Be Cautious With
Regard to "No Closing Costs"
Michael Tapscott
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Volume 2, Issue 2
- April 2006
It is no secret that as
higher education costs go up, inevitably,
many students will be more dependent on
financial aid. Recent federal legislation
ensures that eligibility for a higher loan
amounts will grow while federal grant
programs remain stagnant. Loan maximums for
freshmen and sophomore students will
increase but there will be no corresponding
increase in federal grants.
Student loans will
continue to play an important role in the
recruitment and retention of our students.
As our students take on increasing debt
loads to attend our institutions, our
responsibilities to educate them on the best
value become more important. We are no
longer in a position to provide a list of
loan options for students and their families
to consider. More often, these students and
families are relying on professionals in the
Financial Aid Office to provide financial
planning services. They rely on
professionals to provide informed answers,
not options.
Some students and
families are immediately attracted to loans
being offer with discounted or "no closing
cost" up-front fees. While this seems
initially attractive , the student fails to
examine the total cost of the loan – that is
, what is the actual cost
over the life of the loan? I have reviewed
cost comparisons from several lenders. A
lender offering no fees up front can save a
student from two to three percent initially.
That translated to 60-80 dollars on a
freshman loan. Other lenders, while charging
an up-front fee, offer repayment incentives
and other befits that can reduce the costs
for students by hundreds of dollar over the
life of the loan. Incentives for good
repayment are also positive reinforcements
for building and maintaining good credit.
College and
university administrators as well as
financial aid professionals, must help
students and their families to make informed
decisions. The best financial advice
includes long-term repayment considerations
as well as short-term discounts on initial
disbursements.
While it seems an uphill battle to fight
the immediate gratification of no closing
costs, it is part of our educational role
outside the classroom to discuss all aspects
of student loans. We must provide
information on both initial costs and the
long-term costs of borrowing over the life
of the loan. I would counsel a student not
to get a free pizza or free Frisbee to get a
23% credit card…..and I recommend the
students to examine the total cost of their
student loan.
Michael Tapscott serves as the Director
of the Multicultural Student Center at
George Washington University.
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