In an era of exceptionally low interest rates, it’s annoying that the rates are so high on these federal loans. After all, you’re getting a very marketable degree, and the government is at low risk because it has greater power to collect on these loans than lenders have on most other kinds of loans.
But the government does what the government wants, and we all gotta deal. Many other MBAs will use these borrowing options, so don’t feel as though you are alone in feeling the burn. None of these federal loans penalizes you for prepayment, so if you make big bank on your summer internship or first job, you can take swipes at the federal debt loan without penalty. If you can’t get cheaper private loans, the federal loans are a sturdy backup.
To start figuring out your options, you first need to fill out the FAFSA, the Free Application for Federal Student Aid. (Unlike business school, you don’t have to pay to apply—the title guarantees it!) The FAFSA becomes available on Jan. 1st for the school year that begins the following fall. You must have completed your tax return for the year before you can submit the FAFSA, so you might have to wait until after April 15th. Check the due date; you will probably have to submit the FAFSA no later than July 15th prior to enrollment.
Your FAFSA should be processed in three to five business days, at which point you will receive an email Student Aid Report, detailing how much aid you are eligible and in what forms. The same form should show up in about seven to ten days via snail mail.
That July 15th date also applies to a number of different things, including the date by which you must file a Master Promissory Note if you are taking out any federal loans. These loans, if approved, also require that you undergo counseling. Not on-the-couch, talk-about-your-mother kind of counseling. But you do have to do an online workshop before they will cut you a check for tens of thousands of dollars.
The key to this process is to follow the suggestions and recommendations of your school. And definitely remember to pay attention to deadlines, since that’s what they are. Just like with that whole April 15th deal we American citizens have come to know (and not love), when the federal government wants something on a particular date, it means it.
If you are approved for loans, they will come in two chunks, one for each semester. As we’ve mentioned, this means that you will be starting the semester very, very flush and finishing it substantially less so. Be sure that you always have enough cash on hand if your loan checks are late or you incur unexpected expenses at the end of the semester.
Your loan amounts may also be adjusted if you decide to take on additional education-related expenses. Most schools are able to increase your federal loan amount to cover school-sponsored, educational trips, such as those to visit businesses in other countries. Trips to Rio for Carnival, though perhaps highly educational in a variety of ways, are not considered legitimate reasons to increase loans. Sorry.
PAYING THE PIPER.
While having money to pay your tuition is lovely, some day you will have to think about repaying those loans. As described before, most federal loans have a six-month grace period from the time that you complete your degree or drop below a half-time enrollment. After that, payments must be made. So, what does that look like?
Funny you should ask, The chart below is a simple model based on Wharton’s 2010-2011 budget of $84,000. To compute two years, we simply doubled all of the numbers, even though we know that the likelihood is that the second year will be more expensive than the first, given both increases in tuition and cost of living. (To insert your own numbers, use this model.)
Ten-Year Repayment Estimate
|$20,500 Direct Loan||$63,500 Direct PLUS||Sum of two loans||Doubled to cover 2 years|
|Adjusted Loan Balance||$21,970.84||$74,018.32||$95,989.16||$191,978.32|
|Loan Interest Rate||6.8%||7.9%||Effective 7.65%|
|Loan Term||10 years||10 years||10 years||10 years|
|Total Interest Paid||$9,840.94||$43,796.82||$53,637.75||$107,275.51|