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Suze Orman Money Matters

Suze Orman, Money Matters

Playing the Student Loan Game to Win

by Suze Orman

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Posted on Friday, May 18, 2007, 12:00AM

You're probably aware of the recent disclosures that some college financial aid officers accepted incentives from private lenders in return for getting onto the schools' preferred-lender lists.

In light of this scandal, I want to discuss how college-bound young people and their parents can best navigate the maddening student loan game.

A Student Loan Primer

When seeking financial aid, look to Uncle Sam before you resort to private loans. Federal student loans typically charge lower interest rates and aren't laden with as many add-on fees as private loans.

The big federal loan programs are Perkins, Stafford, and PLUS (for parents of students as well as graduate students). You can get a federal loan either through the government's Direct Loan Program or from a third-party lender that doles out these loans.

Going the federal route can be a huge advantage when it's time to repay the loans. With a federal loan (direct or third-party), you lock in a fixed interest rate. The current maximum fixed rate for Stafford loans issued after July 1, 2006, is 6.8 percent. PLUS loans have a maximum 8.5 percent fixed rate.

Loans from private banks and lenders are variable, which means the interest charged on the loan will be reset periodically. Just like homeowners being squeezed by adjustable rate mortgage resets, anyone with a private student loan faces the risk that their payments will rise in the future when interest rates climb.

(For more information on federal aid, go to the Federal Student Aid web site.)

Loan Shopping Checklist

The recent loan scandal reminds us of a basic but often ignored rule of personal finance: shop around for the best deal, even when -- or especially when -- a college loan office serves up its preferred list. It may well turn out that the best deal comes from the first lender on a list, but you at least owe it to yourself to confirm that a preferred lender actually offers you a competitive deal.

Mark Kantrowitz, the publisher of a terrific web site full of free information on student loans called FinAid, shared some other tips with me:

• Don't settle for the first name on the preferred list.

Check out a few of the lenders on the list and comparison shop.

• Look beyond the list.

It's preferred, not required. Even if you receive loan paperwork from a financial aid office with the name of a lender filled in, understand that's just a suggestion -- you don't have to use that lender. For a list of the most popular lenders, go to FinAid and do a search for "lenders."

• Ask about interest rate discounts and fee rebates.

It's important to understand that the 6.8 percent interest rate on Stafford loans is simply the maximum that can be charged. Lenders hungry for your business can opt to offer you a lower rate, often as an incentive deal.

For example, if you agree to have your payments automatically deducted from a bank account you can often get 0.25 percent or more shaved off your interest rate. But be careful here: Read the fine print to see how hard it'll be to maintain a good deal; sometimes the bar is set so high that it's tough to actually qualify -- and keep -- an advertised good rate. (FinAid includes articles and calculators that can help you compare various loan and discount offers.)

And be aware that many lenders have two sets of rates -- one for when you're in school, and another (higher) one for when you're out of school and in the mandatory repayment period. If you don't intend to start repaying until you're done with school, then it's the second rate that really matters.

Give Your Kids Credit

If you do go the private route, your credit score is going to be a big determinant in the rate you're offered. The higher the credit score, the better the rate. This is just another reason why it's so smart for parents to make sure their kids start building a credit history when they turn 15 or so.

If you're a parent and have a FICO credit score of 720 or better, consider adding your child to an existing credit card as an authorized user when they're in their early teens. They'll automatically start to "inherit" your good credit score, but you're still in control of the card.

Then, when it's time to shop for college loans for them, they'll qualify for the best possible rate. Besides, this also gives you an opportunity to teach your kids good credit/debt management skills -- a topic that's tragically missing from high school and college curriculums.

I can't tell you how many young adults tell me they wish they'd learned the ins and outs of credit cards before they went off to college. Instead, they learn it the painful way -- by running up $3,000-plus credit card balances they have no way of paying off quickly.

A Secure Option

If your FICO score isn't in the 720 or above range, don't add your kids to your card as authorized users. Instead, get them their own secured credit card with a low credit limit. (Secured means you have to deposit the amount of the credit limit upfront.)

Choose a secured card that lets you confirm that your child's payments on the card will be reported to at least one of the three major credit bureaus. This is a fairly safe way for him or her to start building a credit history without giving them too much credit.

Ideally, they can make the initial deposit on the secured card and all the monthly payments with money they earn on their own. Credit unions often offer the best secured card deals; Bankrate.com has a useful list of available secured credit cards.

While state and federal lawmakers are beginning to jump on the reform bandwagon and proposing ways to clean up the student loan business, students and parents borrowing money need to protect themselves right now. That means carefully comparing offers from multiple lenders.

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93 Comments

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  • Yahoo! Finance User - Friday, May 25, 2007, 3:47PM ET  Report Abuse

    • Overall: 1/5

    I love Credit, Let's all get in debt it is awesome. NOT, just work at McDonalds you will all be fine, better yet Wal-mart, i heard they pay for school.

  • Yahoo! Finance User - Friday, May 25, 2007, 2:00PM ET  Report Abuse

    • Overall: 4/5

    the info she has been providing are a BIG help ! it states that the choices are there, but it is being critical with what is offered that makes a big point....to those of us learning from her articles, THANK YOU

  • Yahoo! Finance User - Thursday, May 24, 2007, 1:50PM ET  Report Abuse

    • Overall: 5/5

    This article is very informative for high school students and parents. Suze Orman helps to protect many people with many useful financial informations. For me, any information is good even if I already know, it does not hurt to refresh my memory. If the information do not apply to me, it is still good to know for future reference. I might help someone who did not read the article with the info. Anyone has the option not to read her articles. However, the comment "Get her off of yahoo", in my opinion, is out of line

  • dave d - Thursday, May 24, 2007, 12:31PM ET  Report Abuse

    • Overall: 1/5

    Yawn, she has reprinted a brochure found in several banks. What a bore.

  • Samantha - Wednesday, May 23, 2007, 11:36AM ET  Report Abuse

    • Overall: 3/5

    I am going to grad school this fall and NO ONE can give me good advice. My bosses all went to school when tuition/room & board were considerably less money (ie 3 yrs ago). My friends all went to school when the interest rates were 1/3 what they are today (i.e. pre-July 2006 huge rate increase). REALITY: Tuition, books and boarding have increased 10% year-over-year this last decade. REALITY: Federal and Private loan interest rates have increased from 2-3% to 6.8%-9% in July 2006. and FYI Pelosi's plan does nothing for grad students nor rising college costs. REALITY: NO ONE except new entering students have ver faced this LARGE A DEBT LOAD at this HIGH AN INTEREST RATE. It will be interesting to see how this all pans out. Maybe we'll all have to go be investment bankers so we don't end up paying 3x what we withdrew due to the high interest rates (that the Feds and Banks charge) and ridiculously high tuition, books, and board (that the colleges charge). Two-fold problem here in 2007.

  • Denise F - Tuesday, May 22, 2007, 10:04PM ET  Report Abuse

    • Overall: 3/5

    Any information is good no matter who it comes from. Thanks Suzie

  • Yahoo! Finance User - Tuesday, May 22, 2007, 8:26PM ET  Report Abuse

    • Overall: 1/5

    Absolutely ridiculous that Suze Orman can get paid for telling people stuff they should already know. Makes me sick to even hear about this lady, she isn't even a good financial advisor, she's a Womens Rights' activist. Get her off of yahoo before we all switch our homepages to msn.com

  • Yahoo! Finance User - Tuesday, May 22, 2007, 8:07PM ET  Report Abuse

    • Overall: 1/5

    Unfortunately Yahoo chose a Spin Doctor to give meaningless advice. Come on Yahoo you can do better ...Suze Orman...PALEASE...this is a talking bobble head...re-run the article which is a great idea...but get someone who has inteligent information to share !!

  • Yahoo! Finance User - Tuesday, May 22, 2007, 7:42PM ET  Report Abuse

    • Overall: 1/5

    I can't believe she is getting paid to spew this crap.

  • Jason - Tuesday, May 22, 2007, 7:31PM ET  Report Abuse

    • Overall: 5/5

    I think this article is great especially for high school students. I wish someone would have told me this stuff before I got stuck with these 400 dollar payments i can't make. now i wish i would have gone to a cheaper school as well and still have the same degree.

  • Debt - Tuesday, May 22, 2007, 7:21PM ET  Report Abuse

    • Overall: 4/5

    I agree with the information in the article. I currently work for a student loan lender. I see the pros and cons everyday with talking student loans either federal or private. I think that all high school students should be more educated about the student loan process. The decision for taking out these loans should not be taken lightly. The students taken out loans left and right and do not consider the consequences when they have to withdraw from school or get a degree that does not provide them a sufficient salary to cover their student loan debt. Students need to consider what they really want in their future because they could quite possibly be paying on their student loans for thirty years. Consider going to a community college for the first couple to cut down costs . While students loans have helped millions of students to pursue their careers, there is a definite dark side to the student loan industry. The middle class community seems the feel the burden of this. They don’t qualify for enough federal aid to cover tuition and therefore resort to private loans with higher interest rates. Overall I believe that whole system needs to be improved. The Department of Education is raising interest rates on federal loans every year for the past three years. This is making it harder for students to pay down their loans. Private loans are a disaster. I receive phone calls from frustrating students saying that they didn’t know their interest rate was variable and they can’t make their payments. I am instructed to remind them that they signed a promissory note for these loan and agreed to these terms. My suggestion is to read the fine print and know what you are signing. Ask questions about the possibly to postpone payments in case of emergencies or unemployment. Some private loans require a fee defer the payment (keep in mind the interest still accrues and capitalizes) while other private loans have no postponement options. These loans are great because they cover what federal loans wont but over all you will probably be paying back twice as much as you originally borrowed and they leave no room for times of financial hardship. I would consider all these factors before taken out a loan. Students loan lenders are also at fault for not educating their borrowers and leaving it up to the schools financial aid office. I would much rather be at work helping customers them reminding them of what they signed and that there is noting I can do for them. Read the documents and ask a lot of questions. It's your debt and your credit.

  • MatthewF - Tuesday, May 22, 2007, 7:05PM ET  Report Abuse

    • Overall: 1/5

    Not yahoo! or Suze Orman's best work. There's nothing here! Shop around for the lowest interest rate? AND...

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:58PM ET  Report Abuse

    • Overall: 2/5

    The information provided is more like common sense, I worked in the business and it's sad that people don't do the research before they sign papers. It's also sad that we hand out fed. loans to parents that can't even speak english 1/4 the time. Where's mom and dad to make the payment on a plus loan they co-signed..."Oh, they went back to mexico" Nice. Something that's always left out in these articles about student loans...check into your deferment and forbearance options...when you're having a financial problem, these can help postpone your payments...but thousands, (literally,) of people sometimes end up defaulting on their loan before they find out they can use forbearance or deferments. It's worse to default than rack up some interest postponing payments. Deferments are government entitlements on federal loans, so if you qualify, you can't be denied the option. And if you can't fill out the paperwork, always call your lender for help. As for the forbearance option...different lender's offer you different amounts of forb. time...on average it's about 36 months...some lender's give up to 60, and some lenders give more depending on your situation. And most lenders will grant you this by phone. And if you use up your forb time, and then consolidate with a different lender, you get even more forb. time with the new lender. If you know you'll be dead before you ever pay off your loans, you might as well take advantage.

  • amanda v - Tuesday, May 22, 2007, 6:52PM ET  Report Abuse

    • Overall: 1/5

    Federal Student Loans are variable interest rates until you consolidate them which locks you in no matter if the rate goes up or down. However student loan interest rates wont ever exceed 8.25% But the maximums you can borrow for Federal student aid isn't that high so you'll have to find some way to help pay for college.

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:45PM ET  Report Abuse

    • Overall: 1/5

    I'd like to see her 1099's and I would not be surprised at all to see several lending institutions in the stack. This piece is ridiculous. There's nothing here. This part, however, is genius: get your kid plastic. Gotta love that one.

  • Joseph - Tuesday, May 22, 2007, 6:43PM ET  Report Abuse

    • Overall: 3/5

    Some of the info in the article is good. One person wrote that Ms Orman gets her info from the "Enemy". That seems to be a rather extreme statement by your subscriber "Whatnowwwww". Student loans are a alternative way for students to pay for their education when they don't qualify for grants and/or scholarships or their family does not have the means to pay or the student does not want to burden their family with the additional expense.. Student loans do however take some time to payoff and to offer very low payments when repaying however that is the idea of the student loan is to give the graduate the ability to get into the work arena and not be strapped with a huge pmt upon graduation. These loans are simple interest loans and additional payments may be made directly to the principal which in turn will pay the debt down quicker. Imagine how many students would be left behind without this alternative way of paying for their education. I had student loans and did my research and took the responsibilty that comes with them and have paid them off. Good thing they were available or I would not be where I am today. You do need to do your research and find what works for you and offer the biggest bang for your borrowed buck.

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:35PM ET  Report Abuse

    • Overall: 1/5

    Suze Orman is a joke.... a media-blitzed oprah junkie. All she does is take money and spit out nothing-info. If you want a true financial genius that preaches nothing but common sense, then read Dave Ramsey's "Total Money Makeover". If you will ever notice, anyone who has ever read it screams its praise. Credit Cards are for fools... those who think they are "beating the system" are playing with snakes.... and snakes bite. The banks and credit card companies didnt build those multi-million dollar buildings off of NOT taking you money..... just something to think about. And to the 20 year old, with no debt, but 4 credit cards... when you say you NEED a credit card in this day and age, you are the proof of brand/child marketing that the credit cards have spent BILLIONS on. Shopping Barbie with her MASTERCARD (think Matel got paid for that?) If you know mortgages, you can get the exact same rate as a PERFECT fico score if you use a lender that has manual underwriting.... real people doing the mortgage, not some monkey at a bank that hits a button. Take your head out of the sand of what the credit card companies are SPEWING at you. Until this culture learns to say NO.... there will always be stress (#1 reason- money), bankruptcies, divorces (#1 reason- money and money fights), and DEBT DEBT DEBT DEBT DEBT. Go to half price books and trade in your Orman book... Dave Ramsey will change your life.

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:34PM ET  Report Abuse

    • Overall: 1/5

    There's nothing here. For Yahoo to headline a piece of garbage like this is pathetic. Here's the best advice out there -- If your parents can't / won't provide for your college education, start saving every friggin' penny you can get your hands on. Take a year off between high school and college, work your tail off, and put every cent you make toward tuition. Then, while in college, get a part-time job working 15 or so hours a week as a work study -- or whatever. Put every penny you make toward your college education. In short, just work your rear-end off. Life is hard but getting consumed by student loans is like walking through fire. Live like a pauper if you have to but do whatever you must in order not to strap yourself with thousands of dollars of debt by the time you're out of college. Strapping yourself to thousands of dollars of debt is an exceptionally sad way to begin your adult life. Also, after college look for a company that might have a college-debt retirement program. They're still out there but you usually have to ask. Finally, I'm betting Suze has a sweetheart deal with Chase Bank (or similar). I wouldn't be surprised if she simply gets a monthly check while they write this drivel and slap her name on it. Her advice reads something like this: 1) Get the lowest, preferably fixed, interest rate you can (wow! there's a great idea.). 2) Get your kids credit cards. hmmmm. Fabulous advice. Suze, I now see why you get paid the big bucks.

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:25PM ET  Report Abuse

    • Overall: 4/5

    I think that suze did a good job with general information directed towards students that need to take a loan out for college. There alot of students that find themselves having to take debt to get their degree. It is something that should be taken seriously because you are stuck with your decision for years to come. I work directly in the loans dept of a FA office and have given several workshops on the subject. Thinking about the after effect before hand is a good idea. Another thing to remember is that private loans and federal loans can not be consolidated together. When the student graduates they will be making two loan payments. If they are not careful about what they take out now it may be a huge burden later. There are loan repayment calculators on the web in just about every lending site. It is a good idea to estimate what you think you will borrow through out your education, and take a look at what the repayment is going to look like. It may inspire you to dig a little deeper or work that second summer job.

  • Susannah - Tuesday, May 22, 2007, 6:21PM ET  Report Abuse

    • Overall: 3/5

    I think the article only provides very basic information, and only begins to scrap the surface of the federal student loan industry. I work within the Federal Student Loan industry, and unfortunately student loans can be extremely complex. My advice would be to shop around for the best deal, there are many smaller not for profit organizations that truly desire to help the student. In addition I would contact the customer support department of prospective lenders, and ask questions. If they are helpful and knowledgeable now they will be in the future. They should also be able to provide you with information on the borrower benefits program they offer. These benefits should include at least a reduced interest rate for on time payments, as well as possible interest rate reductions for using direct debit. If you decide to consolidate your loans upon graduation consolidation can truly help you gain the best bang for your buck, so do your homework!!

  • Robert - Tuesday, May 22, 2007, 6:15PM ET  Report Abuse

    • Overall: 3/5

    As a white male born to a middle class American family I didn't qualify for Stafford Loans. I find it disappointing that PLUS loans are granted at a higher interest rate than standard student loans. My story is I spent 10 years working through college as a part-time student until I was old enough to qualify to Stafford Loans being as I had no financial support from my family. I'm surprised nothing has legally challenged this paradigm...so much for equal opportunity.

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:15PM ET  Report Abuse

    • Overall: 4/5

    As an older student (45 ) and gainfully employed, the student loan packages offered me were affordable and fair. You cannot fault the system if people make bad choices. In all fairness, if you are just making 9-10 dollars an hour, why not substitute teach for a while until you can get that job that pays well. Research jobs before you declare a major and find out what credentials other people in an interesting business or industry need first. Another problem with many students is that they don't network the job market until they hit the street after graduation. Research real life, not just books. The bottom line is that it is hard to get a good job without an education -- but just getting a piece of paper does not guarantee you a good job. Happy hunting!

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:12PM ET  Report Abuse

    • Overall: 2/5

    Student loans are fine and all, but remember at the end of the day you are totally responsible for repayment of the loan. Student loans are not dischargeable in bankruptcy, anymore. These debts remain with you until repaid. If you or your child is a prodigy and have the potential to finish a law or medical degree but doing so requires a large amount of student loan debt, this may be an option. But for those that are not 100% dedicated in their studies towards a particular career and have accumulated significant student load debt will find their futures ruined as a result of acquiring so much debt. While college provides some of the best opportunities to have a comfortable life, the decision to attend college (without a savings) by utilizing the federal student load programs is a major decision and not to be taken lightly.

  • Jen - Tuesday, May 22, 2007, 6:12PM ET  Report Abuse

    • Overall: 3/5

    The information is correct in reference to federal loans. These are good reminders.

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:10PM ET  Report Abuse

    • Overall: 3/5

    To all those people posting comment about how student loands are never worth it, I think you may need to re-evaluate the degree you're getting and the jobs you're looking for. As a college graduate, you should not be looking at jobs paying 7-10 dollars an hour. I was making that at McDonald's before finishing high school. If you're majoring in something that doesn't have a real job attached to it(i.e. the only thing you can do with it is teach others how to get the same degree as you) then you should not be taking out student loans. But if you're majoring in a Business/Medical/Computer Science field, you can almost guarantee that the result of your investment will be a positive one. Student loans are a horrible idea for people who are just gettign a degree under the assumption that any degree is better than no degree. While that is true to some extent, it is not worth enough to put yourself 60k in debt. People need to realize that college is an investment. If your salary will be 20% higher a year as a result of having a degree, then even after the 6% interest you're coming out ahead. Take the 14% of your salary(Or whatever rate it really is) and factor that out to determine how long till you repay your loan. If you think you're going to be dead by then... DON'T TAKE OUT THE LOAN! The problem today is too many people think they need a degree, so they get some pointless degree that will never increase their salary. Pick a good major or decide that college isn't right for your career. Either way can work.

  • boogie - Tuesday, May 22, 2007, 6:09PM ET  Report Abuse

    • Overall: 3/5

    Oh, by the way. It's probably somewhat my fault but I was ignorant to it. My school never informed me of the pros and cons to student loan debt. Living off of peanuts and barely being able to put gas in my car made signing for student loans so much more enticing...wow, what a waste.

  • Yahoo! Finance User - Tuesday, May 22, 2007, 6:07PM ET  Report Abuse

    • Overall: 1/5

    Interesting when you go to the hyperlink website and click on loans you see a sponsor--citibank. Seems to me that this website "recommends" citibank. Upon research, it's not the most competitive deal. Thus, one has to wonder why this sponsor is out there.

  • Brett M - Tuesday, May 22, 2007, 6:07PM ET  Report Abuse

    • Overall: 4/5

    Ok...nothing wrong with student loans just don't take more than you need. If you can't pay it back - you will always have the education... Better to spend money on that than run up the credit cards! The goal is not to go bankrupt or to be dishonest but really to spend the credit well and get that education. You will have the degree forever no matter what happens to you! Go to a real good school and - Get the degree!

  • jason p - Tuesday, May 22, 2007, 6:03PM ET  Report Abuse

    • Overall: 1/5

    You would think that if somone were writing a headline story on the home page of the website, would have at least some idea of what they were talking about. After reading suze's article, it is apparent that she does in fact- need to get her facts straight. Most of the information she gave regarding federal loans is not only inaccurate, but also misleading. Art J is on the money. Maybe yahoo should recruit him.

  • HiddenLight - Tuesday, May 22, 2007, 6:00PM ET  Report Abuse

    • Overall: 3/5

    Most of us from Generations X & Y will be working for the rest of our lives with the way things are looking now anyway. We can't look forward to a great retirement plan in our future! So why not be college educated and work instead of doing so as a lunch aide? I would rather stack up loans (which I have plenty of) and graduate as an educated young adult than work the rest of my life anyway. I live in Michigan so the economy is really awful...all I have to rely upon is my college education. I don't care if I get another $250,000 in loans to pay off because I would rather be educated and working a job paying me $50,000 a year than a job paying me barely $20,00 a year. Yes, debt is debt but this debt can be paid in more than one way and is taken so that one can better oneself. Thank about that.

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