Loan groan…

The scandals. The high costs. The headaches. Paying for college is harder than ever, but having the right information can save students and parents thousands of dollars. And plenty of headaches. Read on.

Dear High School Graduate: Congratulations!

Now, get ready for the maze known as “financing your college education.”

With college tuition skyrocketing and federal grants all but stagnant, more and more students are going into debt to make their way through school. In Maine, the average college grad leaves school with more than $20,000 in student loans, and at some schools 80 percent of students get at least one loan before graduation.

Federal subsidized loans. Federal unsubsidized loans.

Parent loans. Private loans.

With so many choices, it can be easier to rack up $20,000 in college debt than it is to get a car loan or even a credit card. No credit score required. You don’t even have to have a job.

Of course there’s a hitch.

College loans – like all loans – must be paid back. With interest. And if you can’t pay, college loans aren’t generally erased in bankruptcy.

But they’re so easy to get, so attractively priced, so desperately needed, some college students sign on the dotted line without really thinking.

And if students do think to ask – Is this the best lender? How much will my payments be? Is this large a loan really necessary? – answers still may be tough to get at some colleges. Across the country, financial aid offices have gotten in trouble for taking kickbacks from loan companies.

So what’s a student to do?

Local financial aid experts offer some advice.

Conflicts of interest

Student loans began making national headlines this spring when New York Attorney General Andrew Cuomo accused some colleges of having a conflict of interest with loan companies.

Among other things, he said, colleges accepted kickbacks and all-expense-paid trips from lenders in exchange for a coveted spot on the school’s “preferred lender list,” in which colleges recommend certain lenders to students. Cuomo said colleges also allowed lenders to set up call centers for them, so students who called the college’s financial aid center actually got the lenders’ representatives.

So far, 25 colleges have entered into agreements with the New York Attorney General’s Office, saying they’ll distance themselves from preferred lenders, adopt codes of conduct and re-pay money received from lenders.

Although Maine’s attorney general plans to speak with Maine schools about the situation in the coming weeks, no Maine college has been accused of any wrongdoing. Local colleges – including Bates, Bowdoin, Colby, the University of Maine at Farmington, the University of Southern Maine and the University of Maine in Orono – say they maintain some type of lender list but only recommend lenders that best benefit students.

Central Maine Community College in Auburn allows lenders to help with budget workshops, loan counseling and orientation, and the school does consider that help when putting together its preferred lender list. But Financial Aid Director Monique Schreiber said CMCC gives much more weight to a lender’s customer service, and some lenders don’t land on the school’s preferred lender list even after helping with orientation or workshops.

“In no way do we receive any kickbacks,” she said.

If you’re afraid your college has a conflict of interest, local experts advise asking a lot of questions. How did the college come up with its list? Why is this lender recommended? How does the lender benefit me?

Students have the right to use any lender they want if their college participates in the Federal Family Education Loan Program. (That’s most of them.) The college can’t force students to use a lender on its preferred lender list and it can’t refuse to honor the student’s choice.

So who?

Student loans have become a multi-billion-dollar industry annually, and loan companies have taken notice.

“Federally backed loans are better than mortgages. If a student defaults, the government pays it. They have no risk (to the lender),” said Steve Thomas, admissions director for Colby College in Waterville.

It seems like everyone, from major corporations to the local credit union, wants in on student loans. So many people got into the business, in fact, that the University of Maine at Farmington used to hand students a sheet completely filled with the names of eager lenders.

Students were overwhelmed.

“It was like turning on a hydrant when they only wanted a drink,” said Financial Aid Director Ron Milliken. “Then they’d call and say ‘Which one do you recommend?’ I never want to recommend one lender.”

In recent years, colleges have started winnowing down the choices, offering students a preferred lender list with a handful of names. Students could still choose any lender they wanted, but the list served as a starting point, a guideline.

Although preferred lender lists have now come under fire, local experts say legitimate ones help students who are faced with a legion of lenders and have no clue how to choose.

“If we were to get rid of it today, we’d have many irate students and parents,” said Mary Dyer, assistant financial aid director for the University of Maine at Orono.

But whether students follow their school’s preferred lender list or strike out on their own, local experts say there are steps everyone should take in choosing the right lender.

First: Fill out the Free Application for Federal Student Aid, or FAFSA, and turn it in before deadline. This form is used to determine how much a family can contribute to college, and it must be filled out in order to qualify for student aid and federally backed loans. Experts advise all students to fill out the FAFSA, even if they think their family makes too much money, even if they think there’s no way they’ll ever qualify for aid.

“If you’re a late filer, you’re not going to get any need-based aid for the most part,” said Dyer.

Second: Take out federally backed loans – Stafford, Perkins and PLUS – before going to private loans, home equity loans or a second mortgage.

Federally backed loans have lower interest rates, have simple deferment options and, for those who qualify, the government pays the interest while the student is in school. A Perkins loan may be forgiven if the student works in a high-need profession, such as education, nursing or law enforcement. And if a student can’t pay, the government requires the lender to take multiple steps before declaring the loan in default.

The others don’t have those perks. The interest rate is often higher and, for private student loans, a credit check or co-signer are usually required. Generally, payments must be made while the student is in school or interest accrues, and lenders can rule a borrower is in default after one missed payment.

Plus, if you default on a home equity loan or second mortgage, the risk is greater than any: you lose the family home.

After that: Check out the lenders’ incentives and compare.

Since lenders are virtually fighting over customers, they often reduce interest rates, waive fees or give discounts for on-time payment. They want your business and they’re willing to offer some sizable benefits to get it.

“Go ahead and shop around. Go online. It’s not difficult at all to find lenders that are offering student loans. See if you’re getting the best deal,” said Beth Bordowitz, general counsel for the Finance Authority of Maine, or FAME.

There is some controversy over which incentives actually save students more money over time, but most experts agree that each situation is unique and students should go with the incentives that best fit them.

Still can’t decide on a lender? When in doubt, experts say, ask around. Get recommendations from the college, from friends or family and from fellow college students. Consider the lender’s interest rate, customer service and reputation.

And be aware: Lenders routinely sell loans to other lenders, and those discounts for on-time payments may disappear when another lender takes over your note. Before signing, ask how likely it is that your loan will be sold. If a sale is possible, make sure – in writing – that your perks go with it.

How much?

In recent years, college costs have skyrocketed while grants have, well … not. For many students, loans are now a very large chunk of their financial aid package.

In 2000, for example, the University of Maine at Orono processed $1.5 million in private loans. This year, it did $11 million.

“It’s pretty scary,” said Dyer at Orono, where the average student graduates with $16,700 in federal loans alone. “It’s one of those necessary evils. There’s just not enough grant money to go around.”

Local experts agree that student loans are often necessary, but, they say, students sometimes take more loans than they need to and use the money for things other than school.

“We have a lot of conversations with people, ‘Do you really want to pay for today’s pizza with a loan you have to pay off for seven, eight years?'” said Keith DuBois, financial aid director for the University of Southern Maine.

So how do you decide how much you need?

First: Look realistically at expenses and shave off what you can. Students can’t do much about college costs, but they can control their living expenses. Eat in the cafeteria instead of getting take-out. Live with roommates. Leave the car at home with Mom and Dad if at all possible. The smaller your budget, the less money you’ll need.

Second: Find other ways to pay. Scholarships, grants, work-study and part-time jobs on or off campus all give students money or reduce costs, and not one penny has to be paid back. Take advantage of them first.

“If you have a $5,500 loan and a $3,500 work-study award that’s going unused, you really have to look at that,” DuBois said. “A student who’s willing to work 10, 12 hours a week, that can really take a bite out of a loan.”

After that: Try a payment plan. It may be difficult to come up with $5,000 for tuition all of the sudden, but it’s often easier when you spread it over the year.

Still need a loan? Talk to the college’s financial aid office about the amount it figures you’ll need. Then consider your future career. A doctor can easily pay off $20,000 in loans. A teacher will have more trouble. Experts say students should never borrow more money than they can reasonably pay back.

To design a budget, to calculate the maximum loan amount advised for your career and to figure out how much your loan payments will be, experts recommend www.finaid.org.

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