Why are Stafford rates so (comparatively) high?

[thebeatblitz]

Today I was talking to my roommate about his hunt for car loans. He ended up with a 6.4%/60mo with his 750 FICO.

Now, having never borrowed money to purchase a car before, I've always heard of the horror stories of 11+% rates on car loans. But 6.4%? WTF, that's lower than my government subsidized (lol?) Staffords even disregarding origination, etc. fees. I haven't done the math to see if the interest freeze on the subsidized and no capitalization will end up outweighing a lower rate, but there are available home equity lines at 2.99%...

My parents offered when I first started to take out a home equity line instead of going with Staffords, but I declined. They own the house outright and it appraises for 550k according to Zillow, with two recently sold houses (8/2008) for exactly that in my neighborhood.

Staffords for us are still locked in at 6.8% for the 2009-10 aid year, and all our old perks and benefits are probably gone in the near future.

What to do for the next 2 years?

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[GeraldMonroe]

Take more Staffords.

A car loan has collateral : the car itself. What's the collateral for a $200,000 loan if you don't finish school? That's why the interest rate is higher.

 

[thebeatblitz]

Well, the "collateral" is med school graduation rates and median salary of graduates. I'd say it's a safe bet compared to mortgages.

 

[Sol Rosenberg]

Well, the "collateral" is med school graduation rates and median salary of graduates. I'd say it's a safe bet compared to mortgages.

Stafford loans aren't specifically for medical students. The underwater basket weaving major gets them just the same.

Mortgages are also collateralized -- the house is the collateral.

 

[thebeatblitz]

Ultimately, collateral is immaterial to me; I don't care if I'm subsidizing the underwater basket weaving grad students. I just want to pay less. Thus, I want to know:

1. The probability of a home equity line changing from 2.9 to 7+% over the course of 8-10 years.

2. How often the rate changes. I'm assuming it's somehow tied to prime rate, but at what interval are adjustments applied?

Gerald is probably right though in just sticking with Staffords. Less headache; just momentarily annoyed.

 

[UserNameNeeded]

You're absolutely right. 6.8% for graduate/medical school loans is ridiculous. At the beginning of this school year, even my credit card interest rate was lower than my Stafford's. Where the hell is our stimulus?!

And as for collateral, we are enslaved to this federal loan debt. The only way we can get out of this debt is if we die or if we're so disabled that we wish we were dead! They'll garnish our wages, freeze our assets, whatever it takes to get this loan + 6.8% annualized interest back!!

 

[GeraldMonroe]

The reason is matters what risk the banks face is simple.

You can almost never violate basic economic realities. The bank is not going to offer you a loan at a better interest rate with comparable terms and conditions than the government. No bank will. The reason is that banks do have to make a profit, while the federal student loan program is subsidized by taxpayers (even so called 'unsubsidized' loans)

So, you could look for the next 6 months and call all your banker friends, but, odds are, you aren't going to get a better deal than Staffords. Private loans have a variable interest rate, set such that it will almost certainly be higher on average over the life of the loan than Staffords. While Staffords have various onerous terms, private loans are even worse.

 

[Sol Rosenberg]

Ultimately, collateral is immaterial to me; I don't care if I'm subsidizing the underwater basket weaving grad students. I just want to pay less. Thus, I want to know:

1. The probability of a home equity line changing from 2.9 to 7+% over the course of 8-10 years.

If I could tell you this, I wouldn't be borrowing money to pay for medical school. However, my own personal opinion is that it is highly probable (If you look back 10 years, home equity lines were above 7% at times)

2. How often the rate changes. I'm assuming it's somehow tied to prime rate, but at what interval are adjustments applied?

Highly variable among lenders. You need to read the fine print and shop around.

You're absolutely right. 6.8% for graduate/medical school loans is ridiculous. At the beginning of this school year, even my credit card interest rate was lower than my Stafford's. Where the hell is our stimulus?!

Unlikely that your normal credit card rate was lower than 6.8%. Most probably, you are talking about an introductory (teaser) interest rate.

And as for collateral, we are enslaved to this federal loan debt. The only way we can get out of this debt is if we die or if we're so disabled that we wish we were dead! They'll garnish our wages, freeze our assets, whatever it takes to get this loan + 6.8% annualized interest back!!

I don't think that they can garnish your wages, but I might be wrong. However, if you have assets and debt, why wouldn't you be paying back your loans with your assets? Honestly, I don't think that situation happens very often. Regardless, that's not collateral, anyways.

 

[Bleurberry]

I don't think that they can garnish your wages, but I might be wrong. However, if you have assets and debt, why wouldn't you be paying back your loans with your assets? Honestly, I don't think that situation happens very often. Regardless, that's not collateral, anyways.

It's not a crime to be wrong - I am more frequently than I'm right it seems - but in this case, yes, you're wrong. They garnish, baby!! They'll garnish the hell out of you, friend. 15% of your check, if I'm not mistaken (my turn to be wrong?).

 

[dragonfly99]

You and your parents need to read the fine print of the home equity line of credit. I think it is likely to go up (the interest) in the next few years. However, if they wanted to loan you a small amount to live off of, that you could pay back in the first couple of years of residency, perhaps that would be O.K.

 

[GeraldMonroe]

It's not a crime to be wrong - I am more frequently than I'm right it seems - but in this case, yes, you're wrong. They garnish, baby!! They'll garnish the hell out of you, friend. 15% of your check, if I'm not mistaken (my turn to be wrong?).

That's not the problem, though. The reason student loans are a risk for the bank/federal government is because a certain percentage of time, someone fails the academic program and never has any wages that could be garnished.

Medical school has a very low failure rate. Still, if even 2% of total medical graduates fail to ultimately become attendings making 6 figures a year, that would raise the interest rate several percentage points right there.

Sure, they'll still garnish the wages of someone making $50,000 a year. But if the total loan bill is $225k, then the debt would increase faster than 15% of the pay of someone making 50k would ever pay off.

 

[Bleurberry]

That's not the problem, though. The reason student loans are a risk for the bank/federal government is because a certain percentage of time, someone fails the academic program and never has any wages that could be garnished.

Medical school has a very low failure rate. Still, if even 2% of total medical graduates fail to ultimately become attendings making 6 figures a year, that would raise the interest rate several percentage points right there.

Sure, they'll still garnish the wages of someone making $50,000 a year. But if the total loan bill is $225k, then the debt would increase faster than 15% of the pay of someone making 50k would ever pay off.

Good point, and that's the risk everyone takes when they leverage their life, right? I guess it's more extreme in this example you share because stafford's aren't affected by bankruptcy.
Yea, good point.

 

[mrx2]

Another reason student loans are so high is because students have no collateral to put up if they default. With a mortgage you have the house, with a car loan a car, but with a student loan you can't give up your degree. Thus, the banks are taking a more sizable risk with students and this is reflected in the interest rate.

 

[gstrub]

What are you talking about? If you default, they take the $ right out of your paycheck. So unless you plan on working for your uncle's restaurant and getting paid under the table, you're screwed. You can't discharge student loans.

6.8 is insanity. They have to make the money back from the crap ass loans they gave to schoolbus drivers who bought $800K houses, so they take it out on the responsible people they know will borrow 200K at that rate. It blows.

 

[UserNameNeeded]

Unlikely that your normal credit card rate was lower than 6.8%. Most probably, you are talking about an introductory (teaser) interest rate.

No, I know the difference between regular rates and teaser/promotional/introductory rates. My normal, variable APR for purchases on my Chase card was prime + 1.99% which was less than 6% in interest last time I checked. My Bank of America card had a fixed rate of 9%. Credit cards are completely unsecured and, for the bank, the riskiest of loans. I could have charged over $50,000 on those two cards alone and there would have been very little the credit card companies could have done if I defaulted or declared bankruptcy (other than ruin my credit report). On the other hand, Federal (and, apparently, private) student loans cannot be discharged in bankruptcy-- they're a means of lifelong indentured servitude for all of us saps who need it to finance our education. The collateral for these loans is your body, your mind, your labor for life (or until you pay off these loans, which at 6.8% would take a lifetime to pay off, anyway).

I really wish contributors here would know what they're talking about before defending the status quo that's stacked against us as medical students. The bankers and the politicians don't need you to be rah-rahing on their behalf, they've got enough ammo as it is-- you're the one that's getting screwed, so defend yourself and your interests, first!

 

[dragonfly99]

username,
You must be from a wealthy family, or have had a really great-paying job, to get credit cards with interest rates of <7% that is not an intro/promotional rate. I have always had excellent credit (FICO score is in the 800's) and never got that good of a rate in recent years. There must be something special about your situation such that you were able to get a great credit card rate like that (which wasn't for balance transfers or an intro rate). That is not a normal credit card rate. Normal is more like 11-14% (for a good rate). Maybe you have a Platinum card or something? The more money you have, the better rate you get...it's like with home mortgages...put more down payment down, get a better mortgage rate.

 

[gstrub]

username,
You must be from a wealthy family, or have had a really great-paying job, to get credit cards with interest rates of <7% that is not an intro/promotional rate. I have always had excellent credit (FICO score is in the 800's) and never got that good of a rate in recent years. There must be something special about your situation such that you were able to get a great credit card rate like that (which wasn't for balance transfers or an intro rate). That is not a normal credit card rate. Normal is more like 11-14% (for a good rate). Maybe you have a Platinum card or something? The more money you have, the better rate you get...it's like with home mortgages...put more down payment down, get a better mortgage rate.

My wachovia card WAS prime +2.99, but since the prime dropped so low those a-holes made a minimum "prime" set at 6% (that happened this month and I am pissed). So I had a card at ~5.5% for a while.

 

[Sol Rosenberg]

I really wish contributors here would know what they're talking about before defending the status quo that's stacked against us as medical students. The bankers and the politicians don't need you to be rah-rahing on their behalf, they've got enough ammo as it is-- you're the one that's getting screwed, so defend yourself and your interests, first!

Yes, I'm being blunt here, but what the hell are you talking about? Nothing is stacked against us -- you know the deal before you take the loans. If you are so flush with credit as to have 50k in available credit on your credit cards at a lower interest rate than Stafford Loans, by all means, use that first. You don't seem to have a coherent point here -- you're just whining about getting screwed "by the man." Grow up.

Of course I'd like the interest rates to be lower -- hell, why not give us the money interest free, because, by-golly, we're medical students and we're ENTITLED to it. Bleech. I need to go vomit.

 

[dragonfly99]

rosenberg,
I think the banks could still make money charging med students <6.8% on student loans. The problem is that all Stafford loans are set at 6.8%, and this includes students studying things other than medicine. I'd be willing to bet that the default rate on medical students' loans is much lower than the default rate for the average college student or even the average grad student. The problem is that med students are thrown into the same pool with everyone else. Also, in the case of these federal loans, people with pretty crappy credit ratings are allowed to borrow money at the same rate of 6.8% interest as people with >> credit scores. This is good for those of you with a lousy credit rating, but perhaps not so great for those with a great credit rating.

 

[Sol Rosenberg]

rosenberg,
I think the banks could still make money charging med students <6.8% on student loans. The problem is that all Stafford loans are set at 6.8%, and this includes students studying things other than medicine. I'd be willing to bet that the default rate on medical students' loans is much lower than the default rate for the average college student or even the average grad student. The problem is that med students are thrown into the same pool with everyone else. Also, in the case of these federal loans, people with pretty crappy credit ratings are allowed to borrow money at the same rate of 6.8% interest as people with >> credit scores. This is good for those of you with a lousy credit rating, but perhaps not so great for those with a great credit rating.

Maybe so, but I'm still not seeing the point. We may be lower risk, so we are ENTITLED to lower interest rates?

 

[chessknt]

I think if you move away from the word entitled and instead look at it as a business move. You want to make loans to people who you know are going to pay you back, and in a timely manner. If med students are statistically more likely than anyone else in the stafford population to do this, you want to entice them with lower interest rates because their business is the best kind. Because the rates are dictated by the government, this does not happen. In a free market however, yes med students would probably be given lower rates because they are a profitable loan target.

 

[anoncurious]

So even though the stafford loan rates are 6.8%..is the consensus that this is still the best option for medical school loans? (assuming your credit card doesn't have <7%)

If not--would anyone mind sharing their loan strategies?

 

[TMP-SMX]

Yes Stafford loans are the best option out there besides obviously the small amount of Perkins at 5% and scholarships out there.

Credit cards are a terrible idea anyway. No deferment involved there plus the rate can go up at any time (unless you have some year long deal at no interest). Plus, it's rare to have credit limits at a high enough level to borrow any significant amount.

 

[Sol Rosenberg]

.

 

[Bleurberry]

So even though the stafford loan rates are 6.8%..is the consensus that this is still the best option for medical school loans? (assuming your credit card doesn't have <7%)

If not--would anyone mind sharing their loan strategies?

To me the death and disability clauses make it a little bit more valuable than just a regular private loan... so if I was offered one at 6.25 or 6%, lets say, I would have to debate it with myself awhile, and I'd probably still pick stafford in the end.

 

[abbaroodle]

For anyone who doesnt know, grad rates were locked in at 6.8% a few yrs ago. (Despite the fact that many of us signed on to med school with 2.8% variable staffords. Not to mention the 20/220 ruling that also changed on us. But they are allowed to change the rules.)

You need to write your senator and representative. These are federally set. While 6.8% felt a bit high a year or two ago, it feels ridiculous now!!!

As for collateral, these are federally backed loans. I die or drop out of school or cant get a job, the govt guarantees the loan and repays the bank. So the banks make a fortune for very very minimal risk. Its a boondoggle. That why you need to complain to your lawmakers!

 

[sumstorm]

As for collateral, these are federally backed loans. I die or drop out of school or cant get a job, the govt guarantees the loan and repays the bank. So the banks make a fortune for very very minimal risk. Its a boondoggle. That why you need to complain to your lawmakers!

Great! So who pays back the taxes that have to cover that risk?

Part of the issue is that while garnishment is possible, it isn't like your degree can be taken from you and sold to the highest bidder. Heck, even with houses we are finding that doens't work very well. I think another part of it is that there are long terms on these loans, which means the funds are at risk for a greater period of time. If you don't want to pay that interest rate for that long, pay off the loans sooner. I do agree that it is not a great system, but unless everyone wants to pay even higher taxes, or have less opportunities, it is what it is. I took 8 years off between undergrad and professional because I didn't have familial support for either, and moved to a state with the cheapest tuition possible. We all have to make tough decisions within the system, and right now, the system is hurting.

 

[Poitiers2]

Ultimately, collateral is immaterial to me; I don't care if I'm subsidizing the underwater basket weaving grad students. I just want to pay less. Thus, I want to know:

1. The probability of a home equity line changing from 2.9 to 7+% over the course of 8-10 years.

This current administration has been spending money at a torrid pace. Budget projections for our nation's deficits are completely out of check in regard to anything we've seen in history. And these aren't funny money projections that don't look at deficit as a percentage of the budget. Despite the pretty little name games we've been seeing and all the talks of "saving 100-million" (after spending trillions), we've not seen this kind of spending before.

We are due a nasty little bout of inflation, and the only way to prevent that is to burn money. And how do you burn money? By increasing interest rates; that's how. Believing these low interest rates are going to hang around is a fool's game--one I myself would be want to play.

The other things you'd need to consider:

1) You'd have to start making payments immediately on a home equity line. You don't have to with medical school loans. This alone should stop 99.9% of medical school students from going this route.

2) A private loan will not be subsidized through school as is the case with some Staffords ($8,400 per year) and Perkins loans.

One of the downsides to the availability of federal funds to students is that universities can get away with jacking up their tuition with very little real protest from students, which is something they have absolutely done. At many institutions, they've doubled in less than 10-years. And they can get away with because we have access to the loans to pay it off. Has the cost of educating really gone up that much? Or are expenses just being handed off to us?

I think the answer is obvious enough.

 

[womp]

6.8% is pretty ridiculous. But you could easily take some of your savings and invest it in the stock market right now. I'm pretty sure in 10 years, it will be a considerable sum (especially if inflation goes through the roof). If you pick the right stocks, you can easily double or ten-fold your starting amount by the time you get out of residency (or lose your shirt by a bankruptcy). Hell, I doubled my portfolio since last month. Seems like a much better plan than worrying about 0.25% of your interest. If you really got guts, you can invest the unused amount of your 6.8% Stafford loan and make a profit on the back of taxpayers. Banks don't have to be the only greedy ones.

 

[TMP-SMX]

6.8% is pretty ridiculous. But you could easily take some of your savings and invest it in the stock market right now. I'm pretty sure in 10 years, it will be a considerable sum (especially if inflation goes through the roof). If you pick the right stocks, you can easily double or ten-fold your starting amount by the time you get out of residency (or lose your shirt by a bankruptcy). Hell, I doubled my portfolio since last month. Seems like a much better plan than worrying about 0.25% of your interest. If you really got guts, you can invest the unused amount of your 6.8% Stafford loan and make a profit on the back of taxpayers. Banks don't have to be the only greedy ones.

Good luck with that. It's not a good idea though and unless your school is extremely generous with the CoA you shouldn't have that much money left over after the year is over to invest. Also keep in mind that after the "10 years" your loans have grown quite large. Any small change in interest you gained is unlikely to put a dent in the amount.

 

[Grif]

Let's point out the biggest reason why rates are fixed at 6.8-8.0%: most college students either don't have credit, don't have much credit or have bad credit.

I (sadly) am in the bad credit category due to forgetting to pay off small <$100 bills before they went to collections. Based on my work, I'd say that small bills falling through the cracks is fairly common, but those with good credit have a lot of positive marks to balance it out. Whereas I just have one small credit card and positive student loans to balance it out.

But a 750 is very uncommon and gets the best interest rates. So it might help to keep that in mind.

Also, Stafford loans have the best repayment policies. If you're out of work for a few months, you can defer it. That's not usually the case for credit cards or home equity loans. Even if you have the "insurance" on your credit cards, it can be difficult to get them to hold your balances.

 

[ChiDO]

But a 750 is very uncommon and gets the best interest rates. So it might help to keep that in mind.

My parents gave me a credit card at the age of 15 to start building credit (now 24). When I went to the store with my parents, they always had me buy groceries and gas. It really helps as I just check my credit score and it was 800+++. Guess I should thank my parents next time I see them!

 

[Aznfarmerboi]

My parents gave me a credit card at the age of 15 to start building credit (now 24). When I went to the store with my parents, they always had me buy groceries and gas. It really helps as I just check my credit score and it was 800+++. Guess I should thank my parents next time I see them!

Just keep in mind that credit score isnt a true credit score, and that credit scores varies. It is hard for somebody to get a good interest rate on a loan unless they already took out a major loan and started payment on it(car lease/finance, mortgage, student loans) etc.