Archive for December, 2015

December 9, 2015

Prepare for upcoming FAFSA changes

by Grace

Lynn O’Shaughnessy reports on a change that will make filing FAFSA easier.

Currently, the earliest that families can file FAFSA each year is January 1, and college deadlines for this information can be as early as February.  At the same time, prior year tax return information must be included in the submission, making it difficult for parents who have not filed their taxes as of February.

The parental scramble to file the FAFSA and get their taxes completed will soon no longer be an issue. Beginning with the 2017-2018 school year, students will be using prior-prior tax returns when completing the FAFSA.

Parents of students who will be in college in the fall of 2017, for example, will use their 2015 federal tax return to complete the FAFSA. Under the traditional system, these parents would have relied on their 2016 tax returns. So you can see that scrambling to complete their tax returns will no longer be an issue because of the reliance on an older tax return.

One of the most critical points families must consider in light of these change is that their 2015 financial situation will be used twice in determining eligibility for financial aid.  This can penalize families who has an unusually prosperous 2015.

Taxes for 2015 will be doubly important.

As the system transitions to using prior-prior returns, many families will have to use their 2015 tax return twice. Parents will use the 2015 return if they are applying for aid for the 2016-2017 school year and the following year too.

Relying on the 2015 tax return twice won’t be an issue for parents whose incomes have remained stable during those two years. But it can be a terrible development for families who experienced a tremendous financial year in 2015 but not in 2016.

What should these families do?

If your financial situation has changed since you filed your 2015 tax return, you can ask for a professional judgment from a school. College financial aid administrators have the power to adjust your aid amount based on information that isn’t reflected in the aid application.

Check out this link for more details on upcoming FAFSA changes:

Lynn O’Shaughnessy, “No More Financial Aid Rush”, The College Solution, September 24, 2015.

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December 4, 2015

Our broken student loan system

by Grace

The New York Times published another student loan article that featured the extreme case of a college graduate who owes the federal government $410,000 after unwisely borrowing to pay for degrees that only qualify her to be a high school teacher.  Maybe it was supposed to elicit sympathy from readers, but even the usually soft-hearted NYT readers made it clear in the comments that this woman is not much of a victim and only has herself to blame.

More of interest to me was the way the article explained the troublesome truths about our broken student loan program, which “has been removed from the norms and values of prudent lending”.

The private enterprise system is built to limit overborrowing by sharing risk between lenders and borrowers. Lenders examine credit and income histories and ask for collateral that can be repossessed in case of default. They charge more interest when they take on more risk. Because most loans can be discharged in bankruptcy, lenders share the cost of default. It’s likely that Ms. Kelley’s mortgage lender lost money on her 2008 foreclosure, for example.

But the federal student loan program doesn’t work that way. Those ads that run on bus stop signs and on late-night television — “No Cash? No Credit? No Problem!” — are essentially the Department of Education’s official policy on student loans.

On the front end, the department is the world’s nicest, most accommodating lender. Interest rates are set by Congress and are lower than banks charge in the private market. Borrowing for college is essentially an entitlement — as long as you’re enrolled in an accredited college and aren’t in arrears on a previous student loan, it doesn’t matter how much debt you have or how little money you make. Undergraduate loans are capped to contain borrowing and college costs, but graduate loans are bound only by the vague limits of “living expenses.”

Private lenders also don’t let people defer making payments for years or decades at a time.

A private sector lender approached by a potential borrower with no assets, a modest income and $350,000 in debt who had never made a payment on that loan in over 20 years would not, presumably, lend that person an additional $7,800. But that’s exactly what the Department of Education did for Ms. Kelley in 2011. Legally, it could do nothing else.

Our culture also encourages a great deal of trust in colleges. When people walk onto a used-car lot, they generally understand that promises of easy credit are just another tool for a slick salesman to close a deal. The local university and the Department of Education, by contrast, are assumed to have students’ best interests in mind.

Pro-student organizations support low interest rates, no credit checks and lengthy deferment options, as do colleges that can’t stay solvent without debt-financed tuition. Individually, these policies have merit, just as not repaying a student loan is often a perfectly rational choice in the short term, right up until the point when the short term becomes long. For some people, it hardly seems like debt at all.

When the loan bill finally comes due, the federal government transforms into a heartless loan collector. You don’t need burly men with brass knuckles to enforce debts when you have the Internal Revenue Service. It is both difficult and illegal to hide money from the federal government, which can and will follow you as long as you live.

The government acts this way because the federal student loan program has been removed from the norms and values of prudent lending. Because the Department of Education doesn’t consider risk, it takes no responsibility. If life, luck and bad choices leave you $410,000 in the hole, it’s all on you.

At the core of the problem is poor underwriting.  Not every warm body should receive a loan based solely on attendance at a college that may or may not have reasonable standards for admission.

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