May 6, 2015
The New York Times ran an article in which student loan borrowers explained what they wish they had known before taking on debt.
Federal law makes debt counseling mandatory for first-time borrowers, but “because the topic is dense and the department’s content is devoid of anecdotes, it’s tough to make the lessons stick”. Most colleges use the Department of Education’s online counseling module, which apparently most students find difficult to navigate and comprehend. What type of counseling would work to make students clearly realize what they were getting themselves into before it was too late?
The ideas from the article seem helpful, but some of them, like requiring a course during the first year of college, are only applicable after the money has been borrowed. Plus that recommendation seems to be overkill and costly.
A TG report, “A Time to Every Purpose“, gives some other suggestions for colleges, including these:
- Delivering supplemental counseling, ideally in a face-to-face setting, in order to help answer questions
- Providing sample budget sheets using local cost-of-living expenses
Ultimately, it is the student’s responsibility to take the time to fully understand the implications of college debt. Maybe students who borrow should have to pass a pre-entrance exam that covers practical knowledge about how loans will affect their personal financial situation.
Related: “College students are ignorant about how student loans work”
Ron Leiber, “Student Loan Facts They Wish They Had Known”, New York Times, May 1, 2015.
April 20, 2015
While a 529 plan is commonly considered the “best college savings vehicle”, this option does have some downsides.
Reasons to use a 529 plan:
Investments in 529 plans grow tax-deferred and withdrawals are tax-free when used for qualified college expenses. Also, most states offer income tax deductions on contributions. Even if funds are not needed for the intended beneficiary, there are other options that let the owner escape tax penalties.
Reasons against using a 529 plan:
• The earnings portion of withdrawals not used for qualified expenses is subject to ordinary income taxes and a 10% penalty.
• It’s not for the short term.
… one instance where the benefits of a 529 college-savings plan may not have time to accrue is for those that are looking at very short investment horizons—such as one year—before beginning to take withdrawals. The benefit of tax-free growth is very limited over such a short period of time in low-return, no-risk investments, and could be offset by investment expenses or plan fees in the short run.
• Requires extra research.
Plans will vary from state to state, which is a little more challenging for families. Therefore, you need to do your due diligence on the sales charges, fees, and investment choices by the plan administrator.
• Limited investment options and higher fees.
• Restrictions in moving funds between accounts.
Some families may simply prefer to maintain more flexibility and control over their college savings, and therefore are willing to forego the tax benefits that 529 plans offer. There are no absolute right or wrong choices since investing is a highly personalized undertaking. Here’s a good resource for learning more about 529 plans:
Understanding 529 Plans
“The Experts: Are 529 Plans the Right Choice for All Families Saving to Send Their Kids to College?”, Wall Street Journal, June 5, 2013.
April 13, 2015
While most colleges that use the CSS/Financial Aid PROFILE do include the value of your home in calculating eligibility for financial aid, there are some exceptions.
PROFILE Schools That Ignore Home Equity*
- Bard College
- Bucknell University
- California Institute of Technology
- DePauw University
- Hamilton College
- Harvard University
- Princeton University
- Santa Clara University
- University of Virginia
- Washington University, St. Louis
- Whitman College
*This list was compiled last year, and changes may have occurred since then.
Additional information about how other PROFILE schools treat home equity can be found by clicking the link above.
- Schools that only use the FAFSA (Free Application for Federal Student Aid) to determine eligibility for financial aid do not use home equity in the calculation.
- Schools that use the CSS/Financial Aid PROFILE to determine eligibility usually use home equity in the calculation, but often the amount is capped as a percentage of a family’s income.
Running the Net Price Price calculator for a particular college will usually show if home equity is counted, but the best way to be sure is to ask the school.
Schools can be flexible in awarding financial aid, and Lynn O’Shaughnessy reminds us of this important point:
By the way, how schools treat home equity can also depend on how desirable an applicant is.
Lynn O’Shaughnessy, “Will Your Home Equity Hurt Financial Aid Chances?”, The College Solution, August 7, 2014.