Should you refinance your student loan by using a lower-interest home equity loan?

Should I use a home equity loan to refinance my student loans at a lower interest rate?

Rohit Chopra, the Consumer Financial Protection Bureau’s Student Loan Ombudsman, looked at the option of using a home equity loan to refinance existing student loans.  This would only apply to homeowners with significant equity, probably someone out of college ten years or more.  The main advantage would seem to be the ability to swap a high-interest student loan for one with today’s enticing low rates.  The window of opportunity for using this strategy may be closing soon, with expectations by some forecasters that an increase of interest rates is on the horizon.

Here are some important considerations.

• Your rate may be lower, but your home is at risk. Interest rates for home equity loans are generally lower than interest rates for student loans. (Lenders are willing to offer a lower interest rate because they know that if you don’t pay, they have a legal claim on your home.) If you can’t pay, you could end up in foreclosure.
• On your federal loans, you are giving up repayment options and forgiveness benefits. Federal student loans feature a number of protections for borrowers that run into trouble, including Income-Based Repayment (IBR). These benefits no longer exist when you pay off a federal student loan with a home equity loan.
• This may impact your taxes. The interest you pay on a home equity loan could equate to a greater tax benefit for some borrowers, when compared to the student loan interest tax deduction, especially if you have high income and itemize deductions. You may wish to consult with a tax advisor when considering your options.

Last year I wrote about this topic from a parent’s perspective, addressing  the question of whether a federal Direct PLUS parent loan or a home equity loan is better for financing a child’s college costs.

Regional interstate compacts as a way to cut college costs.

Don’t overlook higher education regional interstate compacts as a way to cut college costs.

Regional interstate compacts are reciprocity arrangements whereby state universities and colleges offer tuition discounts to out-of-state students, allowing them to “pay the same price as a resident or capture a significant discount“.  Here are four regional compacts along with the participating states.

Western Undergraduate Exchange – Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming

Academic Common Market – Alabama, Arkansas, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia

Midwestern Higher Education Compact – Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, and Wisconsin

New England Board of Higher Education –  Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont

Not all schools in each state participate, and most schools limit the number of students accepted.  Various restrictions are imposed.  In many cases, only programs not available in the student’s home state are included in the agreements.

Example of savings from an MHEC public college or university:

In-state tuition	$4,000
Out-of-state tuition	$8,000
MSEP Tuition (150% of In-state tuition)	$6,000
Your Savings	$2,000

These interstate compacts are worth exploring by students interested in attending college outside their resident states.

Preferential packaging – college financial aid as a recruiting tool

Preferential packaging of financial aid is commonly used by private colleges and universities.  Because schools are not transparent about this strategy, many families are ignorant of how it works.  Muhlenberg College is unusually open about explaining this practice.

Preferential packaging means, simply, that the students a college would most like to enroll will receive the most advantageous financial aid packages.

There are three basic types of financial aid (FA):  grants, loans, and work.

A preferential financial aid package includes a far greater percentage of grant aid than self-help (loans and work). Because they have discretion over how much grant aid they choose to award a student, a college can award a bigger grant to a student they would really like to enroll….

Willamette University also is exceptionally forthright about its preferential packaging.

For students with demonstrated financial need, the percentage of need that is met with “gift-aid” (scholarships and grants from all sources) will also reflect the students’ academic standing within our admitted applicant pool. In other words, the stronger the student, the greater the scholarship award is likely to be.

Let’s look at an example from a CollegeConfidential post.

In this case the college’s Cost of Attendance (COA) is $40,000, and two applicants have the same financial need but quite different academic credentials.

Student A ACT 33 GPA 4.0 EFC = $7k

Student B ACT 24 GPA 3.2 EFC = $7k

Student A is more attractive to the college because his stats would improve the school’s stats.  Perhaps Student A is also an Underrepresented Minority (URM), another desirable factor.  Both students will be offered $10,000 in FA, but Student A will receive a preferential package that does not include a loan.

Financial Aid Offered
Student A:  $8,000 grant; $2,000 work-study – Total = $10,000
Student B:  $3,000 grant; $5,000 loan; $2,000 work-study - Total = $10,000

Note that these awards are technically “need-based”, but in fact do take merit into consideration.  If it is the official policy of this college only to offer FA based on need and not on merit, another student with the highest of academic credentials but lacking any financial need (EFC = COA) would receive nothing.

What it means to applicants

• Students seeking to maximize financial aid should apply to schools where their statistics place them in the upper third of the applicant pool.
• Students with no financial need are shut out of many merit awards that include a need component.

Related:

• Psst – one of Duke’s so-called merit scholarships is actually need-based (Cost of College)
• Family income matters for ‘merit’ awards at the University of Rochester (Cost of College)

A look at one family’s first three years of college expenses

The Family CEO shared details of paying for her daughter’s first three years of college.  This breakdown offers insight into how many families are managing to send their kids to college without going broke.  In this case, Julie Mayfield’s daughter is attending the “University of Kansas, an in-state school with affordable costs”.

JUNIOR YEAR COSTS:

Tuition/Room & Board/Books: $10,143

• Tuition = $3059*
• Room = $2950
• Board (Meal Plan) = $3800
• Books = $334

*After scholarships

Fees: $1328

• Required Campus Fees = $888
• Technology Fees = $290
• Sports Combo Pass = $150

Sorority: $2465

• Dues & House Maintenance: $1032
• Moms/Dads Weekends, Flowers, Musical Production = $1433

Total: $13,936

What’s Not Included:

Spending money – Lindsey is responsible for her own spending money so I don’t have costs for things like eating out, snacks, toiletries, school supplies, clothing, laundry, gas, etc.

TOTALS FOR THE FIRST THREE YEARS OF COLLEGE:

• Freshman year: $17,435
• Sophomore year: $13,171
• Junior year: $13,936
• Total: $44,542

The first year involved some “start-up costs”, including a printer and dorm furnishings.  Go to Julie’s blog for more details, including itemized expenses for the first two years of college.

Related:  Average amount of parents’ contribution to college is about $10,000 (Cost of College)

Don’t be surprised by these college expenses

Uexpected expenses can add thousands of dollars to the annual cost of college.

1. Textbooks can total $1,000 or more per semester.  Used books, rentals, and Kindle versions are some options that may cut costs.

2. Parent expenses include the cost of traveling to drop off children and to attend orientations.  Especially in some big cities, budget hotel rooms are hard to find.  These should be part of the financial considerations when making the final college selection.

3. Meal plans may waste money.  In some cases students do not eat enough meals in the dining room so “points” are left over at the end of the semester.  Or sometimes a student finds himself paying extra for meals instead of taking full advantage of the prepaid dining plan.  Picky eaters or students with food allergies may end up avoiding dorm meals.  In either case, better planning and discipline could save hundreds of dollars a year.

4. Student loan interest rates should be factored into the costs of financing.  Paying interest over ten or more years can add 50% or more to the total repayment cost, reinforcing the importance of avoiding too much student loan debt.

Read more details at US News.

A special day to remind us about the benefits of 529 plans

Darn! I missed 529 day.

The College Savings Plans Network sponsored National 529 College Savings Day this past Wednesday, 5/29/13.  Many states sponsored promotions for their 529 plans, with some offering special incentives that are still in effect.

Florida, for instance, is waiving the $50 enrollment fee for plans opened from May 20 through June 30.

You can check out individual states’ events and promotions by clicking on this map.

…

In general, 529 plans are college savings and investment accounts sponsored by state governments. Money deposited in the accounts grows tax free, as long as the funds are used for educational purposes when withdrawn. You don’t have to be a resident of a particular state to use its plan, although some states offer additional tax benefits to in-state plan participants.

Most 529s are designed as traditional savings-and-investment vehicles, but some states offer prepaid 529 plans, which allow savers to pay tuition at certain schools in advance at current rates.

Related:  What you may not know about 529 plans (Cost of College)

 

Parent PLUS loans are similar to no-doc mortgage loans

Parent PLUS loans, which are ”both remarkably easy to get and nearly impossible to get out from under“, can be a trap for uninformed borrowers.

Remember no-doc mortgage loans?  Parent PLUS loans, federally sponsored and available for parents of college students, are eerily similar.

The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached. When a parent applies for a PLUS loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt—like a mortgage or other student loans—the borrower is already on the hook for.

Designed for families who may not qualify for other types of debt, PLUS loans “sometimes hurt the very families they are intended to help”.

Of course, Parent PLUS can be an important financial lifeline—especially for those who can’t qualify for loans in the private market. An iffy credit score, high debt-to-income ratio, or lack of a credit history won’t necessarily disqualify anyone for a PLUS loan. Applicants are approved so long as they don’t have an “adverse credit history,” such as a recent foreclosure, defaulted loan, or bankruptcy discharge.

No cap on loan amount

Unlike other federal student loans, PLUS loans don’t have a cap on borrowing. Parents can take out as much as they need to cover the gap between other financial aid and the full cost of attendance. Colleges, eager to raise enrollment and help families find financing, often steer parents toward the loans, recommending that they take out thousands of dollars with no consideration as to whether they can afford it.

Harsh treatment for debtors who run into trouble

When it comes to paying the money back, the government takes a hard line. PLUS loans, like all student loans, are all-but-impossible to discharge in bankruptcy. If a borrower is in default, the government can seize tax refunds and garnish wages or Social Security. What is more, repayment options are actually more limited for Parent PLUS borrowers compared with other federal loans. Struggling borrowers can put their loans in deferment or forbearance, but except under certain conditions Parent PLUS loans aren’t eligible for either of the two main income-based repayment programs to help borrowers with federal loans get more-affordable monthly payments.

Parent PLUS spending has shot up over the last decade.

Last year the government disbursed $10.6-billion in Parent PLUS loans to just under a million families. Even adjusted for inflation, that’s $6.3-billion more than it disbursed back in 2000, and to nearly twice as many borrowers.

An interactive list of schools with accompanying Parent PLUS data shows that many of the institutions with the highest average loans are art and music colleges.  New York University is ranked 11th, with an average loan balance of $27,305.

Related:

• Qualifying for a parent Direct PLUS loan (Cost of College)
• Federal Direct PLUS or home equity loan for college costs? (Cost of College)

Tuition discounting grows to all-time high at private colleges

Tuition discounts continue to climb at private colleges.

The average “tuition discount rate”—the reduction off list price afforded by grants and scholarships given by these schools—hit an all-time high of 45% last fall for incoming freshmen, according to a survey being released Monday by the National Association of College and University Business Officers.

Rising discounts along with the smallest sticker price increases in years have combined to make college more affordable for many families.

“It’s a buyer’s market” for most colleges ”as more families focus on cost and value”.

Some facts and figures:

• 65% of private colleges increased their discount rate in the fall of 2012.
• About one in eight U.S. undergraduates is enrolled at a private nonprofit college, which provided 70% of all grant aid to undergraduates in 2009.
• “The average discount rate at private colleges has climbed for seven years in a row.”
• The median sticker price at about 280 private schools rose 3.9% last year, the smallest increase in about 12 years.
• At four-year public colleges and universities, in-state tuition and fees rose 4.8% last year, also the smallest increase in about 12 years.
• “The discount rate for public universities fell modestly in 2012 … after rising from 2007 to 2011.”
• Last fall, enrollment fell at about half of 400 private colleges surveyed as the number of high school graduates dropped.

Both need- and merit-based aid appear to be part of this trend of growing discounts.

The economic downturn boosted the number of families who qualify for aid. In addition, even those earning too much to demonstrate need under aid formulas “expect to see some sort of merit aid,” unless the school is highly selective, said Trey Chappell, a college adviser in Scottsdale, Ariz.

Is it a “fundamental shift”, or simply the result of a weak economy?

The question of whether the revenue problems facing colleges and universities are a result of a fundamental shift in the country’s attitude toward paying for college – the so called “college bubble” – or whether it’s simply the result of several years of weak economic growth will only be answered if families begin to experience the kind of economic growth they were accustomed to prior to the recession.

Related:  Tuition Discounting: Not Just a Private College Practice (CollegeBoard)

‘Rich’ families get a sweet financial aid deal at the most selective universities

For students who win the college admissions lottery and get in to the most selective universities, high income may not be a barrier to receiving financial aid.  Here are some examples.

HARVARD

2011-12 School Year:  About 240 families earning $180,000-200,00 received financial aid.

Beginning with the Class of 2016, families with incomes between $65,000 and $150,000 will contribute from zero to ten percent of income, and those with incomes above $150,000 will be asked to pay proportionately more than 10%, based on their individual circumstances. Families at all income levels who have significant assets will continue to pay more than those in less fortunate circumstances.

PRINCETON

2011-12 School Year:  99% of families earning $180,000-200,000 who applied for financial aid received grants that averaged $23,600.

Applicants receive aid based on their families’ financial need. We do not use income cutoffs when determining whether to award aid.  Any student whose family feels unable to afford the full cost of attendance is encouraged to apply for aid.

YALE

2011-12 School Year:  99% of families earning $150-200,00 who applied for financial aid were approved.  Grants for those 505 families averaged $26,500 each.

• Families whose total gross income is less than $65,000 are not expected to make any financial contribution towards their child’s Yale education. 100% of the student’s total cost of attendance will be financed with a Yale Financial Aid Award.
• Families earning between $65,000 and $200,000 (with typical assets) annually contribute a percentage of their yearly income towards their child’s Yale education, on a sliding scale that begins at 1% just above $65,000 and moves toward 20% at the $200,000 level.
• There is no strict income cutoff for financial aid awards. Many families with over $200,000 in annual income receive need-based aid from Yale.

UNIVERSITY OF CHICAGO

2012-13 School Year:  59% of families with incomes above $120,000 who applied received financial aid.

The average University of Chicago aid applicant receives $37,500 in scholarships each year.

$160,000 income puts you in the top 10% of families in the United States.

Related:

• Can rich families qualify for college financial aid? (Cost of College)
• Berkeley will offer financial aid to ‘middle-class’ families (Cost of College)

Private College 529 Plan is a unique option for locking in tuition costs

The Private College 529 Plan is “a relatively little-known program that lets participants prepay tuition at private colleges and universities, at today’s rates”.  This plan is unusual in that prepaid 529 plans are typically designed for enrollment in public colleges.

How it works

… Families contribute to a trust and get a certificate representing a share of tuition at current rates, a proportion that remains constant even as tuition rises. So, for instance, if you were to pay in $10,000, and the tuition at a given college were $40,000, the certificate you bought would be worth a quarter of one year’s tuition at that college. If, in 10 years, the tuition is $60,000, your certificate would be worth a fourth of that amount, or $15,000. Money must be in the plan for at least three years before it can be used. The plan covers tuition and mandatory fees, but not room and board and other expenses, like books.

The private plan includes more than 270 participating colleges and universities, but what happens if your child doesn’t want to attend one on their list?

If your child chooses a college that is not in the plan, you can change the beneficiary of the account, so another family member or relative can use it. Or you can request a refund. But you will earn only 2 percent maximum on your savings in the plan, and you could be subject to a loss of as much as 2 percent, depending on the performance of the trust’s investments. (While the value of the tuition certificates are guaranteed, plan documents caution that refunds aren’t assured, if the trust lacks funds to pay them. But Ms. Farmer says it’s “hard to imagine a scenario” in which that would happen. Refunds have averaged about 1 percent of plan assets for the last five years.)

Both the private and state prepaid 529 plans guarantee parents a locked-in tuition cost that can mean substantial savings, but there are some risks involved.

Because the emotional draw of the plan is strong, it is important that families carefully consider possible risks. For instance, to benefit from the plan, students must be accepted at a member college, and they do not get extra points in the admissions office for participating. The savings are greatest when families join early, but making such a commitment for a baby is a gamble. A student may later feel financial pressure to choose a college that participates in the plan.

What if college costs stabilize?  These prepaid plans may not turn out to be such a good value if college costs stagnate or even drop after their meteoric increases over the last few decades.

Related:  Average 529 savings reach all-time high