Private student loans are one of the riskiest ways to pay for college because they are more expensive than federal loans and lack strong protections for consumers. A college consultancy company plans to take some of that risk for its clients with a new private student loan guarantee.
The company, Edmit, will cover six months of private loan repayment for eligible students who cannot find employment within a year of graduation. Edmit, who aims to help families make a more financially informed decision about where to go to college, launches his new product as a safety net for students who need more than federal student loans to be able to afford a specific school.
With this offer, the company wants to offer students using its services some sort of insurance, say co-founders Nick Ducoff and Sabrina Manville. Edmit’s promise to cover certain student loan payments is unique in the private student loan market. But the company is part of a growing network of startups, lenders and organizations looking for innovative and alternative ways to pay for college.
“If Edmit says it’s good and it ends up not being good for you, we should have some skin in the game,” Ducoff said.
Most experts recommend that students stay in the federal system and avoid private debt altogether. But sometimes that’s easier said than done, especially in states where even within the state, public college tuition fees aren’t affordable if a family hasn’t saved up for college or if the student or parents cannot pay some of the current income bills.
Take Pennsylvania, for example. Federal data shows that the state’s four-year public colleges charge families earning between $ 48,000 and $ 75,000 an average net price of about $ 20,000 per year. (The average net price for this income group in state private colleges is slightly higher, at $ 22,300.) This is the price families pay after subtracting federal, state, and institutional grants and scholarships.
Yet dependent students (typically any student under the age of 24) can only borrow between $ 5,500 and $ 7,500 per year in federal student loans, depending on their grade. So after maximizing federal student loans, a typical family might need to bridge a gap of $ 12,500 to $ 14,500 per year. To pay this amount, there are either parent PLUS loans, private loans, current income, savings or third party scholarships.
Edmit’s new offering, says Ducoff, is really aimed at people who are evaluating private student loans versus parent PLUS loans to bridge that gap.
How the private student loan guarantee works
Edmit has data on around 1,500 colleges, and warranty eligibility is personalized, depending on how you plan to pay for your education and what you study.
To see if you will qualify, you need a tuition bill showing how much you will be paying out of pocket. Edmit has a calculator where users can enter their scholarships, college savings, and loan amounts, and this will help you calculate the total expected borrowing over four years, including federal and private loans. . If this total is less than what Edmit estimates your major’s first year salary is likely to be, then you are eligible for coverage.
After graduation, if you can’t find a job or earn less than $ 20,000 per year, Edmit will make your private student loan repayments for you for up to six months.
âIt’s really hyper-personalized for the student,â explains Ducoff, explaining that two students from the same college, studying in the same academic field, may not be eligible, depending on their borrowing plans versus their expected return on investment.
An example of what Edmit users will see when signing up for the warranty offer. Courtesy of Edmit Garantie.
For now, the offer is only available to freshmen starting college this fall. They can check their eligibility now and officially register this summer.
Edmit plans to have six lenders from which students can choose. If the students end up borrowing from one of these lenders through Edmit, the business will be paid by the lender. This income is what will fund the guarantee. In the future, the company says it hopes to provide more borrowing options for students.
Last month, Edmit was acquired by Vemo Education, which designs and manages revenue sharing agreements, a funding model where students agree to repay part of their earnings as an alternative to a traditional loan. While Edmit’s guarantee offer is not a revenue sharing deal, it stems from the same philosophy: students should be able to share some of the risk of funding a degree with a college, lender, or college. third.
Edmit says he sees this as a small step. The goal is to extend both the term of the guarantee beyond six months and the income threshold for qualifying, and the company is looking for ways to fund a similar guarantee for federal loans in the future.
Yet a significant drawback of a guarantee with a fixed income threshold is that it is difficult to set universal parameters for what it means to fight debt, says Dominique Baker, assistant professor of educational policy at Southern Methodist University. If someone gets a job earning $ 25,000 – above Edmit’s guarantee threshold – will they be able to afford private student loans, especially if they work in an area where the cost of life is high?
“It becomes difficult to know where the line is for people who need help versus those who don’t,” she said, adding that she had more questions than answers on the issue. new offer from Edmit.
What Students (and Parents) Should Know Before Using Edmit’s Guarantee for Private Loans
One of the biggest benefits for students considering this product is seeing it as a bonus if you were already going to take out private student loans, says Beth Akers, author of Make college pay and resident researcher at the American Enterprise Institute. It shouldn’t convince you to take on private debt if you can fill the void in other ways. Here are some other tips to guide you:
Maximize Federal Student Loans First. Edmit points it out, but it bears repeating: You shouldn’t take out private student loans until you’ve borrowed the maximum amount allowed for federal student loans. At the undergraduate level, this amounts to up to $ 7,500 per year for dependent students, or $ 12,500 per year for independent mature students.
Ask yourself if your study plans might change. Many students change specialization or change schools. This, in and of itself, doesn’t disqualify you from the guarantee, but it does complicate it as income can vary widely depending on your field of study. When students sign up for the guarantee, they get a list of majors or approved schools that they can switch to while still keeping the deal.
The guarantee only applies to graduates. You will only benefit from the benefits of the guarantee if you have obtained a diploma. It might seem obvious, and most students are probably enrolling in the hope of completing, but nationwide some 40% of first-time students not obtaining a bachelor’s degree within 6 years.
Think about the long term commitment of the loan. The offer only provides protection for six months from the end of your loan grace period. (For most lenders, that’s six months after leaving school.) This is a major difference from federal loans, where the protections last for the life of the loan, Baker says. The pandemic is a perfect example. Most federal borrowers haven’t had to make a payment for over a year, while private borrowers have had to fend for themselves. And while the widespread financial upheaval from the pandemic is hopefully a one-off event, says Baker, economic shocks happen all the time at the individual level, whether it’s job loss or loss of life. unforeseen expenses.
âIt takes a lot of money and capacity to provide this kind of support over the life of the loan,â she says. “This is why we rely so heavily on the federal loan system.”
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