Categories
Taxes

What Investors Should Know About Commercial Real Estate Loans

Your commercial real estate transaction does not close unless the loan is approved. You can also improve the cash flow if the interest rate for the loan is low. So the more you know about commercial loans, the better decision you can make about your commercial real estate investment.

Loan Qualification: Most of you have applied for a residential loan and are familiar with the process. You provide to the lender with:

  • W2’s and/or tax returns so it can verify your income,
  • Bank and/or brokerage statements so it can verify your liquid assets and down payment.

In general the more personal income you make the higher loan amount you qualify. You could even borrow 95% of the purchase price for 1-unit principal residence with sufficient income.

For commercial loan, the loan amount a lender will approve is based primarily on the net operating income (NOI) of the property, not your personal income. This is the fundamental difference between residential and commercial loan qualification. Therefore, if you buy a vacant commercial building, you will have difficult time getting the loan approved since the property has no rental income. However, if you

  • Occupy at least 51% of the space for your business; you can apply for SBA loan.
  • Have sufficient income from another commercial property used as cross collateral; there are lenders out there that want your business.

Loan to Value: Commercial lenders tend to be more conservative about the loan to value (LTV). Lenders will only loan you the amount such that the ratio of NOI to mortgage payment for the loan, called Debt Coverage Ratio (DCR) or Debt Service Ratio (DSR) must be at least 1.25 or higher. This means the NOI has to be at least 25% more than the mortgage payment. In other words, the loan amount is such that you will have positive cash flow equal to at least 25% of the mortgage payment. So, if you purchase a property with low cap rate, you will need a higher down payment to meet lender’s DCR. For example, properties in California with 5% cap often require 50% or more down payment. To make the matter more complicated, some lenders advertise 1.25% DCR but underwrite the loan with interest rate 2%-3% higher than the note rate! Since the financial meltdown of 2007, most commercial lenders prefer keeping the LTV at 70% or less. Higher LTV is possible for high-quality properties with strong national tenants, e.g. Walgreens or in the areas that the lenders are very familiar and comfortable with. However, you will rarely see higher than 75% LTV. Commercial real estate is intended for the elite group of investors so there is no such thing as 100% financing.

Interest Rate: The interest for commercial is dependent on various factors below:

  • Loan term: The rate is lower for the shorter 5 years fixed rate than the 10 years fixed rate. It’s very hard to get a loan with fixed rate longer than 10 years unless the property has a long term lease with a credit tenant, e.g. Walgreens. Most lenders offer 20-25 years amortization. Some credit unions use 30 years amortization. For single-tenant properties, lenders may use 10-15 years amortization.
  • Tenant credit rating: The interest rate for a drugstore occupied by Walgreens is much lower than one with HyVee Drugstore since Walgreens has much stronger S&P rating.
  • Property type: The interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it’s much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lenders, everyone needs a roof over their head no matter what, so the rate is lower for apartments.
  • Age of the property: Loan for newer property will have lower rate than dilapidated one. To the lender the risk factor for older properties is higher, so the rate is higher.
  • Area: If the property is located in a growing area like Dallas suburbs, the rate would be lower than a similar property located in the rural declining area of Arkansas. This is another reason you should study demographic data of the area before you buy the property.
  • Your credit history: Similarly to residential loan, if you have good credit history, your rate is lower.
  • Loan amount: In residential mortgage, if you borrow less money, i.e. a conforming loan, your interest rate will be the lowest. When you borrow more money, i.e. a jumbo or super jumbo loan, your rate will be higher. In commercial mortgage, the reverse is true! If you borrow $200K loan your rate could be 8%. But if you borrow $3M, your rate could be only 4.5%! In a sense, it’s like getting a lower price when you buy an item in large volume at Costco.
  • The lenders you apply the loan with. Each lender has its own rates. There could be a significant difference in the interest rates. Hard money lenders often have highest interest rates. So you should work with someone specialized on commercial loans to shop for the lowest rates.
  • Prepayment flexibility: If you want to have the flexibility to prepay the loan then you will have to pay a higher rate. If you agree to keep the loan for the term of the loan, then the rate is lower.

Commercial loans are exempt from various consumers’ laws intended for residential loans. Some lenders use “360/365” rule in computing mortgage interest. With this rule, the interest rate is based on 360 days a year. However, the interest payment is based on 365 days in a year. In other words, you have to pay an extra 5 days (6 days on leap year) of interest per year. As a result, your actual interest payment is higher than the rate stated in the loan documents because the effective interest rate is higher.

Prepayment Penalty: In residential loan, prepayment penalty is often an option. If you don’t want it, you pay higher rate. Most commercial loans have prepayment penalty. The prepayment penalty amount is reduced or stepped down every year. For example on a 5 year fixed rate loan, the prepayment penalty for the first year is 5% of the balance. It’s reduced to 4% and then 3%, 2%, 1% for 2nd, 3rd, 4th and 5th year respectively. For conduit loans, the prepayment amount is huge as you have to pay for the interest between the note rate and the equivalent US Treasure rate for the whole loan balance for the remaining term of the loan. This prepayment penalty is called defeasance or yield maintenance.

Loan Fees: In residential mortgage, lenders may offer you a “no points, no costs” option if you pay a higher rate. Such an option is not available in commercial mortgage. You will have to pay between ½ to 1 point loan fee, appraisal cost, environment assessment report fee, and processing/underwriting fee. A lender normally issues to the borrower a Letter of Interest (LOI) if it is interested in lending you the money. The LOI states the loan amount, interest rate, loan term and fees. Once the borrower pays about $5000 for loan application fees for third party reports (appraisal, phase I, survey), the lender starts underwriting the loan. It orders its own appraisal using its own pre-approved MAI (Member of Appraisal Institute) appraisers. If the lender approves the loan and you do not accept it, then the lender keeps all the fees.

Loan Types: While there are various commercial loan types, most investors often encounter 3 main types of commercial loans:

1. Small Business Administration or SBA loan. This is a government guaranteed loan intended for owner-occupied properties. When you occupy 51% or more of the space in the building (gas station or hotel is considered an owner-occupied property), you are qualified for this program. The key benefit is you can borrow up to 90% of purchased price.

2. Portfolio loan. This is the type of commercial loans in which the lenders use their own money and keep on its balance sheet until maturity. Lenders are often more flexible because it’s their money. For example East West Bank, US Bank and some life insurance companies are portfolio lenders. These lenders require the borrowers to provide a personal guaranty for the payment of the loans. And thus these loans are recourse loans.

3. Conduit loan or CMBS (Commercial Mortgage-Backed Securities) loan. This was a very popular commercial loan program prior to the 2007 recession where its market size was over $225 Billion in 2007. It was down to just a few Billion in 2009 and is making a comeback with issuance of almost $100 Billion in 2015. Many individual loans of different sizes, at different locations are pooled together, rated from Triple-A (Investment grade) to B (Junk) and then sold to investors over the world as bonds. Therefore it’s not possible to prepay the loan because it’s already part of a bond. These are the characteristics of conduit loans:

  • The rate is often lower. It is often around 1.2% over the 5 or 10 year US Treasury rates compared to 1.85-3% over the 5 or 10 year US Treasury rates for portfolio loan. Some CMBS loans have interest only payments. Since the rate is lower and borrowers are required to pay interest only, the LTV can be over 75%. Low rates and high LTV are the key advantage of conduit loan.
  • Conduit lenders only consider big loan amount, e.g. at least $2M.
  • Lenders require borrower to form a single-asset entity, e.g. Limited Liability Company (LLC) to take title to the property. This is intended to shield the property from other the borrower’s liabilities.
  • The loans are non-recourse which means the property is the only collateral for the loan and the borrowers do not have to sign personal guaranty. And so these loans are popular among investment firms, REIT (Real Estate Investment Trust), TIC (Tenants in Common) companies that invest in commercial real estate using funds pooled from various investors.
  • If the borrower later wants to sell the property before the loan matures, the new buyer must assume the loan as the seller cannot pay off the loan. This makes it harder to sell the property because the buyer needs to come up with a significant amount of cash for the difference between the purchase price and loan balance. Furthermore, the lender/loan servicer could reject the loan assumption application for various reasons as there are no strong incentives for it to do so. The loan servicer can also impose new conditions to loan assumption approval, e.g. increase reserve amount by several hundred thousand dollars. If you are a 1031-exchange buyer, you may want to think twice about buying a property with loan assumptions. Should the lender reject your loan assumption application, you may end up not qualifying for the 1031 exchange and be liable for paying capital gain. This is the hidden cost of conduit loan.
  • Even when you are allowed to prepay the loan, it costs an arm and a leg if you want to prepay the loan. The prepayment penalty is often called Defeasance or Yield Maintenance. Basically you have to pay the difference in interest between the note rate of your loan and the applicable US Treasury rate for the remaining years of the loan! This amount is often so high that the seller normally requires the buyer to assume the loan. You can compute the defeasance from www.defeasewithease.com website. Besides the defeasance, you also have to pay 1% loan assumption fee. This is another hidden cost of conduit loan.

Conduit loan may be the loan for you if you intend to keep the loan for the life of the loan that you agree to at the beginning. Otherwise it could be very costly due to its payoff inflexibility.

Lenders Coverage Area: Commercial lenders would do business in areas they are familiar with or have local offices. For example East West Bank will only consider properties in California. Many commercial lenders don’t lend to out-of-state investors.

Lenders Coverage Property Types: Most commercial lenders would only consider certain types of properties they are familiar with. For example Chase would do apartments and owner-occupied office buildings but not retail properties or gas stations. Westford Financial specializes on church financing. Comerica concentrates on owner-occupied properties.

Lenders Escrow Accounts: Most lenders require borrowers to pay 1/12 of property taxes each month. Some lenders require borrowers to have repairs and/or TI (Tenants Improvement) reserve account to make sure the borrowers have sufficient funds to cover major repairs or leasing expenses should existing tenants not renew the leases.

Conclusion: Commercial loans are a lot more complex and difficult to obtain with loan approvals more unpredictable than residential loans. As an investor, it is in your best interest to employ a professional commercial loan broker to assist with your commercial loan needs. By doing so, you will vastly improve your chances of paying lower interest rates, avoid potential pitfalls and improve your chance on getting the loan approved.

Categories
Taxes

The Advantages and Disadvantages of Tax Refund Anticipation Loans

Tax refund anticipation loans provide a way of gaining access to the funds due from a tax refund faster than if you were to wait for the IRS to process the refund. In essence, they are short-term loans against the anticipated income from a tax refund.

Whether this type of loan will be suitable for you or not, will depend on your personal circumstances. While a tax refund anticipation loan will undoubtedly give you virtually instant access to the money that you are owed by the government, there are also some disadvantages that you should bear in mind too.

The advantages

The main advantage of a refund loan is that you will have the funds that you expect to receive from your tax refund available to spend earlier. This type of short-term loan is usually processed very quickly and you could have your money in your checking account within just a few days. That can be especially beneficial if you have urgent bills to pay and you can’t wait for the refund to come through the usual channels.

The disadvantages

The main disadvantage of these types of loans is that you will be charged interest and fees, which can be quite high, and that will reduce the amount of money that you receive from your refund. It is important when you apply for this type of short-term loan that you are fully aware that it is a loan, it is not, as some advertisements would lead you to believe, a means of getting your tax refund processed faster.

Another potential disadvantage that consumers need to be aware with this type of loan is that, if the tax refund is delayed or the IRS refuses the refund, the loan will be still be outstanding and it will still need to be repaid.

When is a tax refund anticipation loan appropriate?

As with all types of loans, the need for a tax anticipation loan will depend on your own circumstances. If you don’t need the funds urgently, then it would be better to wait for the refund to be processed in the normal way than it would be to spend money on the fees and the interest of a loan.

On the other hand, if you need funds urgently and you are prepared to receive slightly less of your refund than you might have originally expected, a tax anticipation loan would make those funds available to you within just a few days.

Shop around

If you do decide to apply for a loan in anticipation of tax refund, it is better to shop around rather than taking the first loan that you see advertised or the loan that your accountant offers you. There are lots of loan companies who provide this type of finance and the interest rates and fees can vary considerably, so a loan matching service is often the best option, because you may be offered a loan by more than one lender, in which case, you can look for the best deal that is available.

It is always important when agreeing to any loan, including tax refund anticipation loans, that you read the terms and conditions very carefully and that you understand what the cost of the loan will be and when the loan will need repaying.

Categories
Taxes

The A-Z of Stated Income Loans

Here’s the lowdown of stated income taxes, otherwise called ‘loans without income verification’ or ‘no doc’ loans. They sound wonderful – until you see the price.

Here’s why they sound wonderful.

You don’t need to supply proof of employment or income verification. Then again, you don’t want to go through the 60 day hassle of filing document after document that opens up the can of worms of your income details. You’ll face no red tape of having to submit tax returns and verify income.

But then there’s the price…

Standard income loans first emerged in 2008. Their innovator was the company Ameriquest. They were offered by banks as part of their regular repertoire and were cheaper than today. Then came the string of defaults, and banks pulled out as fast as they could. Today only a few intrepid individuals sign the loans and fund them from their own pockets. In order to ensure maximum profit and to offset risks, these unconventional lenders set arbitrary rules, terms, payment rates, and schedules.

Here’s the good news of stated income loans as it appears in 2015:

If you are a borrower, here’s what your lender will request:

  • No W-2 income documents
  • No need to furnish tax returns
  • No IRS documents
  • No need to show proof of employment

Instead, you’ll be simply asked to state how much you earn and you’ll be taken at your word. Little wonder that these loans are called ‘liar’s loans’ or ‘liar loans’! Stated income mortgage loans have become increasingly popular for borrowers with low credit as well, especially in the case of people who have an unstable source of income or have reduced self-employed income shown on their taxes. Your application for a stated mortgage loan is approved based on your cash reserves or equity and on your ability to afford the monthly payment. Whether you can or not is essentially based on what you tell your lender.

The conditions of these loans makes them alluring to customers with a wide range of credit histories, including subprime borrowers. The lack of verification makes these loans simple targets for fraud.

Other factors

Stated income loans are also appealing in that they fill a gap of situations which normal loan standards would not approve. For example, a standard rule is that a customer’s mortgage and other loan payments should take up no more than 45% of the person’s income. This makes sense when it comes to a person applying for a mortgage for her first home. However, a real estate investor may have multiple properties and for each may receive only a small amount more than their loan payments on each house, but end with $200,000 in disposable income. Nevertheless, a non-stated income loan would decline this person since his, or her, debt to income ratio would not be in line. The same issue can arise with self-employed borrowers, where the bank with a fully documented loan would include the borrower’s business debt in their debt to income calculation. Stated income loans also help borrowers in cases where fully documented loans normally would not consider the source of income as being reliable and stable. Examples include investors who consistently earn capital gains.

Finally, fully documented loans also do not consider potential future income increases. (This is similar to the ‘no income disclosure’ loan).

So what’s the catch?

Plenty. There’s higher interest for one. Lenders are taking a huge risk by extending this type of loan to you, so they want to make sure it’s worth their while. They’ll be asking you for enormously huge repayments – think of double, if not triple the rates of the conventional loan. So consider that you’ll be forking out magnanimous repayments each month.

Then, there’s the higher chance of default. Banks cover their risks by assessing your ability to repay. In this way, they lower the chances of default. Unconventional lenders who hand out these stated income, or ‘no doc’ loans, basically accept anyone on his or her word. Most of these applicants tend to overstate their income falling into unwelcome levels of bankruptcy as a result.

In August 2006, Steven Krystofiak, president of the Mortgage Broker’s Association for Responsible Lending, reported that his organization had compared a sample of 100 stated income mortgage applications to IRS records, and found almost 60% of the sampled borrowers had overstated their income by more than 50 percent.

Fraudulent misuse of these loans had grown such that in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, went into effect to restrict stated income loans. Section 1411 of the Act states: “A creditor making a residential mortgage loan shall verify amounts of income or assets that such creditor relies on to determine repayment ability… “.

Today, lenders are conducting their own version of income and asset verification, but many borrowers can still slip past and into ruin. Court-cases, stress, and bankruptcy are some of the results.

The short of it is this…

Stated income loans are still offered by some small banks. Qualification requirements are based on stable employment, good reserves, good FICO and no less than 40% equity position in the property. Stated income loans are also offered by independent individuals who fund from their own pockets and may be more lax in their requirements. Stated income loan availability changes from state to state and from county to county. This kind of loan is ideal for self-employed individuals, or for those borrowers who do not have a stable source of income, as well as for applicants who have low credit scores, and applicants who do not want their income documents to be reviewed by underwriters.

The price is high, so if you find that intimidating you may want to consider taking the chance of going the conventional route.

Do you think stated income loans is the path for you?

Categories
Taxes

The Hard Facts About Hard Money Loans

When investors discuss money as it relates to lending, they use two terms to differentiate it – hard and soft money. Soft money typically refers to a loan with flexible terms. Traditional and government home loans offer a variety of options for a real estate loan. A hard money loan, on the other hand, has rigid, very specific terms. It is loaned for a relatively short time frame with a specific interest rate not necessarily determined by your credit score. It is also called “private money,” because it often originates from individual investors who possess a lot of cash to invest.

Some characteristics that set these loans apart from a more traditional one are high interest rates, a brief approval time frame and the loan is most often for a short period of time. Low loan to value ratios are also typical of hard money loans. Often no more than 60 percent is approved for the loan. High interest rates are the hallmark of hard money loans, up to 21 percent and higher if the property goes into default. Hard money loans are borrowed for very short periods of time, and can often be obtained within a few days, as opposed to weeks for a more traditional property loan.

Hard money loans are most often used for flipping a home, bridge loans and construction loans where the money would only be borrowed for a short amount of time, until the property is sold or refinanced. An investor may find a home that is in need of repair at a very good price. Obtaining a hard money loan may be a way for the borrower to buy the home, repair it and make a lot of money when the property is sold.

These loans are usually not used to finance property over a period of years. Homeowners who have no credit history or experienced a default in home ownership often cannot obtain approval for a traditional loan with a lower interest rate. They will sometimes borrow hard money until their credit score raises enough to be approved to refinance using a traditional loan with a much lower interest rate.

If you’ve tried the traditional route to obtain a home loan and failed, you might want to try for a hard money loan. Obtaining approval for one is not as easy as it used to be in some cases. In the past, hard money lenders based the loan strictly on the value of the property. Now, however, many of them require borrowers to fill out credit applications and provide pay stubs and income tax statements. Before applying for a loan, make sure you have access to any income statements the lender may require.

The best way to access a hard money lender is to contact local lending institutions and mortgage companies. Ask them for names of reputable lenders. Most loan servicers are familiar with ones they’ve known over a period of years.

Categories
Taxes

What No Money Down Loans Are Available in Texas?

There are 3 solid programs available for prospective home buyers seeking 100% financing for a primary residence and I will explain them in plain English for you. I will give you the basic requirements as well as the pros and cons for each. Don’t worry; there will be no quiz at the end of this article.

FHA/TDHCA – The first and most common method is a combination of a standard FHA loan which requires a down payment of 3.5% and down payment assistance funds of up to 4% of the sales price that is offered through the Texas Department of Housing and Community Affairs (TDHCA). This is typically the easiest scenario to qualify for because FHA guidelines are the most lenient for borrowers with less than perfect credit. Typically if a buyer has a 620 middle credit score or higher and no new collections, charge offs or late pays filed in the last 12 months they have a very good chance at getting approved. TDHCA will assist with up to 4% of the sales price that can be utilized for down payment and/or closing costs. They do have their own approval process, income & loan amount guidelines and must review the complete loan package prior to disbursement of funds. There is a limited amount of funds available for this program so the TDHCA is typically inundated with applications that may or may not be approved. Because of this, average closings when utilizing this program can be on average 45 to 60 days depending on volume and market conditions.

Pros: Great for less than perfect credit, no geographic restrictions, most common program so majority of lenders are familiar with closing them, no pre-pay penalty

Cons: 2 different approval processes, income restrictions apply (can’t make too much money), requires mortgage insurance, take longer to close, funds not always available, some pre-pay/recapture restrictions apply

“If you have had credit issues in the past this is your best bet. “

VA loan (Veteran’s Administration) – The second most common type of no money down program is the VA loan. The application process for VA financing is no different from any other type of loan. In fact, the VA application form is the same as that used for HUD/FHA and conventional loans. It is similar to FHA in which it is a government backed loan but is for current or previous members of the Armed forces only. It is one loan for 100% of the contract sales price and has no monthly mortgage insurance premium payment. Like FHA this loan typically requires the buyer have at least a 580 middle credit score or higher and no new collections, charge offs or late pays filed in the last 12 months. The rates are competitive and closely mirror standard FHA rates. Aside from the credit requirements the borrower must have a Certificate of Eligibility and form DD-214. The one quirk on this program that can at times throw off the process is that VA has their own appraisal ordering system. That means your lender does not order the appraisal so it can be hard to gauge estimated value and delivery times. This however can be addressed by having your realtor provide you with a detailed Competitive Market Analysis before securing a property under contract.

Pros: Great for less than perfect credit, no geographic restrictions, no mortgage insurance payment, competitive rates, lower closing costs, may be assumable, graduated payment available under some conditions

Cons: For veterans only, appraisal process can be unpredictable, primary residence only

“No brainer here. One of the benefits of military service.”

USDA (RD) – The third option is one of the least known programs on the market and may be the best if buyers fit the criteria. The United States Department of Agriculture has a Rural Housing Service that helps provide adequate housing for families in rural development areas. Rural development areas do not always mean hundreds of miles out of town but usually just outside the city limits where the population begins to taper off. Like FHA and VA this is a government backed loan and not directly funded through these government agencies. This moderate income loan program is for the purchase of a primary residence and can be a single family home, town home or condo; no manufactured homes. It is a true no money down program with one lien only, that is actually calculated up to 102% of the appraised value of the property and not the sales price. This is helpful in cases where the seller does not want to or cannot pay any closing costs; those fees can be rolled into the loan as long as the loan amount does not exceed 102% of the appraised value. There is no mortgage insurance required, no max in seller concessions, no reserve requirements, not limited to firs time home buyers and rates are competitive with FHA & VA. Buyers need to have at least a 620 or higher middle credit score, no unpaid collections, charge offs, tax liens or judgments and no late payments over 30+ days in the last 12 months.

Pros: One lien, no mortgage insurance, no cap in seller concessions, roll in closing costs as needed, max loan amount based on appraised value, no pre-pay penalty, no recapture conditions, competitive rates

Cons: Geographic & income restrictions apply, not as lenient with previous derogatory credit, income restrictions (can’t make too much money)

“If you are looking for a quiet home just outside of town and have been relatively careful with your credit this is definitely the way to go.”

As I mentioned this is just a real basic description of the 3 no money down loan programs available to prospective home buyers. They each have their own respective qualifying procedures and requirements so please consult with a qualified lender for complete details and quotes.

Categories
Student Loans

Paying for College: Student Loans or Credit Cards?

Research conducted by student loan company Sallie Mae shows that in 2010, about 5 percent of college students paid an average of more than $2,000 in tuition and other educational expenses using a credit card to avoid taking out student loans. The same study showed that 6 percent of parents used credit cards to pay an average of nearly $5,000 in educational expenses for their college children.

Is using credit cards a smart way to avoid college loan debt? Financial advisors are in near-universal agreement that the answer is no, but that isn’t stopping thousands of families from using credit cards in place of parent and student loans.

Some families might think that all debt is equal; others might think that they won’t qualify for college loans. So what advantages exactly do education loans offer over credit cards?

1) Availability

Particularly in the last few years, as credit card companies have tightened their credit requirements in a retraction of the lax lending that led to the foreclosure crisis, credit cards have become harder to qualify for, available mostly only to consumers with strong credit. Many consumers with weaker credit have had their credit lines reduced or eliminated altogether.

Federal college loans, on the other hand, are available with minimal to no credit requirements. Government-funded Perkins loans and Stafford loans are issued to students in their own name without a credit check and with no income, employment, or co-signer required.

Federal parent loans, known as PLUS loans, have no income requirements and require only that you be free of major adverse credit items – a recent bankruptcy or foreclosure, defaulted federal education loans, and delinquencies of 90 days or more.

In other words, don’t turn to credit cards simply because you think you won’t qualify for school loans. Chances are, these days, you’re more likely to qualify for a federal college loan than for a credit card.

2) Fixed Interest Rates

While most credit cards carry variable interest rates, federal student and parent loans are fixed-rate loans. With a fixed interest rate, you have the security of knowing that your student loan rate and monthly payments won’t go up even when general interest rates do.

Many credit cards will also penalize you for late or missed payments by raising your interest rate. Federal school loans keep the same rate regardless of your payment history.

3) Deferred Repayment

Repayment on both federal student loans and federal parent loans can be postponed until six months after the student leaves school (nine months for Perkins undergraduate loans).

With credit cards, however, the bill is due right away, and the interest rate on a credit card balance is generally much higher than the interest rate charged on federal school loans.

If you’re experiencing financial hardship, federal loans also offer additional payment deferment and forbearance options that can allow you to postpone making payments until you’re back on your feet.

Even most private student loans – non-federal education loans offered by banks, credit unions, and other private lenders – offer you the option to defer making payments until after graduation.

Keep in mind, however, that even while your payments are deferred, the interest on these private student loans, as well as on federal parent loans and on unsubsidized federal student loans, will continue to accrue.

If the prospect makes you nervous of having deferred college loan debt that’s slowly growing from accumulating interest charges, talk to your lender about in-school prepayment options that can allow you to pay off at least the interest each month on your school loans so your balances don’t get any larger while you’re still in school.

4) Income-Based Repayment Options

Once you do begin repaying your college loans, federal loans offer extended and income-based repayment options.

Extended repayment plans give you more time to repay, reducing the amount you have to pay each month. An income-based repayment plan scales down your monthly payments to a certain allowable percentage of your income so that your student loan payments aren’t eating up more of your budget than you can live on.

Credit cards don’t offer this kind of repayment flexibility, regardless of your employment, income, or financial situation. Your credit card will require a minimum monthly payment, and if you don’t have the resources to pay it, your credit card company can begin collection activities to try to recover the money you owe them.

5) Tax Benefits

Any interest you pay on your parent or student loan debt may be tax-deductible. (You’ll need to file a 1040A or 1040 instead of a 1040EZ in order to take the student loan interest deduction.)

In contrast, the interest on credit card purchases, even when a credit card is used for otherwise deductible educational expenses, can’t be deducted.

To verify your eligibility for any tax benefits on your college loans, consult with a tax advisor or refer to Publication 970 of the IRS, “Tax Benefits for Education,” available on the IRS website.

6) Student Loan Forgiveness Programs

Whereas the only way to escape your current credit card debt is to have it written off in a bankruptcy, several loan forgiveness programs exist that provide partial or total student loan debt relief for eligible borrowers.

Typically, these loan forgiveness programs will pay off some or all of your undergraduate and graduate school loan debt in exchange for a commitment from you to work for a certain number of years in a high-demand or underserved area.

The federal government sponsors the Public Loan Forgiveness Program, which will write off any remaining federal education loan debt you have after you’ve worked for 10 years in a public-service job.

Other federal, state, and private loan forgiveness programs will pay off federal and private student loans for a variety of professionals – veterinarians, nurses, rural doctors, and public attorneys, among others.

Ask your employer and do a Web search for student loan forgiveness programs in your area of specialty.

Categories
Student Loans

Are Pell Grants And Student Loans Really Constitutional?

The Pell grants is a type of post-secondary educational federal grant which is sponsored by the US Department of Education. The Pell grants are constitutional as they are covered by the legislation titled the Higher Education Act of 1965. Pell grants originally known as the Basic Educational opportunity Grant Program are awarded on formula based on financial need. This formula is determined by the congress using criteria submitted the Free Application for Federal Student (FAFSA).

Federal Pell grants are awarded to the undergraduate students who don’t have a bachelor or professional degree. The amount of money that you can receive under the federal Pell grant is based on your need, the cost of Attendance at your school for both part time and full time students. The US Department of Education has a standard formula to determine if one is eligible or not to get approved for Pell grants.

In the United States, the federal loans are authorized under the title IV of the Higher Education Act. They can be subsidized by the US government depending on the student’s financial need. Both subsidized and unsubsidized loans are guaranteed by the US Department of Education. Almost all the students are eligible to receive them. Subsidized federal loans are offered to the ones who come with a demonstrated financial need. Federal government makes interest payments for these students while the students remain in the college. Unsubsidized federal loans, on the other hand, are also guaranteed by the US government but on these loans the government does not pay interest for the students, rather interest accrues on the loans. Interest begins accruing on $12, 000. There are basically two distribution channels for federal student loans i.e. Federal Direct Student Loans and Federal Family Education Loans.

Federal Direct Student Loans are funded from public capital originating with the US Treasury. FDLP are distributed through a channel beginning with the US Treasury Department, goes to the U.S Department of Education and passing through the college or university goes to the students.

Federal Family Education Loan programs are funded with private capitals which come from banking institutions. Through these loans, students are able to take payment options like allowing a discount for automatic payments or a series of on time payments.

Private student loans are not funded or guaranteed by government agencies but advocates of private student loans suggest that they combine the best elements of different government loans into one.

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Student Loans

How to Consolidate Federal Student Loans – FDLP, FFELP, Etc

The cost of higher education continues to rise. Many students are unable to afford to finish college. Because of this, Student Loan Consolidation has been made available to students. Student Loan Consolidation is multiple loans combined into one loan. The US Government and the Department of Education has developed Federal Loans to help students pay for their higher education. These loans allow the student to combine their federal loans into one loan. By paying one loan they're paying one creditor.

Federal student loans are provided by the US Government and the US Department of Education. The Federal Direct Student Loan Program (FDLP) and Federal Family Education Loan Program (FFELP) have been developed to help students and parents consolidate their loans. These two programs allow students to consolidate PLUS Loans, Federal Perkins Loans and Stafford Loans. Students get lower monthly repayments and a longer payment period. These loans usually provide lower interest rates and fees. For these programs, the fixed interest is usually the weighted average of the interest rates of the loans that were consolidated. Congress set the formula for the federal interest rate. Federal programs give graduates longer repayment periods. A student can have a repayment period from 10 to 30 years.

There are two Programs for Federal Loan Consolidation:
o The Federal Family Education Loan Program (FFEL) was a result of the Higher Education Act of 1965. The program is funded by private and public partners. FFEL also makes use of government funds and private companies. The private companies that fund this program receive subsidies from the government.

o The William D. Ford Federal Direct Loan Program (FDLP), commonly known as Direct Loans. With this particular program, instead of the Government or a private company, the US Department of Education acts as the creditor, handling the student's loans.

Federal Loans have three types:
o The Perkins Loan is a consolidated loan provided by the US Department of Education for college students. It has a fixed interest rate of 5% for a 10 year repayment period. With usual consolidation companies you are required to start repayment after six months of graduation. With the Perkins Loan you have a nine month period after graduation. The loan limits for undergraduates are $ 5,500 per year with a lifetime maximum loan of $ 27,500. For graduate students, the limit is $ 8,000 per year with a lifetime limit of $ 60,000.

o Stafford Loan offers a lower interest rate but has strict eligibility requirements and limits. There are subsidized and unsubsidized loans. With Subsidized loans the interest is paid by the Federal Government. For Unsubsidized loans, the students pay the interest. Examples of Stafford loan companies are Sallie Mae, JP Morgan Chase, Citibank, Bank of America, and Wachovia Education.

o A PLUS Loan is for parents and graduate students. To be eligible for this loan, the parent or graduate student has to pass the credit check. Usually interest rates are higher. This loan allows the parent to make use of the total cost of the college fees such as tuition, room and board.

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Student Loans

Private Student Loans: 3 Ways to Improve Approval Chances

Financing a college education is not easy, with college fees anything but cheap. While it is possible to get government sponsored financial aid, not everyone is successful because of the quota system reserving funds for those in most need. For many, private student loans are the only option open to them.

Of course, there is nothing wrong with the private loan option, but securing this kind of funding is dependent on the same criteria to getting any other kind of loan. So, an applicant needs to have certain aspects in good order if college loan approval is to be achieved.

There are problems with this since students usually have little income to speak of. But there are student loan options to consider that can help in finding the right loan deal at the best possible terms. Compromises may need to be accepted, but the funds at least can be secured.

1. Find a Cosigner

Since the biggest issue for lenders is the certainty of receiving the monthly repayments, the addition of a cosigner to the application can prove invaluable. A cosigner acts as a guarantor, assuring the lender that payments on the private student loan will be made, even if the student is unable to make them.

The most common cosigner for students is their own parents but extended family members and even friends are acceptable too. However, to stand a chance of getting college loan approval, the cosigner must have an excellent credit history. Ideally, they should have a score of 700 or more, and have a large enough income to cover the repayments if that becomes necessary.

But if a suitable candidate can be found to cosign on the student loan, remember that failure to pay will put pressure on them. So, be clear that the obligation still rests on the shoulders of the applicant.

2. Search the Internet

The Internet has changed many things about how we go about securing financing. The development of comparison sites means that finding the best possible deals, even for private student loans, is fast and easy, with the best of thousands listed clearly before us.

Online lenders are widely recognized as experts in bad credit lending, so those who have very poor credit histories are more likely to get college loan approval from them than they are from traditional lenders. And they charge the lowest interest rates and offer the most flexible repayment schedules.

Still, it is necessary to read the small print on any possible student loan deal to see if there are any hidden charges. And check the reputation of the lender on either the Better Business Bureau or the Verify1st websites before agreeing to anything.

3. Tend To Your Credit Rating

Another valuable move to help in securing a private student loans is to set about improving your own credit score. This improves the terms of the possible loan, making it more affordable. There are several ways to do this, but starts with getting the credit report to identify where the weaknesses lie, and have any errors in the report corrected.

Paying off existing debts is the best way to increase the score. But to do this, a series of small, quickly repaid loans are required. Alternatively a larger consolidation loan can be taken out, significantly reducing the monthly repayments. By freeing up more cash for repayments on the college loan, approval is more likely.

Another option to improving the credit score is to take out a student credit card several months before and make repayments on time. This establishes a good repayment habit and so getting a student loan become that bit easier.

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Student Loans

Student Loans Help College Tuition Costs Rise

College tuition prices are rising every year – faster than almost any other expense including health-care and food. The bad news for students is that post-graduation salaries have been practically flat! In a free market economy, this might lead to students seeking cheaper educational alternatives and driving down the price of learning, but government support of the student loan industry will preserve the ability for students to acquire the debt for the more expensive choices. Thanks to these specific government policies, there is very little chance that tuition costs will be coming back down.

While most debt and credit markets seize up, the student loan industry is mostly guaranteed and insured by the federal government. Even though some companies have been leaving the student loan sector, the government is expanding its own direct loan program to ensure that the system of loans for college stays intact. If students were unable to find loans, schools would be forced to immediately cut costs and offer lower tuition rates to keep enrollment up.

Yet for some reason, lower costs seem strange to the American economist or consumer – we often demand the best, we demand the most, and somehow we still act surprised when we can't afford to pay the bill for that dream product we just custom -ordered. That lack of money is never seen as a problem – as long as it is easy for the consumer to acquire loans. Everything that made the housing bubble a nightmare is still playing out in higher educational financial statements …

As long as those easy loans are available, colleges have little incentive to cut costs in outside-the-classroom activities like social programming, semi-competitive sports teams, and lavish furnishings. If there were no government safety nets, students could still find loans if the lender felt that the student would actually be able to pay it back after graduation. This means more students and student lenders would choose local and cost-effective schools. Competition for funding would even ensure that the smartest and hardest working students get enrolled first.

Ideally, everyone who wants to go to college should be able to – and to some extent the student loan programs have helped to provide that opportunity. Unfortunately, it is showing signs of an unintended consequence that would quickly undo that benefit and make college ultimately unaffordable for a large part of the population.