SafeStart: What Is It, and Is It Right for You?
Student debt is no easy thing to deal with. For many students, the prospect of a mountain of debt when they graduate can affect which college they choose to go to—or whether they go to college at all.
Several companies have tried to make a profitable niche out of middle-class students and their families with these concerns. So far, the most prominent one is a company called SafeStart—which promises to take away the threat of enormous student loan payments after graduation.
How does SafeStart work?
The company offers a line of credit, interest-free, that you can borrow from to pay off your student loans. You can tap their line of credit up to twelve times during the first five years after graduation—and the money is paid directly to your lender. Each time you tap the loan, it covers three payments on your student loans—for a total of 36 months’ worth of coverage. In a second five-year period, you have to pay back your SafeStart loan.
The benefit is that the SafeStart loan is interest free—so you should save money even on repayment of a federal loan, but especially on private loans. When you pay back your loan from SafeStart, you’ll have to make payments of at least $20 or one-sixtieth of each draw—whichever is more—until the loan is paid off. If you want, you can also start paying back the loan before your second five-year period starts—and there is no penalty for fast repayment.
How much does it cost?
SafeStart is a new program, and there’s plenty of debate over whether it will turn out to be a better deal than the various federal programs on offer already.
SafeStart charges approximately $40 to $90 per $1,000 you’ve borrowed on your student loans. You can pay the fee up front or in 12 monthly installments over the period of a year. The fee varies depending on how much you have in student loans, the school you go to—it’s likely they charge more for schools with high rates of student defaults—and other factors. Once you pay your fee, the rest of the loan is interest-free.
Who is eligible?
You are only eligible for SafeStart if you graduate from college. You also have to prove financial hardship to get access to your line of credit. To achieve financial hardship, you have to prove you’re either unemployed or your monthly loan payments add up to more than 10% of your gross income per month.
As of now, SafeStart only covers Stafford loans—although the program plans to offer coverage to other federal loans in the future. It does not cover private loans.
What are the drawbacks?
The price of the student loan won’t change depending on your major—and it’s possible that SafeStart is a better option for students who are pursuing degrees that lead to less lucrative careers. In addition, it’s possible that you could pay for the loan, then find you’re not in financial hardship when you graduate—so you won’t get to access a loan you’ve paid a hefty price to access up front.
The disadvantage works the other way, as well. The company basically asks you to predict that you’ll be in financial hardship when you graduate—and pay a significant amount up front on that prediction. Many students don’t believe they’ll be the ones facing hardships after graduation—although it’s a bit early to predict whether or not the program will be in high demand in the future.
There are other drawbacks as well. After the five-year period after college during which you can draw on your SafeStart loan, you’ll have to start paying it back. Theoretically, you could wind up having to make repayments to both your student loans and your SafeStart loan during that time.
On the face of it, it looks like the benefit of SafeStart is that it offers an interest-free loan in place of a loan with interest. However, when it charges a 4% to 9% up-front fee, it’s almost as though it’s charging an interest rate up front.
This would be great if you were buying SafeStart to cover your payments to a private loan with a high, variable interest rate. Instead of a high rate of interest that could jump at any time, you’re paying a lower percentage up front—it won’t accumulate on you if you have to defer the loan, and it won’t increase. Once you’ve paid it, you’re done and have only the balance of the loan to worry about.
However, Stafford loans have interest rates that start at around 5.6%—so depending on how much SafeStart charges you up front, it’s possible you would be exchanging a lower interest rate for a higher one.
Is SafeStart a better deal than federal programs?
SafeStart is a new program, and there’s plenty of debate over whether it will turn out to be a better deal than the various federal programs on offer already. Detractors say that with all the federal options, there’s really no need for SafeStart.
Federal loan repayment options—such as deferments and forbearances—allow you to postpone or dramatically reduce your payments if you prove financial hardship. However, your interest rate is likely to accumulate during your grace period.
Income-based repayment programs also allow you to dramatically reduce your payments, and they’ll even forgive your loans under some conditions after a 25-year payment period.
So far, it seems as though SafeStart may be offering too little to make a discernible difference with the loan burden many students are faced with when they graduate. However, some students may benefit from it—particularly those entering low-paying or high-competition career fields, with an up-front SafeStart fee that’s discernibly lower than their existing Stafford loan interest rates. Only time will tell whether SafeStart turns out to be a helpful way to combat the growing problem of student debt.
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