Archive for ‘paying for college’

March 25, 2015

Tips for older student loan borrowers

by Grace

How can older Americans sidestep student debt trouble?

With the need to retool career skills or pursue new vocations, more Americans are taking on loans to finance education later in life — for new degrees, certificates or course work called continuing education units to improve knowledge in demanding professions.

According to the Government Accountability Office, student debt held by those 65 and older has risen significantly in recent years, growing to about $18.2 billion in 2013, from about $2.8 billion in 2005. While it’s not known how much of that is the result of college loans co-signed for children or grandchildren, a good portion is for continuing education. Before the last recession, the working-age population pursuing “re-entry” courses jumped 27 percent over a decade, according to the Education Department.

The New York Times’ advice for senior citizens seems to be the same that younger student loan borrowers should follow.

… “Do a cost-benefit analysis. How will it maximize my earnings? Will I be able to service the debt?”…

“Evaluate your postgraduate payment plan,” Mr. Weber suggests. “What will your salary be after graduation? Will there be an immediate payoff in terms of a higher salary?”…

You can overpay for a degree or certificate that will yield little career advancement or salary increases. Mr. Weber warns against for-profit colleges that market aggressively and says their programs and graduation rates should be carefully vetted.

The federal government offers some flexibility in paying back loans, including income-based repayment (IBR).

But what happens after you’re out of school with continuing education debt if you can’t increase your income or don’t start earning money right away?

If you have federal loans, you can qualify for a break from payments until you can start paying them down. See the Education Department’s federal student aid website to explore the options.

Another option is income-based repayment, available only for federally guaranteed loans. Private loans are the least flexible in terms of repayment.

Retired borrowers may be more likely to qualify for IBR.

“If you’re at or near retirement, your income may be lower, which may affect your ability to repay your loan,” she said. “There is income-based repayment available, which can make repayment more manageable, but can also extend the repayment period, leading to more interest accrual. It’s something to keep in mind as you plan for the future.”

Since assets are not counted in determining eligibility for IBR and similar debt relief programs, senior citizens with substantial home equity and retirement accounts may find it easy to qualify.

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John F. Waskimarch, “Managing Student Loan Debt as an Older Adult”, New York Times, March 19, 2015.

March 19, 2015

New ‘Student Aid Bill of Rights’ makes it easier to pay back student loans

by Grace

The Obama administration’s new “Student Aid Bill of Rights” will “simplify the process to apply for income-based repayment”, a move likely to shift more of the burden for paying back student loans from borrowers to taxpayers.  That is just one of the new benefits for the 40 million borrowers holding $1.3 trillion in student debt.

President Barack Obama announced a new “Student Aid Bill of Rights” Tuesday, directing the Department of Education and other federal agencies to undertake initiatives in three areas to help improve affordability for the estimated 40 million borrowers with federal loans. “We’re going to require that the businesses that service your loans provide clear information about how much you owe, what your options are for repaying it, and if you’re falling behind, help you get back in good standing with reasonable fees on a reasonable timeline,” Obama said during his speech at the Georgia Institute of Technology Tuesday afternoon.

This is the government’s rather magnanimous promise:

A Student Aid Bill of Rights

  1. Every student deserves access to a quality, affordable education at a college that’s cutting costs and increasing learning.
  2. Every student should be able to access the resources needed to pay for college.
  3. Every borrower has the right to an affordable repayment plan.
  4. And every borrower has the right to quality customer service, reliable information, and fair treatment, even if they struggle to repay their loans.

Summary of changes:

1. Create a centralized website that makes it easy to file complaints and to see all your student loans in one place….

2. Try having federal employees collecting debts instead of private contractors…

3. Make it easier for borrowers who become disabled to get their student loans discharged….

4. Ensure that the private debt collectors hired by the Department of Education apply prepayments first to loans with the highest interest rates, unless the borrower requests a different allocation.

5. Make it easier for students to get IRS information to qualify for income-based student loan repayment.

6. Clarify the rules under which students who declare bankruptcy can get their student loans reduced or eliminated….

While I disagree with some of the federal student loan program’s fundamental policies, it’s nice to see the government take the initiative for more clarity and transparency.

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Kelli B. Grant, “Student loan initiatives could benefit 40M borrowers”, CNBC, March 10, 2015.

Kim Clark, “6 Ways the New ‘Student Aid Bill Of Rights’ Will Help Borrowers”, Money, March 10, 2015.

March 16, 2015

Most borrowers take more than 10 years to repay student loans

by Grace

The standard maximum repayment time for federal student loans is 10 years, but in reality most borrowers take longer.

The vast majority of former students entering repayment on their federal student loans in 2012 picked 10-year plans. The numbers were higher for former students from two- and four-year programs, up to 90 percent of which picked the standard 10-year plan.

Recent history indicates that many of those borrowers will be repaying their federal student loans for far longer than 10 years. With a lackluster economy, tepid wage growth and vast numbers of Americans still looking for full-time work, some federal policymakers fear current borrowers will need more time to repay their loans than previous generations.

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Just last month the Obama administration predicted “the increased use of student loan forgiveness programs will cost taxpayers $22 billion next year”. Student loan forgiveness programs allow reduced monthly payments that typically extend the repayment period beyond ten years.

Here’s a listing of federal student loan repayment time frames.  Click the links to find more details. 

REPAYMENT PLAN TIME FRAME
Standard Repayment Plan Up to 10 years
Graduated Repayment Plan Up to 10 years
Extended Repayment Plan Up to 25 years
Income-Based Repayment Plan (IBR) Up to 25 years
Pay As You Earn Repayment Plan Up to 20 years
Income-Contingent Repayment Plan Up to 25 years 
Income-Sensitive Repayment Plan Up to 10 years

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Shahien Nasiripour, “These 9 Charts Show America’s Coming Student Loan Apocalypse”, Huffington Post, 08/20/2014.

March 4, 2015

Can we afford this college?

by Grace

One of the most basic questions during the college planning process is often one of the hardest for a family to answer.

Can we afford this college?

The hard part is usually not in knowing what you can afford to pay, but in trying to find what the net cost of attendance will be for your child.  Here’s a three-step process that may help you answer this question.

  1. Run the Net Price Calculator
  2. Check the college website to find answers to the College Board “dirty dozen” questions
  3. Contact the school’s financial aid administrator


1.  Run the Net Price Calculator (NPC)

The NPC is an online tool that is a useful first step in comparing affordability.  Every college website has a calculator, which typically requires entering family financial information such as income and assets before the estimated net price of attending is generated.  Remember, this is an estimate and may not produce accurate results for business owners and other situations.  Proceed with caution, and check for online resources like the CollegeBoard tip sheet to help in the process.

2.  Check the college website to find answers to the College Board “dirty dozen” questions

A list of 12 questions to get you started on gathering information about a school’s financial aid policies is provided by the CollegeBoard.  In my experience, the answers to most of these questions can usually be found on college websites.  Going through these questions often prompts families to consider other important questions about college costs.

3.  Contact the school’s financial aid administrator

Okay, so not all your answers about costs and financial aid were easily found on the college website or other online resources?  Contact the college’s financial aid office and get the information directly from them.  They should be able to give you information rather quickly, and if they don’t it might be an indication of how transparent and helpful they are in other situations.

For organized families, it’s not a bad idea to create a spreadsheet that can capture important information and allow for efficient comparisons.

February 9, 2015

Poor timing of 529 withdrawals can cancel tax benefits

by Grace

529 funds must be withdrawn and used within the same year that expenses are incurred to preserve tax benefits.

Question: My daughter’s college is offering a discount if you prepay in year one for all four years. Can we use 529 funds to pay all of her tuition up front even though she’ll still be in school for another few years?

Answer: In general, 529 distributions must be used to cover qualified college expenses incurred in the same tax year in which the distribution is made; otherwise, taxes and a penalty apply. The scenario you describe falls into something of a gray area given that you would be using 529 assets to pay for tuition–a qualified expense–but paying for services to be provided not only during the current tax year but in future tax years as well.

Such a scenario isn’t specifically addressed in the IRS rules governing 529 expenditures, but Mark Kantrowitz, publisher of the college-planning siteEdvisors.com, says the way the rules are written suggests that it is not just when qualified expenses are paid that matters but when those expenses are incurred. “In general, the IRS interprets tax law as applying to income and expenses during the tax year except if explicitly stated otherwise,” Kantrowitz says.

The bottom line is you’d be wise to consult a tax professional before prepaying all four years. Even if he or she recommends only counting the current year’s tuition payment as a qualified expense, you could still pay all four years at once to take advantage of the discount. Just keep in mind that if doing so requires using additional 529 funds, you may end up owing taxes on the earnings portion of any nonqualified distributions plus a 10% penalty, and those costs could eat into–or erode entirely–the prepayment discount.

Morningstar offers more advice about avoiding the pitfalls in timing your 529 withdrawals.

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Adam Zoll, “529 Owners, You Must Remember This”, Morningstar, February 3, 2015.

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February 2, 2015

How the ‘middle class’ saved 529 plans

by Grace

Why did President Obama do such a quick about-face on 529 plans, first proposing to eliminate them and then a few days later dropping that proposal?  Although it was widely believed that this initiative had zero chance of getting through Congress, it appears Obama’s actions were due to the efforts of the elusive “middle class”.

Several news sources have pointed out how poorly this proposal polled, notably with Democratic voters.  It seems the administration could have predicted this reaction, but apparently they were blindsided.  Obama’s proposal would have penalized wealthy families the most, since 70% of 529 “tax benefits go to households earning more than $200,000″.  As such, “middle class” families would not be seriously hurt by this change.  But here’s the rub.  The vast majority of Americans consider themselves middle class, including many with household incomes well into the six-figure range.

Don’t tax me, tax that rich guy over there.

The first rule of modern tax policy is raise taxes only on the rich. The second rule is that your family isn’t rich, even if you make a lot of money.

President Obama’s State of the Union proposal to end the tax benefits for college savings accounts ran afoul of these rules, which is why he abandoned it, under intense pressure from both political parties, within a week.

Tax-free college savings accounts, like the mortgage interest deduction and the state and local tax deduction, principally benefit people who range from affluent to wealthy. In pushing its proposal, the White House pointed to Federal Reserve data showing that 70 percent of balances in the college accounts were held by families making at least $200,000 a year. In theory, tax reform is supposed to be built around cutting back preferences like these, in order to pay for some combination of lower tax rates and tax preferences aimed at people with lower incomes.

Politicians have met with strong resistance to increasing taxes on the “merely affluent”.

But in practice, politicians from both parties have made a point of holding the group you might call the “merely affluent” harmless from tax increases. If you make $150,000 to $225,000, you make about two to three times the national median income for a married couple. The list of occupations that can get you into this income bracket — government official, academic, lobbyist, journalist — can sometimes make it hard for people in political circles to remember that 92 percent of American married couples make less than $200,000 a year.

A lot of people in this category don’t think of themselves as rich, and they benefit from tax provisions like college savings accounts.

So how can politicians raise more tax revenue?  It’s a challenge.

… If you can’t go after tax provisions for the merely affluent, you are exempting almost everyone from tax increases. And if you can’t broaden the tax base, then you are very limited in how much you can finance tax reform.

Where else can they find the money?

Raising taxes on the very rich won’t raise enough revenue to balance the budget, and the bottom 50% of income earners — who only pay about 2% of all federal taxes — are not a likely source.

Peter Suderman of Reason believes the 529 debacle shows that the “existing welfare state is unaffordable”.  On the other hand, Reihan Salam of Slate laments that the upper middle class is ruining all that is great about America.  In essence, both may be saying the same thing.  It’s hard to finance expansive government programs because “eventually you run out of other people’s money”.

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Josh Barro, “A ‘Rich’ Person Is Someone Who Makes 50 Percent More Than You”, New York Times, January 29, 2015.

January 19, 2015

Completing the FAFSA

by Grace

Students and parents often find the Free Application for Federal Student Aid (FAFSA) to be a little intimidating. The form asks more than 100 questions about family finances and demographic details. The FAFSA is slightly more complicated than the typical federal income tax return. Officially, the form should take less than an hour to complete, but most parents don’t have advanced degrees in economics. Some parents want help completing the FAFSA, because they worry that making a mistake on the FAFSA will affect their ability to pay for college, ruining their child’s life forever.

Don’t panic! Take a deep breath. Relax.

Edvisors offers an online Step-by-Step FAFSA Tutorial

… This step-by-step guide provides a tutorial overview of completing the Free Application for Federal Student Aid (FAFSA). It is based on the bestselling book, Filing the FAFSA.

The book is available for free download at the link.

The Federal Reserve Bank of St. Louis offers a video that guides you through completing the FAFSA.

FAFSA 101
Take a stroll through each screen of the online FAFSA to see what information you’ll need on hand to complete the application quickly and accurately.

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November 26, 2014

Choice of major is likely to be biggest determinant of student loan burden

by Grace

The Undergraduate Student Loan Calculator offered by the Hamilton Project allows you to illustrate what percentage of your future earnings are likely to go toward paying off your student loan.  Among other variables, you can select your major course of study.

Here’s an illustration comparing a petroleum engineering major with an ethnic studies major, showing a dramatic difference in outcomes, particularly in the first year after graduation.

20141122.COCHowLongPayLoan2

 

The ethnic studies major starts out paying almost 26% of his earnings toward his student loans.

Year One:
Petroleum Engineer      Monthly Income: $3,816   Monthly Loan Payment: $277
Ethnic Studies              Monthly Income: $1,073   Monthly Loan Payment: $277

Income is based on the median earnings for that major.  The loan assumptions are based on average student debt of $26,500 as of 2012 and current federal student loan interest rate of 4.66%.

Run your own illustrations at the Hamilton Project site.

November 10, 2014

What to do if you have not saved up for college

by Grace

Middle- and upper-income families who have not saved for college, and who cannot pay tuition from current income, will likely be taking out loans to finance their children’s higher education.

You are probably not going to get rewarded for having saved nothing. Everyone seems to know a family in their area with a big house, fancy passport stamps and no savings with a child who nevertheless got an amazing financial aid package from a top school. Don’t believe the stories. The details of financial aid are so complex that many families don’t understand their own packages, or the rumormongers transmit the details incorrectly. Income tends to matter in financial aid more than assets and savings, especially at public universities.

Grants typically pay only a relatively small part of the costs, except for the most selective colleges where money flows freely for everyone but the rich.

THE COLLEGES Most families with no savings will be hoping that at least some colleges they apply to will offer large grants and ask them to borrow less money than others. But popular, highly ranked schools tend to have a lot of applicants. Even if you do get in, many of them may not offer outsize rewards or be flexible if you appeal for more money once you get in. Apply and cross your fingers, but don’t count on generosity here unless the school is particularly well endowed.

Here’s a way to start.

THE DATA For families with little or nothing saved, the process has to begin with a crash course in how colleges make decisions about financial aid. First, you’ll want to use the calculator on the College Board’s website that estimates your expected family contribution, the number that the federal government will use in figuring out how much federal aid you are eligible for once you fill out the Fafsa (Free Application for Federal Student Aid) form later in a child’s senior year in high school. Colleges will also use this number, with additional tweaks in some cases, as a baseline for what you can pay each year, though it’s no guarantee that they’ll make up the difference with grants or work-study jobs and not a link to a bunch of loan applications.

There’s more information at the link below for families who face college without savings.  And check out this additional advice for parents of high schoolers facing the high cost of college.

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Ron Liebera, “College Financial Aid Guide for Families Who Have Saved Nothing”, New York Times, Oct. 17, 2014.hing.html?_r=0

November 6, 2014

What’s the hardest part about applying to college?

by Grace

No surprise here.  Students think the standardized tests are the hardest part about applying for college, but parents seem more focused on the challenge of paying for college.

 

20141105.COCCollegeAppToughest2

 

Other survey results can be found at “College by the Numbers, A Statistical Look at College Costs, Financial Aid and More”.

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Christina Lourosa-Richardo, “College by the Numbers”, Wall Street Journal, Sept. 21, 2014.

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