College School Loans, A New Financial Aid Strategy?

In other words, colleges who opt in to this program will require their students to pay back some of the financial aid they would have been given for free, before.

It's a great deal for the colleges; they still get to offer 'financial aid' to their students, they will not have to bear any administrative costs, and they will get back a portion (not all of it) of this funding.

But how can this be sold to prospective students?

The school can truthfully say that:

• the interest rate on the loan is lower than federal interest rates for unsubsidized loans. (6.0% versus 6.8%)
• the amount loaned is low enough to not lead to excessive debt (from $1,000 to $5,000)
• the loan is subsidized while the student is in school (no interest accrues)
• student loan debt forgiveness can be earned for a portion of the loan (25%) with:
• a graduation benefit of 10% of the principal; and
• an on-time payment benefit of 15% of the principal

There is no question that this loan product is a better deal than most private student loans and even better than the government's Direct PLUS loans. But that doesn't change the fact that the only way you qualify for this loan (aside from having a cosigner with minimum FICO scores) is by being what would have been in prior years, a candidate for a grant or scholarship.

College School Loans as Financial Aid

(The "discount rate" represents all the ways that schools lower their 'sticker price' for students.)

So, the argument goes that these rates are too high for schools to maintain without budget cuts. But the discount rate was pretty flat from 2002 to 2007. And this report shows that in 2010, private schools' endowments made a pretty good comeback from their disastrous 2009 fiscal year. (The net return on endowments averaged 11.9% in 2010.)

A better argument might be that schools could use the money they save by switching to college school loans, for improvements that benefited all their students (like a new athletic center, for instance) without raising their tuition.

Student Options?

1. Call the financial aid office and ask, before you apply. If the answer is "yes", you can decide if this is all right for you, or if you want to look for a comparable school that has not replaced some of their grant and scholarship money with institutional loans.
2. If you have already applied to colleges, look carefully at the award letters they send you. Grants and loans for college will all be grouped together. Go down the list and see if the SAGE Tuition Loan Program is one of your awards.