Direct To Consumer Student Loans

For some students, college isn’t always affordable — even if they have good grades and financial aid. So, what options do these students have? Direct-to-consumer (DTC) loans.

A DTC loan is a private student loan that doesn’t go through a bank; instead, it goes straight to the consumer. These loans are not regulated by the federal government and can vary widely in terms of interest rates, repayment requirements, and other factors.

However, they may be helpful for students who don’t qualify for federally subsidized programs but still need money to finance their education.

How does DTC work?

First, the lender asks a borrower for his or her credit score and income level. If the borrower meets certain criteria, he/she will likely receive a loan offer in the mail. After accepting the loan offer, the borrower fills out a short application online and then pays a small processing fee to start the loan. Borrowers generally pay back the principal over 10 years at fixed interest rates — sometimes as low as 2%, but often much higher than that.

What about default risk?

If borrowers cannot afford to make payments, they may incur negative marks on their credit reports and possibly face foreclosure. And while lenders could require proof of employment before issuing a loan, many companies don’t verify whether someone actually has steady employment, making them vulnerable to fraud.

Is it safe?

While the industry is unregulated, most lenders claim to use best practices and protect consumers’ information. Also, since the loans aren’t issued by traditional banks, borrowers won’t find themselves dealing with high fees, hidden penalties, or shady business practices.

Despite these potential drawbacks, many experts recommend against using DTC loans. “There’s no guarantee you get an accurate assessment of your financial situation,” says Lauren Asher, founder of iBorrowed.com. “The company might use a faulty algorithm or just take advantage of people who are desperate. You’re putting all your eggs in one basket. Plus, if things go wrong, there’s no one else to sue.”

Still interested?

Even though many experts say avoid DTC loans, others believe borrowers should consider them as a last resort. “I would recommend anyone looking for a personal loan look at them, especially if they’re strapped for cash,� says David Hirschfield, cofounder of Loanio.us. But only go for them after weighing the risks.”

Direct To Consumer Student Loans

A student can go to any bank in America and get a loan, however if they have bad credit no bank will lend them money at all. However, if they were to apply for a federal college loan, they would be denied. There are still banks that do not want to give loans out because it competes with their own business. Banks make money by charging interest on loans, and the government subsidizes many students with loans. So, instead of banks making money off of loans, the government makes money off of them.

In 2012, there was a bill called the “Student Aid Bill”. The bill was supposed to change the way student aid worked. It allowed private lenders to offer direct student loans to students. The problem was that almost all students who took these loans defaulted on them and ended up being declared bankrupt. According to the Department of Education, over 1 million people defaulted on their student loans from 2007 until 2013. These numbers show how risky these types of loans are, and should never be given to anyone without some type of insurance or guarantor.

If someone borrows $20,000 from a private lender, they pay back about 10% in interest plus the original amount borrowed. If someone borrows from the government, they only pay 8%. But if someone defaults, the government gets nothing. That’s why we use the term ‘subsidized lending’ rather than subsidized borrowing.

Because the government receives less money from each person, there is a lot of competition between the different states in the United States. Each state wants to attract businesses and jobs for their region. One method they use is to lower taxes. Other states know that having companies start or move there means a higher demand for services which leads to increased tax revenue.

When you graduate high school, you are already considered an adult and are free of parental debt. You can choose to take out private loans for further education. Private loans work just like student loans except that they need to be paid back regardless.

For those who struggle to find good paying jobs after graduation, sometimes taking out private loans is the best option. Most employers don’t care where you went to school or what major you chose. What matters is whether or not you have experience working in your field. Unfortunately, many students end up choosing things related to healthcare or public service thinking that it will help them later.

Many students think that they can get good grades and then borrow a lot of money. They believe that since the government gives out free money, why shouldn’t they? After all, if everyone could afford to go to college, wouldn’t society benefit greatly? Unfortunately, getting good grades is extremely difficult, especially for low-income families. Because of this, nearly half of all bachelor’s degree recipients receive financial assistance from the government.

Another reason that government grants, scholarships, and student loans exist is to promote access to higher education. Since the population is increasing and more people feel that going to college is necessary for success, the government knows that the more people who attend college, the better.

Before the establishment of the Federal Government, America had a system of land grant colleges. Under this program, schools were funded by the federal government to educate Native American children. There was no tuition and the schools were built specifically for this purpose. Students attended these schools, learned English, and eventually returned to their home communities upon graduating.

Today, colleges and universities often charge high tuition fees, which forces low-income students to seek alternative ways to finance their education.

On average, students spend around 10 years paying off their student loans before they start seeing much in return. This means that during that time, they missed opportunities to save money and possibly even purchase property or invest in stocks.

Currently, in the US, there are 4 main options available to students that are struggling financially. They can either ask family members for a small loan, they can try to find employment in their chosen field while attending college full-time, they can ask the federal government for financial aid, or lastly, they can raise funds by selling personal items like electronics and clothing.

Selling items on sites like Facebook Marketplace and eBay can help reduce financial burdens on students. Sometimes, teachers or parents can sell old or unused items for extra money to help students pay for books or rent.

Over two-thirds of Americans live paycheck to paycheck. For these individuals, any additional money goes towards saving, emergency expenses, or debt repayment.

Direct To Consumer Student Loans

Direct To Consumer (DTC) student loans were first introduced in the U.S in 1995. Since then they have become an increasingly popular way for students to borrow money for their education. In 2016 DTC loan volume totaled $47 billion. At present time DTC lending is a multi-billion dollar industry. There are over 300 companies providing direct student loans. Most offer loans for undergraduate programs. However, some specialize in graduate school and postgraduate programs. DTC companies often focus on low interest rates and quick repayment times compared to traditional banks. Lenders use credit scores and income information to calculate loan amounts. Once approved for a loan, borrowers owe back payments directly from their bank account without making a payment before the end of the grace period. Borrowers have no need to pay any fees or service charges associated with using a lender. On average DTC student loans offer lower interest than other forms of funding. However, the majority of lenders charge origination fees ranging between 1% and 6%. Lenders may also charge additional fees based on how high the borrower’s credit score was when applying for the loan.

Direct To Consumer (Banks)

Banks are the largest lenders; however, only a fraction of all Americans qualify for a bank loan. Banks tend to look at applicants’ financial status, employment history, and assets. Loan applications can take anywhere from three to six months to complete. In addition, due to regulations banks are prohibited from charging certain types of fees and cannot require collateral. As a result, interest rates on bank loans tend to be higher than those offered by DTC lenders. A survey conducted by Bankrate, a consumer research company, revealed that while 58 percent of DTC loans carry an annual percentage rate (APR) below 8%, the APR for private student loans averages 11.3%. Both figures are still cheaper than many credit cards.

Credit Cards

Credit card debt was around $800 billion in 2014, according to the Federal Reserve. While credit cards do not require collateral, consumers tend to incur high interest rates. Credit card APRs range from 14% to 24%. The Federal Reserve Board states that nearly half of the credit cards issued in 2015 carried variable interest rates tied to prime plus 2.75%. Interest rates on credit cards vary depending on the credit line and credit score of the borrower. Higher credit scores mean lower interest rates. Many credit cards have fixed rates with varying minimum monthly payments. Paying off the balance early lowers the total amount owed. Consumers who carry balances on credit cards tend to spend less money and feel happier about their finances, studies show.

Direct To Consumer Student Loans

The federal government provides student loans directly to students. These loans are called Direct Student Loan (DSL) programs. In 2016, the largest loan program was Federal Family Education Loan Program (FFELP). FFELP is a federally guaranteed loan program offered by the U.S. Department of Education. Through FFELP, private lenders offer FFELP loans for education purposes. A borrower’s eligibility for an FFELP program varies depending on whether they are enrolled in undergraduate, graduate or professional school. Undergraduate borrowers have the option of using either Direct Subsidized or Unsubsidized Loans while Graduate and Professional borrowers must use Direct PLUS loans.

Federal Family Education Loan Program (ffelp.ed.gov/programs/ffelp/)

-Subsidized Loans: Borrowers do not need to pay interest on their first $20,000 of subsidized Stafford Loans each academic year. After paying off this amount over time in monthly payments, borrowers may borrow additional money without incurring interest charges.

-Unsubsidized Loans: Browsing for these loans requires no payment until after graduation, although some colleges waive the full refundable portion of the cost for their direct marketing campaigns.

Federal Perkins Loan (Perkins.ed.gov/index.html)

-Income based repayment plan options require that borrowers participate in an income contingent repayment program after earning enough to repay the loan in 10 years. The loans can be repaid at any point during repayment period. However, the earlier the loan is paid back, the less the remaining balance will be. Repayment begins six months after a borrower graduates or drops below half time enrollment status.

Federal Work Study (WorkStudy.ed.gov/ProgramDescriptions/default.asp/tabid/1045/Default.aspx)

-This program is designed to encourage employment among college students who qualify financially. Eligible participants receive work study jobs that contribute to financial aid awards. Participants must agree to provide employers with written verification of their job search efforts.

Private Lenders

There are many different types of private lenders offering student loans. Private lenders offer their own set of rules and regulations regarding repayment plans and terms. Before taking out a private student loan, read the lender’s disclosure document carefully to determine what your costs might be before borrowing.

Direct To Consumer Student Loans

A Look At What Students Are Paying Today

This video was created by Jacob Minkoff who wanted to provide some insight to Direct-To-Consumer student loans (DTC). He talks about student loan interest rates and what students should do today for financing their education.

Jacob Minkoff

The Law Offices of Jacob Minkoff

85 Broad StreetSuite 1200South Orange NJ 07079

Phone: 973-871-1901

Email: info@jacobminkofflaw.com

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