Posts tagged ‘Student loans in the United States’

August 29, 2013

A checklist before you take out a student loan

by Grace

From the Wall Street Journal comes 5 Things to Know Before Taking Out a Student Loan

1. Research what aid is available to you—including scholarships, state and federal grants, and then federal loans. Meet with your school’s financial-aid counselor to learn these options. Visit the government’s website. The private website also has good resources.

2. Know the terms of your loans. What is the interest rate, what is the repayment period, and when precisely will payments begin? More importantly, find out what your expected monthly payment will be upon graduation….

3. Once you take out loans, be aware that this debt will not go away until you pay it. Federal loans are often called “aid,” but they are not grants—they must be repaid. Also, it is extremely difficult to discharge student loans—federal or private—through bankruptcy….

4. Look up information on your institution. Don’t just find out your school’s overall ranking or graduation rate. Also look up its “three-year cohort default rate,” a figure intended to show how many students pay back their loans within three years of graduation. That reflects how many students from that school are finding work and decent pay. Information on your school, including default data, can be found here.

5. Look up the earnings potential of your major. This website has information on different careers, including average salaries. Consider whether your debt load is too high relative to the expected earnings of your chosen field.

Also check out loan forgiveness options.

I’ll add another item to this list.  Be sure to research the most recent federal student loan relief programs that reduce loan payments based on a percentage of income, subsidize interest charges, and forgive loan balances after 25, 20, or 10 years.

Income-Based Repayment Plan (IBR)
“… a repayment plan for the major types of federal student loans that caps your required monthly payment at an amount intended to be affordable based on your income and family size.”

Public Service Loan Forgiveness Program
“Under this program, borrowers may qualify for forgiveness of the remaining balance of their Direct Loans after they have made 120 qualifying payments on those loans while employed full time by certain public service employers.”

Keep in mind that these taxpayer-funded programs are expected to benefit higher-income borrowers the most while offering only marginal assistance to low-income borrowers.

 “If you are high-income and have a lot of debt, this is a huge giveaway.”

And some advice from Glenn Reynolds:

There are a few circumstances where student loans may be justified, but they should be viewed with extreme distrust.

Related:  Not enough borrowers take advantage of Income Based Repayment’s ‘mind-boggling’ generous benefits (Cost of College)

June 17, 2013

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

by Grace

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.

December 18, 2012

Forgiven student debt can come with a catch – big tax liablity

by Grace

The relief that comes with having student debt forgiven under the federal Income-Based Repayment Plan (IBR) may turn to distress when the tax consequences become apparent.

The catch comes with the forgiveness, since you generally have to pay income taxes on any forgiven debt (unless you were in a program for teachers or worked in a public service job, in which case the taxes go away). For many people, especially those who finished graduate or professional school with six figures of debt, the tax bill could be well into the five figures. And when it comes, you are supposed to pay in full, immediately.

It’s difficult to predict how many borrowers will be affected, with millions of students potentially qualifying for reduced payments under the IBR program according to various sources.  One estimate by the Office of Management and Budget has several hundred thousand borrowers incurring an average federal tax bill of $10,000.

… The O.M.B. assumed that 400,000 borrowers from 2012 through 2021, each with a beginning average loan balance of about $39,500, would each eventually receive loan forgiveness of about $41,000. Yes, you read that right. The forgiven debt will be more than the original balance, albeit many years later.

At $41,000 of loan forgiveness, the federal tax bill could easily be over $10,000 depending on your tax bracket. There are also state income taxes to contend with, depending on where you live.

In some cases the forgiven amount could be much higher, as in the example of Stephanie Day.  Day foresees a tax bill on more than $100,000, the amount she expects will be forgiven after unsuccessful attempts to secure employment in her field after receiving a master’s degree in psychology.

Should these tax liabilities also be forgiven?

 … “Think about it practically,” he said. “You forgive someone’s loans, then you stick them with a tax bill that’s equivalent to making three or five or 10 more years of payment on the loan.”Representative Sander M. Levin, Democrat of Michigan, has tried and plans to continue to try to get a law passed that will take away the tax burden, according to his spokesman. The odds of this happening anytime soon, however, are probably pretty low in the current political environment.

It might not seem fair that someone currently earning six-figures would receive a $200,000+ windfall from other taxpayers.

“Let’s say your debt has grown to $180,000 over 20 years, and by that point, you’re making $120,000,” he said. “If $180,000 is being forgiven, then you’re looking at paying taxes on $300,000 in total income in one year. At that point, you’re over the $250,000 income category, my friend.”

A program that forgives student loans and related tax liabilities seems ripe for opportunities to game the system.  Tax professionals are very familiar with schemes of timing income to take advantage of government loopholes.   And there’s at least one enterprising group already hoping to profit by “helping those burdened by student debt become aware of their repayment options” and aiding young professionals in “utilizing government programs”.

December 10, 2012

Proposed bill would improve student loan debt collection

by Grace

English: Day 3 of the protest Occupy Wall Stre...

Under a proposed bill sponsored by Wisconsin Representative Tom Petri, the federal government would begin to garnish wages of individuals whose student loans are in default.  This move would save about $1 billion in commissions now paid annually to private debt collectors.

… Payments would be capped at 15 percent of borrowers’ income after basic living expenses.

The proposed program is intended to force qualifying debtors to participate in the existing Income-Based Repayment Plan (IBR).

In the U.S., borrowers currently must ask to be enrolled in income-based repayment programs and many don’t because they don’t know about them or collections companies don’t tell them….

Last year, 5 million borrowers were in default — generally meaning they had failed to make payments for at least 270 days — on $67 billion in loans, more than twice the amount in 2003. Through the new system, based on experience in the U.K., 98 percent of borrowers could meet their loan payments through automatic payroll withholding, according to Petri’s office.

The Education Department already has the power, without a court order, to seize a part of wages, tax refunds and Social Security payments to collect on student loans. There is no statute of limitation.

New law would result in lower student loan interest rates under our current economic scenario.

The legislation would tie the interest charged to Treasury market rates. Currently, students in the most popular program pay as much as 6.8 percent.

Problem of ballooning debt balances would be curbed.

In another boon to borrowers, the plan would cap interest owed at 50 percent of a loan’s face value at the time of graduation, giving a break to lower-income borrowers who take longer than the standard 10 years to repay loans. For a student who took out $27,000 in loans, about the national average for a graduate of a four-year program who borrowed, the interest couldn’t exceed $13,500.

Student loans, which can rarely be canceled through bankruptcy, can balloon to several times their original size, after adding interest and collection fees.

Current loan subsidies and loan forgiveness features would be eliminated.

Low-income borrowers would no longer be excused from accruing interest when they are in college. The bill would also eliminate income-based programs that forgive loans entirely after 20 or 25 years — and, after 10 years, for those who enter public-service careers, such as teaching or law enforcement. The new system would apply only to new loans.

While taxpayers might save money by not picking up the tab for forgiven loan balances under the provisions of this bill, cutting loan subsidies may cost more money since it’s unclear if subsidized loans are a moneymaker for the federal government.

Political concerns

While Petri’s bill makes sense, the elimination of the low-income subsidies and forgiveness could face opposition from Democrats, said Sandy Baum, a senior fellow at the George Washington University School of Education. Republicans may be concerned that taxpayers won’t be repaid if more borrowers join the income-based program, she said.

Congress is expected to consider the bill early next year.

July 23, 2012

Easing the rules on paying back student loans

by Grace

An indication of an upcoming taxpayer bailout of student loans?

Education Dept. Proposes New Rules on Student Loans
July 17, 2012 – 4:35am

The U.S. Education Department today proposed new rules governing federal student loans, which would, among other things, ease the process by which disabled borrowers could have their loans discharged, establish a new income-contingent repayment plan for direct student loans, and expand the government’s income-based repayment program. The changes regarding borrowers with disabilities were prompted by concerns (many contained in a 2011 series by ProPublica) that they were being required to jump through far too many hoops to have their loans forgiven. The rules emerged from a round of negotiations that the agency held last winter, and public comments on the proposed changes are due by Aug. 16.

Last year Mark Gimein wrote about a possible student loan bailout. 

Eventually both private lenders and the government will be on the hook. The government has already moved to ease some loan terms. It will need to find more, especially for those snookered into paying for degrees worthless in the job market. The private loans, meanwhile, will simply blow up. We may as well start figuring now how graduates, taxpayers, lenders, and schools will split the bill.

May 18, 2012

The student loan problem: ‘I’m not going to worry about it right now. I had to take that plunge.’

by Grace


Statistics show it’s a growing problem, but not a crisis.

* About two-thirds of bachelor’s degree recipients borrow money to attend college, either from the government or private lenders, according to a Department of Education survey of 2007-8 graduates; the total number of borrowers is most likely higher since the survey does not track borrowing from family members.

By contrast, 45 percent of 1992-93 graduates borrowed money; that survey included family borrowing as well as government and private loans.

For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000, the Federal Reserve Bank of New York reports….

Students and their families are often clueless, failing to consider the ramifications of their actions.

Even discounted, the price is beyond the means of many. Yet too often, students and their parents listen without question…

Many students and parents don’t have a firm understanding of the cost of attending college, or the amount of debt they will incur….

“Ultimately with everything in financial aid, from start to finish, the student and their family need to take responsibility and monitor their aid,” Melanie K. Weaver, the director of financial aid at Ohio Northern, said in an e-mail. “With over 3,000 on aid it is difficult for our office of 10 staff members to stay on top of every student.”…

“As an 18-year-old, it sounded like a good fit to me, and the school really sold it,” said Ms. Griffith, a marketing major. “I knew a private school would cost a lot of money. But when I graduate, I’m going to owe like $900 a month. No one told me that.”…

Ms. Potter figured she would have to borrow about $10,000 a year. But the tuition increased every year, and because she didn’t declare a major until her junior year, she needed five years to graduate.

A social worker, she now owes $80,000…..

“Maybe at the time I was a little naïve,” said Mr. Frank, 22, a senior who owes $80,000. “Everyone was like, ‘You can get grants, you can always get loans.’ I wanted to play football really bad, and I hoped eventually I’d get a football scholarship.”…

“I didn’t quite think in terms of money”…

“I kind of ignored the fact that I had to pay all these loans”…

An opaque pricing and financial aid system adds to the problem.

Instead, college pricing is complicated by constant tuition increases, a vast array of grants and loans and a financial-aid system that discounts tuition for most students based on opaque formulas. “No one has a vested interest in simplifying the process but families,” said Mark Kantrowitz, the founder of FinAid, a Web site devoted to explaining college financial aid. “It obscures the price of a college and makes the choice of college not depend on the price but other factors.”

Factors contributing to the growth in student loans

… as with the housing bubble before the economic collapse, the extraordinary growth in student loans has caught many by surprise. But its roots are in fact deep, and the cast of contributing characters — including college marketing officers, state lawmakers wielding a budget ax and wide-eyed students and families — has been enabled by a basic economic dynamic: an insatiable demand for a college education, at almost any price, and plenty of easy-to-secure loans, primarily from the federal government.

Until recently, college administrators might have ignored the problem.

“I readily admit it,” said E. Gordon Gee, the president of Ohio State University, who has also served as president of Vanderbilt and Brown, among others. “I didn’t think a lot about costs. I do not think we have given significant thought to the impact of college costs on families.”

The goal of “college for all” means more taxpayer funds for student loans

To that end, the Obama administration has given out more grants and loans than ever to more and more college students with the goal of making the United States first among developed nations in college completion. The balance of federal student loans has grown by more than 60 percent in the last five years. And in 2007, Congress made sure the interest rates on many of those loans were well below commercial rates; currently, a debate over keeping those lower rates from doubling in July is roiling lawmakers.

While the student loan problem is not a crisis, it is a drag on the economy.

Economists do not predict a collapse of the student loan system, which would, in essence, mean wholesale default. And if there were one, it would be unlikely to ripple through the economy with the same devastating impact as the mortgage crash. Though now larger than credit card and other consumer debt, the student loan balance remains smaller than the mortgage market, and most student loans are issued by the federal government, meaning banks wouldn’t be affected as much.

Still, economists say, growing student debt hangs over the economic recovery like a dark cloud for a generation of college graduates and indebted dropouts. A study of recent college graduates conducted by researchers at Rutgers University and released last week found that 40 percent of the participants had delayed making a major purchase, like a home or car, because of college debt, while slightly more than a quarter had put off continuing their education or had moved in with relatives to save money….

State government spending on higher education has increased, but not as much as in other areas.

In the late 1970s, higher education in Ohio accounted for 17 percent of the state’s expenditures. Now it is 11 percent. By contrast, prisons were 4 percent of the state’s budget in the late 1970s; now they account for 8 percent. Federal mandates and court orders have compelled lawmakers to spend more money on Medicaid and primary education, too. Legislators could designate a greater percentage of the budget to higher education by raising taxes, but there is no appetite for that….

Colleges aggressively market themselves as affordable.

Colleges are aggressively recruiting students, regardless of their financial circumstances. In admissions offices across the country, professional marketing companies and talented alumni are being enlisted to devise catchy slogans, build enticing Web sites — and essentially outpitch the competition.

Affordability, or at least promising that the finances will work out, is increasingly a piece of the pitch.

After all, colleges are not in the business of turning away students.

… And most colleges aren’t much help. Student debt is not their primary concern in the end — the loan money usually gets deposited directly with the colleges, so they get paid either way — and the main job of the admissions staff, after all, is to admit students.

One recommendation:  a standardized form

While there are standardized disclosure forms for buying a car or a house or even signing up for a credit card, no such thing exists for colleges.

For-profit schools are a particular problem, but keep in mind they serve more disadvantaged students.

… Students at for-profit colleges are twice as likely as other students to default on their student loans. Moreover, among students seeking a bachelor’s degree, only 22 percent succeed within six years, compared with 65 percent at nonprofit private schools and 55 percent at public institutions. (For-profit students, however, tend to do better at obtaining associate degrees and certificates.)

Leaders of the for-profit industry defended themselves, saying they were providing higher education for lower-class students that traditional colleges had left behind. “The reality is the type of students we attract have no other opportunity,” said Steven Gunderson, head of a leading trade organization. “We are the ones that provide a path to the middle class.”

It ultimately comes down to the students’ responsibility.

But even with more information, students and their parents seem willing to pay the ever-escalating price of a college degree, which remains the key rung up the ladder of economic mobility.

Denise Entingh, 44, dropped out after two quarters at Columbus State Community College because she didn’t want to wait any longer to get into the nursing program. So she signed on at the Hondros School of Nursing, a for-profit college that advertises “No Waitlist!” on a billboard a few blocks from Columbus State.

Ms. Entingh said she expected to borrow about $45,000 to get a bachelor’s degree in nursing from Hondros, which costs more than three times as much as Columbus State.

“It scares the hell out of me,” she said of her debt load. “But I think it will be all right. I’m not going to worry about it right now. I had to take that plunge.”

Whew!  After all that, I may not want to write anything else about student loans for the next six months!
(But I probably will.)

* CORRECTION:  The original article misstated the percentage of students who had borrowed as 94%.

May 16, 2012

A roundup of pending federal college financial aid changes

by Grace

Some changes in federal financial aid for college students are coming soon.

Pending higher student loan interest rates are in limbo.  Unless Congress acts to delay this change, the interest rate for subsidized federal student loans will double to 6.8% in July.  Although both parties agree on keeping the lower rates, disagreement on how to pay for this benefit has stalled action on this issue.

In addition, the maximum eligibility period for Pell Grants will be cut from eight to six years starting with the 2012-13 school year.

More new developments in federal financial aid affecting high school graduates heading for college this fall:

  • If a student’s family income doesn’t exceed $23,000, their expected family contribution will automatically fall to zero — this has been reduced from the previous maximum income of $32,000.
  • To qualify for federal student aid, students applying in higher education for the first time must have either a high school diploma or a recognized equivalent such as a GED, or have been home schooled. This erases a previous option of passing an approved test or completing at least six credit hours or 225 clock hours of post-secondary education.
  • Direct subsidized loans will not be eligible for an interest subsidy during the six-month grace period after graduation, meaning interest will begin to accrue as soon as a student graduates or leaves college.
  • Graduate and professional students are no longer eligible to receive subsidized loans, but can qualify for up to $20,500 in unsubsidized loans each year.
  • The U.S. Department of Education can no longer offer borrowers repayment incentives, except interest rate reductions to borrowers who agree to have payments automatically electronically debited from their bank account.


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