Archive for ‘student loans’

April 7, 2014

Be careful — your college financial ‘award’ may include loans

by Grace

College financial award letters can sometimes be difficult to decipher.  With the May 1 deadline for fall enrollment decisions fast approaching, families must be careful as they review details about the types of aid listed in these letters.

That number next to the word “financial aid award”? It’s not all a gift This is the single biggest point of confusion, financial aid experts say. There may be a line at the bottom of your letter that reads, “this is your award amount,” and the number next to that phrase could look like a lot of dollars. However, you have to look at the lines above the “total aid award” number to figure out what went into calculating that total – and chances are, there are some loans mixed in. Since loans need to be paid back with interest, these are hardly a “gift.”

This sample award letter shows a $39,000 “award” that “includes “$2,000 you’re expected to earn and another $6,500 you’ll have to pay back”.

20140403.COCFinAwardLetter1

 

What’s worse, Mark Kantrowitz says, you may not be able to quickly tell which items are grants and which are loans. “There’s no interest rate, no monthly payment listed, and they may not use the word loan. They set up a character limit for the name of the award and they use lots of abbreviations. Sometimes they’ll say L or LN instead of using the full word for loan,” he says. So, for instance, you may see “Fed Staff L,” and there may be a “sub” or “unsub” afterwards. This stands for “federal Stafford loan,” a loan that comes from the government and whose current interest rate is 3.9%. “Sub” stands for subsidized, which means the interest does not accrue while you’re in school; “unsub” stands for unsubsidized, which means the interest does accrue while you’re in school so the amount you owe upon graduation will be larger than the amount you borrowed (unless you pay down the interest while you’re in school).

Sometimes loans to parents are included in the award amount.

Stafford loans are loans that go in the student’s name, but parents need to be careful to scan the award letter for the addition of loans that will be in their names, too. Troy Onink, CEO of college planning service Stratagee.com (and a FORBES contributor), says that some schools will even include a Parent Plus loan into the “award” mix. Though this item is just a suggestion — you’re not required to take out a Parent Plus loan, whose interest rate was 6.41% this past academic year and whose 2014-2015 interest rate has not been set yet –some schools include a parental loan to inflate the “award” and make it look better than it is.

Forbes has additional tips for “Decoding College Financial Aid Award Letters.

Related:

April 4, 2014

Two-thirds of families use grants and scholarships to help pay for college

by Grace

The use of grants and scholarship to pay for college is on the rise.

The percentage of families using grants and scholarships for college has increased 30% from five years ago.

According to student loan servicer Sallie Mae, nearly two-thirds of families (65%) used grants and scholarships to pay for college in 2013, up from 61% in 2012 and up from only half of families five years ago. What’s more, 49% of parents say they’re not regularly setting aside money to college savings, and 70% of those parents say the reason they’re not saving is because they simply can’t afford to. In other words: more and more families are counting on grants and scholarships (including tuition discounts from the school itself) to pay for college.

The percentage of students who borrow for college has increased a more modest 10% from five years ago.

In 2013 32% of students borrowed to pay for college, up from 29% in 2009. Parent borrowing is down over that same time, from 15% in 2009 to 12% in 2013.

Related:

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Maggie McGrath, “10 Rules For Decoding College Financial Aid Award Letters”, Forbes, 3/31/14.

Sallie Mae, “How America Pays for College 2013″

April 1, 2014

Turbo Tax being used to promote income-based student loan repayment

by Grace

The federal government has begun to use Turbo Tax to promote income-based and other income-dependent college loan repayment programs.

The new push from the Departments of Treasury and Education uses tax time to promote the opportunity for a borrower to have their entire debt repaid after 20 or 25 years. The agencies are partnering with TurboTax, the tax software used by more than 18 million Americans, to advertise the deal….

Turbo Tax users will see information about loan repayment options and a link to the Department of Education website in a section of the program called “My Money Tools.”

They are provided with a link to a calculator that uses tax information, including their adjusted gross income, marital status and household size to determine eligibility for income-based and other income-dependent repayment programs.

The options allow qualified borrowers to lock-in monthly payments that are determined by how much they make, not how much they owe.

This new marketing push coincides with the upcoming introduction of more generous taxpayer subsidies for student borrowers.

Those graduating after 2014 will have the option of applying to an even more generous program Congress passed in 2009 that would set payments at 10 percent of discretionary income for 20 years. After that, the loan is forgiven.

The Turbo Tax promotion comes after the Obama administration and other supporters expressed concern that not enough borrowers were taking advantage of Income Based Repayment (IBR), a student loan forgiveness program.

Kelsey Snell, “Student loan debt deal comes with tax catch”, Politico, 3/26/14.

Related:  Federal student loan programs create perverse incentives (Cost of College)

March 28, 2014

‘Direct PLUS Loan made to a parent cannot be transferred to the child’

by Grace

Don’t make the mistake of thinking a Direct PLUS Loan can be transferred from the parent to the child.

As a parent borrower, can I transfer my loan to my child?

No, a Direct PLUS Loan made to a parent cannot be transferred to the child. You, the parent, are responsible for repaying the loan.

Parents may be lulled into taking on excessive student debt, believing that this obligation can later be easily transferred to their children.  A verbal promise by a student to take over his parent’s debt after he graduates is easy to make at the beginning of the college experience.  But that promise can become hard to keep later on, especially when job prospects don’t pan out or when a student struggles to get his degree.

Parent PLUS loans are ”both remarkably easy to get and nearly impossible to get out from under“.  With good credit, a parent can take out a PLUS Loan up to the total cost of attendance.  That can easily exceed $50,000 each year.

A side agreement can be made to shift the PLUS Loan payment obligation from parent to child, but the government still views the parent as ultimately responsible.

Unlike most other debt, federal student loans can rarely be discharged in bankruptcy.

When can my federal student loans be forgiven, canceled, or discharged?

You must repay your loans even if you don’t complete your education, can’t find a job related to your program of study, or are unhappy with the education you paid for with your loan. However, certain circumstances might lead to your loans being forgiven, canceled, or discharged.

Death or Total and Permanent Disability are two circumstances that allow for loan forgiveness.

Be careful.  It can be challenging to pay off college loans during your retirement years.

Related:  Qualifying for a parent Direct PLUS loan (Cost of College)

March 5, 2014

Federal student loan programs create perverse incentives

by Grace

Two problems with college loan forgiveness programs:

1.  They encourage students to choose less-valuable majors, according to George Leef.

.. income-based repayment would lessen or even remove the incentive that students now have to think prospectively about the cost/benefit ratio of college. With income-based repayment in place, the government is in effect telling students, “Relax—if college turns out not to do much to increase your income, you won’t have to dig deep to cover the costs.”

2.  They create “a perverse incentive for students to take out large loans they have no intention of paying back in full”, according to Walter Russell Mead.

… This is particularly true for graduate students, who have no limits on the size of the loans they can take out. As a result, the program has gone from “a safety net for undergraduates [to] a very large tuition assistance program for graduate students.”

Both income-based repayment plans and public service loan forgiveness programs absolve participants from paying back a significant percentage of the money they borrowed.

Mead describes how government policies are “Blowing Air into Debt Bubble”.

Over the past few years, the college cost crisis has evolved from merely an important issue facing parents and students into a serious national problem that could impact the future of the country. Moreover, most government programs designed to address the problem have only made it worse, inflating the bubble by encouraging students to borrow and giving colleges few incentives to lower prices. Federal student loans are the biggest offenders in this regard, but even other, more targeted programs have had this effect.

Related:

February 26, 2014

Growing student debt may be a reason for weak housing market

by Grace

A recent headline from the Washington Post highlights the problem of how growing student debt may be hampering an economic recovery.

Student debt may hurt housing recovery by hampering first-time buyers

The share of 25-year olds who have student loans is now at almost 50%, with an average loan balance of over $20,000.  Instead of saving money for a down payment to buy a house, many of these young people must prioritize paying down their student loans.

The money going into paying down student loans is not going into saving for a down payment.

First-time buyers, the bedrock of the housing market, are not stepping up to fill the void. They have accounted for nearly a third of home purchases over the past year, well below the historical norm, industry figures show. The trend has alarmed some housing experts, who suspect that student loan debt is partly to blame. That debt has tripled from a decade earlier, to more than $1 trillion, while wages for young college graduates have dropped.

The fear is that many young adults can no longer save for a down payment or qualify for a mortgage, impeding the housing market and the overall economy, which relies heavily on the housing sector for growth, regulators and mortgage industry experts said.

Recent changes place greater restrictions on the debt-to-income ratio allowed for mortgages.

Federal rules that took effect last month grant mortgage lenders broad legal protections as long as they do not approve loans for prospective buyers whose total monthly debt exceeds 43 percent of their monthly gross income. The overarching goal is to protect borrowers against lender abuses.

Most who struggled to buy their first home blame student loans.

Of the 20 percent of first-time buyers who said it was difficult to save for a down payment, 54 percent said student loans made it tough to save money, according to a recent survey by the National Association of Realtors. About half of the people polled in another of the group’s surveys said student debt was a “huge” obstacle to buying a home.

On the other hand, my anecdotal information tells me that a reluctance to be tied down to one location may also be an important factor in why young people are reluctant to buy homes.

Related:  Amid declining household debt, rising student loans remain a drag on the economy (Cost of College)

February 19, 2014

Recent college graduates suffering worst unemployment rates in 50 years

by Grace

Millennials of all education levels are suffering the worst unemployment in 50 years.

20140217.COCMillennialUnemploymentRatesAtlantic


Whatever the claims that millennials are an entitled generation, it’s clear they are facing employment challenges more difficult than their parents did.  They are also facing the twin problems of unprecedented rising debt and falling wages.

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Related:

February 6, 2014

College 101 Infographic

by Grace

20140202.COCCollege101Infographic1


College 101 Infographic from the Federal Reserve Bank of St. Louis has basic information about choosing a college and paying for it. 

Be educated and informed. Forecast your financial aid with the FAFSA4caster calculator. Find out what percentage of students received federal financial aid in 2012 and see the results of an April 2013 salary survey. Use a calculator to estimate the size of your monthly loan payment and the annual salary required to manage that payment. Learn about the top 75 college destinations with a link to the College Destination Index. Identify some of the reasons students select particular colleges…and more.


Short videos cover three topics:

  • Choosing a college
  • FAFSA
  • Financial aid

Related:  Ten questions to ask about college financial aid (Cost of College)

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January 29, 2014

Is your income too high to qualify for college financial aid?

by Grace

Mark Kantrowitz answers the recurring question about how much is too much income to qualify for college financial aid.

Question:

Is there a certain level of income and assets at which it doesn’t even make sense to apply for aid? I know this is not cut and dried, but before going through all the forms and submission expense, is there a formula where you can absolutely say that if your income is above x (say for a family of four) and your assets (outside of your primary home and retirement fund) are y, don’t even bother? - Stephanie

Answer:

The need analysis formulas are complicated enough that there is no simple answer to this question. The number of children in college can have a dramatic impact on eligibility for need-based financial aid. For example, a family with $100,000 in income and $250,000 in assets might have an expected family contribution (EFC) of about $29,000 with one child in college, but an EFC of $15,000 with two children in college. That won’t qualify for a Pell Grant since the EFC is more than $4,995, but it might qualify for subsidized Stafford loans or even institutional grants depending on the cost of the college. Financial need is defined as the difference between the cost of attendance (COA) and the EFC, so even a wealthy family might demonstrate financial need at a higher-cost college.

If family members have unusual financial circumstances, they may be able to qualify for more financial aid by asking the college financial aid administrator for a professional judgment review, sometimes called a special circumstances review or financial aid appeal. Unusual circumstances include anything that changed from last year to this year or anything that sets the family apart from the typical family. The college won’t make an adjustment for boat payments, but adjustments for job loss, unreimbursed medical expenses and high dependent care expenses (for example, for a special needs child or elderly parent) might qualify. Job loss is the most common reason for an adjustment. According to the 2011 College Decision Impact Survey, about one in six (17.6 percent) high school seniors had at least one parent lose a job in the last year.

Many colleges and scholarship providers require families to file the Fafsa to ensure that the student receives all the federal and state aid to which he or she is entitled. Families often overestimate eligibility for merit-based aid and underestimate eligibility for need-based aid.

Filing the Fafsa is also a prerequisite for low-cost federal education loans, like the Stafford loan and Parent PLUS loan. Almost half of Bachelor’s degree recipients from families with adjusted gross income (AGI) of $100,000 or more graduated in 2007-8 with student loan debt. More than two-fifths of students from families with AGI of $250,000 or more graduate with a Bachelor’s degree and student loan debt. More than a quarter of students from the top 1 percent borrow to pay for their education, perhaps because their parents want to ensure that the student has skin in the game.

Should you fill out the FAFSA if you are a high-income family?  It’s complicated, but keep this information in mind:

  • The FAFSA must be submitted to qualify for a federal loan.
  • Some merit scholarships require a completed FAFSA.
  • A family income that is higher than about $200,000 disqualifies most students for financial aid, but there are exceptions.

Related:

January 7, 2014

How the government promotes rising college costs and lowered standards

by Grace

Richard Vedder believes the federal government is fueling the higher education “arms race” that keeps pushing tuition costs higher and higher.

The government is providing fuel for an academics arms race that is going on all over the country by allowing kids to borrow huge amounts of money at very, very low interest rates, and many of these students are really not knowledgeable about finance and so forth. They go out; they borrow a lot of money. The colleges raise their fees more than they otherwise would. This provides extra income for the colleges, which goes for a ton of different things — luxury facilities, more administrators, higher pay for people, and the like — and makes college less affordable.

Instead of expansive loan programs, how should the government help deserving students?

Help low-income students by giving vouchers or scholarships. That would be fine. But empower individuals and provide information to individuals to make decisions….

In trying to control higher education, the government has stunted genuine progress and contributed to the lowering of standards.

I’m not against investment, but we are overcommitted in higher education. And as a consequence we’re getting students who are not prepared for college. We’re getting high dropout rates. We’re getting low learning levels. We get students only working 30 hours a week, going to class or studying. We get grade inflation. I could go on and on with all sorts of the manifestations of this that have happened as a consequence of this, none of which have been particularly good for American society.

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