Former college students will get the chance to refinance their student loans and reduce the cost of their payments under a new federal law recently signed by President Clinton.
However, Utah officials say it isn't necessarily a good deal for everyone. Officials say former students would be smart to study the federal program when its details are announced in January and compare it with Utah's existing student loan program before making any changes.In other words, let the buyer beware.
From Norris' point of view, Utah's traditional approach still is the best way to go.
Utah currently is not taking part in the direct student loan program where students borrow from the government, rather than through a secondary market of banks or other lending institutions.
However, the new federal law lets Utah students participate in the refinancing part of it, anyway.
Gail Norris, associate commissioner for student financial aid and the executive director of the Utah Higher Education Assistance Authority, said students should become thoroughly informed about both approaches before deciding which would be best for them.
Norris said that under the new federal effort, only students with old loans would do well with federal refinancing. "People who borrowed several years ago have higher fixed interest rates on their loans. Some are 9 percent, some are even as high as 12 percent. If they refinance them (with the federal government), they would get a floating variable rate of interest capped at 8.25 percent."
Norris said this is a good deal if a student has a lot to pay off on an older loan.
But Norris said students getting loans the traditional way in Utah now have a method of cutting 2 percent from part of their debt.
Anyone who got a loan or began repaying one after Jan. 1, 1993, and who keeps up all the payments for four years can get a 2 percent reduction in interest rates on the remaining debt.
For example, it's not unusual for a graduate student to take out a $10,000 loan for each of the three years it generally takes to get a master's or doctoral degree.
"If the typical payoff period is 10 years, they have a 2 percent reduction in their interest rate for six years," Norris said. "They could have a 9 percent loan go down to 7 percent."
Despite the hype from Washington about the proposed direct loan program, Norris still favors Utah's approach.
It works like this: A student applies for federal aid eligibility and this information goes to the school. The student picks a bank, the school certifies the loan to the UHEAA, which in turn informs the bank that the loan is guaranteed, and the bank then disburses the money through the school.
Interest on most loans is paid to the bank by the federal government as long as the person is in school. Six months after the person leaves school, most banks sell the loans to a secondary market, namely the Board of Regents. UHEAA guarantees that the bank will get its money if the student defaults on the loan and the federal government acts as a second back-up.
Utah's students do better than others when it comes to repaying loans. Utah's student loan default rate is 7.6 percent, compared with the national average of 15.1 percent.
Norris attributes this to the Utah work ethic and the fact that most students here attend college, community college or reputable trade schools (trade schools of dubious quality in other states are a source of defaulted loans nationally).
Although Norris is not sold on the direct loan program, some institutions of higher learning in Utah plan to sign up anyway. Next summer, Westminster College and the College of Eastern Utah plan to participate. Also taking part will be three trade institutions - a technology school, massage therapy school and a beauty college.
Students who have many loans from different creditors also can take part in a loan consolidation program that may save them money and make repayment easier. For information about Utah loans, call UHEAA at 321-7200.
To receive information about the federal loan consolidation program, call the U.S. Department of Education at 1-800-455-5889.