees if you don't see it on a lender's website, which should be upfront and center, but oftentimes, you know, some of those fees that lenders might charge might be buried, you can look at the disclosure statement.
So the disclosure statement would be on any lender's website. And you can look at that before you even apply for a loan. So the disclosure statement is a federal document that's required by every lender to put on their website and it dictates all the fees that are associated. So not just the origination fee, which is critical, but [00:14:00] also are there late payment fees, bounced check fees, things like that.
And if it doesn't have any fees at all, but some lenders might charge a 5% fee if you're late on your payment or, you know, a $20 fee for your check or something like that. So it is important to know what those fees are. In addition to the origination fee that everyone would have to pay for a lender is charging that.
Jonathan Hughes: [00:14:23] Great. Thank you. Now talk a little bit about MEFA Loans here, because I was on that webinar with you, and may have had over a hundred and hundreds of people that, it was very good and they had a lot of questions. And so some of the questions that they had actually surprised me a little bit.
So knowing that they're on the minds of a lot of parents, I wanted to discuss them here. So one of the first ones that jumped out at me was about MEFA specifically, and they, a lot of parents, ask is MEFA only for Massachusetts schools or Massachusetts, right?
Stephanie Wells: [00:14:57] Right. So that's a good question. [00:15:00] Because MEFA is a nonprofit quasi-state authority, that comes up a lot.
Right. So we're based in Boston and we are self-financing, so we are a state authority. But we're self-financing. We're not relying upon state appropriations. So that makes MEFA a little bit unique compared to some of the other lenders in the education market lending marketplace. So MEFA, you can use a MEFA loan at any school, any nonprofit accredited school in the country, no matter what state you live in.
So you don't have to live in Massachusetts and you don't have to go to school in Massachusetts. Back in the day, prior to 2019, you did need to have a Massachusetts connection. However, now we're a national lender. So anybody nationwide whose credit, where they can take out a MEFA loan at any school in the county.
Jonathan Hughes: [00:15:54] Another question that families have, probably the second most popular question, is [00:16:00] when you are looking to borrow a loan for your child's college education, do you borrow for four years at once or do you borrow for one year?
Stephanie Wells: [00:16:12] That's a great question. And as, as you mentioned, we get it all the time.
So you're actually not able to borrow for four years at once with, I don't know of any lender that does that, but particularly with us, you can only borrow one year at a time. So it's an annual process. You apply for financial aid each year, you have to fill out that FAFSA each year, just like you have to apply for a loan each year.
So you really do have to kind of take one year at a time and look at each year individually based on the financial aid you're receiving and the cost. However, we do recommend making a four year plan. So if you're borrowing in year one, let's pretend your payment is $200 a month. Assume you're going to need to borrow for years, two, three, and four, and make sure that you can afford that monthly payment times four, assuming that you might need [00:17:00] to borrow for all four years.
And you might not need to, who knows, but just plan for a four year commitment of loans in case you need to.
Jonathan Hughes: [00:17:11] Excellent advice. Continuing on about timing, a lot of parents are wondering about when they need to start applying for loans or if they want to apply for MEFA Loans, when they need to start that process.
Are they behind, you know, what is the timing look like? So what would you say to those parents?
Stephanie Wells: [00:17:33] I would say, you know, you can apply now if you, if you're worried about, particularly if you're not sure what your credit is looking like and you want to just make sure you have that approval. You can apply now, just estimate based on the cost and your financial aid or what you think you might need to borrow.
I always recommend apply for the maximum you think you'll need. And then when you're getting your bill, if you don't need so much, call us, we can reduce the loan. It's easier to [00:18:00] reduce the loan then have to apply for additional funds. And definitely apply for the full academic year so that you have those funds set.
No interest is charged until we disperse money to the school. So you don't have to worry about being charged interest on money that you don't need. Definitely apply whenever you're comfortable, but at least we usually recommend give yourself two weeks before the bill is due. So you can wait until you get your bill.
Because usually there's a three week timeframe from when you get your bills to when it's due at the school. So that should be plenty of time. When you apply online it's an instant credit decision, and you can do all your paperwork online. So you really can get through front to back in about a half hour, even less.
If you wanted to, you can wait till you get your bill to know the exact number, as well as really, you know, how you want to do it. What we do recommend is don't wait too long. Don't wait until the big day before the bill is due. We do have [00:19:00] people apply for loans in September that, you know, their bill is way past due and that's okay too.
But we don't recommend that. We don't recommend stressing yourself out about the bill due date, because you never know what might be on a credit report that might pop up. Maybe the loan doesn't go through and you have to scramble to come up with another resource or clear something up on your credit.
You don't want to put yourself in that situation. So give yourself a couple of weeks. And I do want to also add for folks who pay after the bill due dates, there could be ramifications for that. So, you know, you might be charged a late fee at the school. Last year, during the pandemic, many schools were very flexible with their bill due dates.
They were waiving late fees. They're not going to be as flexible this year and they’re probably not going to waive late fees this year. So don't count on that. Of course, if you have a financial situation that's [00:20:00] untenable, that's causing you problems to pay the bill, you should talk to the financial aid officer or bursar's office.
And see how they can help you and, you know, make arrangements. However, if it's just a matter of just kind of forgetting to pay the bill or, you know, being late on doing that, the student could get dropped from their classes. Or, you know, if you owe some money, maybe you pay part of the bill, but you owe a little bit more.
Let's say October, November, they may not be able to register for spring classes if your bill isn't paid. So you don't want to deal with those ramifications and you don't want the students to have to deal with them either. Cause it can be really stressful if they're taken out of their classes or can't register for the next.
Jonathan Hughes: [00:20:46] Can we talk about the role of the co-signer on the loan here? So one of the main questions and sort of points of confusion here is whose loan is this?
Stephanie Wells: [00:20:58] Yeah, definitely. So [00:21:00] first and foremost, anybody who signs their name on a loan has equal responsibility for that loan. So whether you're a co-signer or the student borrower, you all have responsibility.
Now with that said, as a lender, we're typically looking at the credit where the individual, the parent, or credit where they co-signer as the quote unquote primary borrower, because that's the person's credit who we're looking at to get the loan approved 99.9% of the time. But the student does have responsibility on a mutual loan as well.
So it is a family loan, if you will. So it really, you know, when you're filling out the MEFA loan application, there'll be a section that says Student borrower. It's very clear that that is where the student's information goes. And then you have the ability to add a co-signer, which you should do if you want to get the loan approved, because usually students can't get the loan on their own without credit.
And then [00:22:00] also in some situations, some families add an additional co-signer, so there might be two co-signers and a student on the loan. So let's say for example, mom or dad, they don't have great credit. You know, they've had some financial difficulties and maybe grandma or grandpa has great credit.
So they might add grandma or grandpa on the loan as a second co-signer to get that approved. Basically, we are going to look at the highest credit score on that application among the folks that are applying and use that to determine whether the loan be approved and to determine the interest rates so you'll get the best deal. It might be a good idea to add a second co-signer if you know, the main, the primary co-signer has some credit difficulties.
Jonathan Hughes: [00:22:43] But what if a parent doesn't have great credit?
Stephanie Wells: [00:22:48] Yep. So there is a few things you can look at. First I'll just speak to the MEFA loan.
If it's not approved with one parent, you could maybe add another parent that might have a better [00:23:00] credit score. Add a second co-signer like a grandparent or family friend that might be willing to add their name to the list. So that's an option. Another option would be that Federal PLUS loan that we've talked about.
So that loan is more expensive and it has over a 4% fee. However, it is pretty easy to get. Even folks have had credit difficulties, as long as they don't have really adverse credit. You know, it's pretty easy to get approved for that loan. But it is more expensive and the Federal PLUS loan is also only in the parent's name.
It has to be a parent or step parents that takes out the loan. It can't be grandma or grandpa, and the student can't co-sign on that loan. So there's some restrictions there. But it is something that we do talk to families about who have had credit difficulties but can make payments on a loan, but they just had some credit score issues and that they're [00:24:00] trying to rebuild their credit.
So those are two options regarding loans. The other option, if folks can afford the payment on, it would be a monthly payment plan. So that is a budget plan through the school, through the college, and there's no interest on a monthly payment plan. It's a small application fee that you pay to participate, and you can spread out all a part of what you owe over a period of let's say, 10 months or so.
So it's a good way to, you know, budget what you owe. It's not a loan. You have to pay the full amount off within that year. But it is a way to spread out the payments in case you’re having trouble coming up with that lump sum. So that's another option.
Jonathan Hughes: [00:24:43] I was wondering if you could say something in general about why is borrowing and that's something that we always like to talk about?
Stephanie Wells: [00:24:49] Yeah, definitely. We always talk about the combination strategy. I like to call it. So first it's really looking at past, present and future, right? So [00:25:00] past income money, you've saved over time in a savings plan, in a savings bond, a 529 plan or U.Plan or MEFA maybe, whatever savings you have.
If you have some, take a look at that, see what you've saved and try to figure out how you want to use that. Whether it's plunking out on the first year payments so you don't have to borrow the first year, or spreading it out over four years, look at what you've saved if you have been able to save, and try and figure out a strategy to utilize those savings.
If you have younger children coming down the road and you haven't started saving, start saving. Start putting money towards a 529 plan for example, which is tax deferred, tax free, if you use it for college. MEFA has the U.Fund in Massachusetts, which is a great option. So definitely look at savings.
That's always a great way because if you think about it, whatever the expenses for college, you're going to have to pay, most [00:26:00] families pay for it over time. So you can pay for it over time by saving and earning interest or pay for it over time by borrowing and paying interest. So you have those two options.
A lot of families are a combination of both and that's okay. Then you look at present income, so that monthly payment plan I talked about using your present income, monthly paycheck, to put money towards a payment plan, or maybe save it up in your checking account to pay for that individual semester.
So money out of pocket. And then the last resort is always, you know, future income in the form of borrowing. So using future monthly payments towards a loan to access, you know, the capital you need to pay your bill now. So past, present, future income and always, you know, loans are a last resort. That should be the last thing you look at when you're looking at paying the college.
Look at your monthly payment. See what you can afford. If you can afford that monthly payment by [00:27:00] putting it all on a payment plan or even a half of it on a payment plan, then you should definitely think about doing that before you actually borrow.
Jonathan Hughes: [00:27:09] Before we go, I just wanted to ask you if a parent was right at the beginning of this process, they know they have a bill due and they have to start looking for a loan options.
How should they begin that search?
Stephanie Wells: [00:27:25] Well, definitely, you know, I would say, start looking at, go to mefa.org. Check up on MEFA rates. MEFA does tend to have a lower range of rates because we are a nonprofit. We just set our rates for this year. And we're really proud that we did not raise interest rates this year, even though all the federal interest rates have gone up. MEFA was able to keep our rates nice and low and not raise interest rates this year.
So we're really happy about that. And you know, you have a good rate option [00:28:00] there. But in addition to that, look at the school's website, the college's website, go on the financial aid page or give them a call. They usually have links, just look for loans. And, you know, even if you do that in the search tool, you should be able to find that on a college's website and see what lenders they're working with.
Cause they've worked with a lot of lenders over the years, so they know who has good service, who might be good. So they're not going to put really bad lenders on their website. So that's always a good resource as well.
Jonathan Hughes: [00:28:33] All right, Stephanie, thanks. And how can people apply for MEFA?
Stephanie Wells: [00:28:38] Go right on mefa.org and apply online. It's right there on our home page. Just look for the apply button, it's right there. And you just log in, set up your login. You have minimal information that you need to fill out and you'll get an instant credit decision. So it shouldn't take you too long. That's the best way to [00:29:00] apply.
Jonathan Hughes: [00:29:00] All right, Stephanie. Well, thank you so much. I'm already looking forward to the third appearance on the show.
Stephanie Wells: [00:29:07] Oh, that's going to be fun.
Jonathan Hughes: [00:29:08] Okay. Well thank you.
Stephanie Wells: [00:29:10] And we'll do something about bill payments, you know, towards August when people are scrambling to pay their bill.
Jonathan Hughes: [00:29:17] Yes, sir. And especially when loans are coming back into repayment as well.
That'd be a good one. Well, thank you Stephanie very much. It was a pleasure.
Stephanie Wells: [00:29:27] Thank you for having me, Jonathan. Appreciate it.
Jonathan Hughes: [00:29:33] All right. Well, that is our show everyone. Julie, as always, thank you for joining me. Remember, if you liked the show, please follow us on Spotify. Apple podcasts, or wherever you're hearing this. And if you could do us an extra favor, please give us a five-star rating. That would make us very happy. Until next time, goodbye everyone. [00:30:00]