Answering Questions on Student Loan Rates and the Murky Future

By Ron Lieber

September 14, 2012

Figuring out how to pay for college has quickly turned into one of life’s most complicated financial decisions.  This is not because the decision involves the largest number of dollars, although it is getting there for many families. Instead, it is because of a number of confounding factors. There is the uncertainty about a student’s future ability to pay back student loan debt or whether spending twice as much for some schools will lead to a future that is twice as lucrative or happy. Then there is the difficulty of having a teenager participating in an enormous financial decision without much experience to draw on.

But perhaps the biggest problem is that people don’t always know where to find good information about the choices and their consequences. This was readily apparent this week when, in the wake of our continuing series of stories about student loans, we took questions on the topic on our Bucks blog. 

We were able to answer many of the questions fairly quickly, but others were big enough and searching enough that I decided to tackle them here. They fall into two categories: questions about why the rules on interest rates and refinancing are the way they are and how to avoid unpleasant financial surprises after you have taken on all that debt.

Here are answers to four of the most important ones:

High Rates

While one type of federal student loan is (possibly temporarily) available at a 3.4 percent interest rate, others cost 6.8 percent, and loans for parents and graduate students are 7.9 percent. (Private loans from banks are often more costly.) Why are they so high, given the low prevailing rates elsewhere? “I tell Europeans this, and they laugh and shake their heads,” said one reader in Copenhagen. As we learned this year when a skirmish broke out in Washington over whether certain rates were going to rise, it is Congress that sets the rates. And doing so is a political act, not one necessarily rooted in economic science or reason.

“Budgeting for the government starts from the status quo, and the status quo is 6.8 percent and 7.9 percent,” said Robert Shireman, who worked on student loan issues at the Department of Education for the first few years of President Obama’s term. So any change that benefits borrowers means an offsetting cut someplace else, perhaps in Pell Grants for the truly needy.

Jason Delisle, director of the federal education budget project at the New America Foundation, a nonpartisan public policy institute in Washington, begins his analysis by noting how different student loans are from loans like mortgages, which have fixed interest rates that are half of what some student loans offer today. There is no credit check for students, no down payment and no collateral or consideration of where you are studying or whether you are majoring in underwater basket weaving.

Also, the loans come with repayment options and loan forgiveness programs that mortgages do not have.  That’s not to say that Mr. Delisle isn’t sympathetic to the call for lower rates, given that the student loan program does take in more than it lends out. But how would you set the new rates? The fixed interest rates that exist today seemed to be a good deal when Congress set them years ago.

“Congress could go back to variable interest rates,” he said. “But then people want a cap on those rates. What should the cap be? Somebody picks a number, and somebody always loses, either taxpayers or borrowers. And variable looks fair, because everyone has the same rate at the same time. But the problem with that is people can’t really plan.”

Rafael Pardo, a bankruptcy professor at Emory University’s law school, frames the issue differently. He would have no problem with the government making money on the student loan program if it were a bit easier to discharge the loans in bankruptcy for people who get in over their heads. But the process is hard enough that he recently spent nearly 650 hours of pro bono time trying to help just one debtor.

Alternatively, he would be fine with much lower rates while continuing to make it very hard to discharge the debt. “But you can’t be hitting them on the front end and on the back end,” he said, which is his view of what the status quo does today.

Refinancing

A reader from New York City consolidated a bunch of loans into a single loan more than a decade ago at 8.125 percent and cannot refinance the loan at a lower rate because of rules that prohibit this. The comment summed things up this way: “I have excellent credit but feel like I am unfairly punished and stuck with this extortionate interest rate for the rest of my working life.”

This, too, is something only Congress can change, and perhaps it didn’t anticipate this problem or worry about it back when it thought it was doing students a favor by letting them consolidate debt at a fixed rate and relieving them of having to keep track of a big pile of individual loans.

Still, Mr. Shireman, who was a champion for the income-based repayment program that now allows people with lower incomes to make more affordable payments and have any remaining debt waived after a certain number of years, doesn’t see this particular complaint gaining much traction.

“There aren’t the votes to make this kind of change,” he said. “And I think one response would be that if these are high-income New York Times subscribers, then their needs are not as great as Pell Grant recipients. And if they’re low-income and struggling, they have income-based repayment and they can get a big benefit from that.”

There are a few exceptions to the no-refinancing rule, and I have linked to an explanation of them (and the best explanations of many of the loan programs, repayment plans and other exceptions) in the online version of the column.

Forgiveness and Taxes

Another reader posted a question about the income-based repayment plan, noting that she will probably have a large amount of debt forgiven at the end of her term and is worried about the tax bill she will face at that point, when she will be 70 years old.

The amount of any debt forgiveness is often taxable income as far as the federal government is concerned. One big exception, however, is for people enrolled in something called public service loan forgiveness.  I have linked to information on how to qualify for that particular program.

If you’re not working in a public service job and are enrolled in income-based repayment, you will have to pay taxes on the debt the government forgives. This hasn’t happened to anyone yet since the program is still new, and bipartisan efforts are under way to grant waivers for people who find themselves in this situation. “I think the odds are very high that it will be fixed long before anyone qualifies for debt forgiveness,” said Lauren Asher, president of the nonprofit Institute for College Access and Success.

Failing that, if your assets (including retirement savings and home equity) are less than your total liabilities right before the remaining student loan balance is supposed to be dismissed, you could declare yourself insolvent and avoid some or all of the big tax bill that way. I.R.S. publication 4681 has the details.

Safe Amount of Loans

And finally, the most difficult reader question of all: “Before starting college, or even choosing which one to attend, how do you suggest families decide on how much borrowing is acceptable?”

There are so many variables here, it’s hard to know where to start. It can depend on the career the teenager seems headed for, the willingness of parents to shoulder some of the debt and the economy.

Mark Kantrowitz, who runs the encyclopedic Finaid.org Web site, has developed one rough guideline: Students should borrow no more, in total, than whatever they think their first-year salary will be once they are finished (though ideally a lot less). That should keep the payments affordable, assuming they don’t change their mind about what they want to study, and manage to get a job in their chosen field.

A slightly more conservative approach may be to limit yourself to $31,000, the maximum amount that the government generally lets undergraduates borrow in federal loans. If you avoid any private student loans from more traditional lenders, every dime of your debt will be eligible for the federal income-based repayment program in case there is little or no income for a while after graduation or later on.

The downside here is that limits like these (and they are caps, not targets, as Mr. Kantrowitz is quick to note) are dream killers for many young people. It may mean no law school at all or community college for two years or the local branch of the state university instead of the flagship.

So how do we get to a point where any college is in reach for every student? It’s a question that no one has a realistic answer for yet.

Source: www.nytimes.com/pages/education/index.html

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Behind the Admissions Curtain: Three Most Common Questions on How Colleges Process Applications–Answered!

As a student or parent, your role in the college admissions process is fairly straightforward: Complete the basic application requirements—which vary little from school to school, and usually include submitting an application fee, letter(s) of recommendation, and transcripts—and be ready to shine in face-to-face interviews.

But what happens once you’ve completed the application packet and submitted it to your school(s) of choice? This article offers a glimpse into the basic admissions review process.

Note: Many schools admit students on a “rolling” basis, so students are encouraged to submit applications as early after January 1 as possible to compete for financial aid and housing opportunities. It’s also important to keep in mind that colleges almost always receive more applicants than they have open spots, so presenting a complete, organized file that showcases your best academic attributes is key.

1. Who Reviews Your College App?

Once your application arrives on campus, it is sorted and forwarded to the appropriate office. In general, applications are reviewed by a combination of:

• Directors of Admissions (who usually get the final say)
• Associate Directors
• Administrative Assistants

These career administrators are continually versed in the admissions policies of their respective schools. Depending on the admissions staff’s workload—as well the school’s level of selectiveness—your application could be reviewed by one person or an entire committee. Most commonly, applications are seen first at the lowest level and then flagged up for review by subsequent overseeing faculty members.

A checklist of required contents usually accompanies each admissions file. At colleges where the admissions process is more open, students may still be considered even if portions of their application packet are missing or if they came close but didn’t quite meet established requirements. Naturally, schools that carry stricter selection guidelines are generally not inclined to make such exceptions.

2. What Do They Look For?

For starters, admissions review boards are looking for applicants who meet the minimum requirements for GPA, standardized test scores, high school course completion, and any extracurricular or nonacademic criteria that may apply. A detailed list can usually be found on the institution’s website, but if not, call the school’s admissions office directly.

Further, admissions boards are motivated by their institution’s unique administrative goals, which often include things like meeting diversity requirements, bolstering athletic organizations, and protecting existing programs by admitting students in pursuit of that specific degree.

3. How Can You Boost Your Chances for Acceptance?

While most colleges and universities adhere to a prescribed set of admissions requirements, there are always a few intangibles that are up for grabs. For example, a fantastic personal essay or stellar letter of recommendation can (and does!) often mean the difference between acceptance and rejection. Be sure that your application packet reflects the full spectrum of your abilities—academic or otherwise—keeping in mind that schools are ultimately looking for proven thought leaders who will excel in their chosen programs. When applying to your college(s) of choice, do yourself a favor by emphasizing those qualities that reflect your eagerness to succeed.

Source: www.CollegeView.com

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For low-income students, the battle for their votes may already be decided

August 19, 2012 By Peter Vanham, Inquirer Staff Writer

While many voters consider the economy and jobs the major issues in this presidential election, college student Donald Stewart judges candidates on a different criterion: Their support for his federalPell Grant.

A Pell Grant provides money for low-income post-secondary students. In the last four years, the number of Pennsylvania students with Pell Grants has grown by 50 percent, according to data of the U.S. Department of Education. For many of them, the grants are essential for earning degrees and launching careers.

The 300,000 or so "Pell students" in Pennsylvania form a significant voting bloc. The battle for their votes, however, would seem to be already decided, if the Community College of Philadelphia is a barometer.

The federal grants fit President Obama's goal that "every child in this nation [should] have the chance to go to college, even if their parents aren't rich." That goal is being met at the CCP, where about 50 percent of the 30,000 students receive Pell money, according to the school's administration.

Mitt Romney, however, is not a fan. The presumptive Republican presidential candidate says the Pell program costs too much and reaches too far. The Pells are part of an "expanding entitlement mentality" and are contributing to the increasing government deficit and the rising tuition fees, Romney said.

To rebalance the educational budget, according to Romney, the financial focus should be on only those students "who need it most," and on helping students make better-informed college choices.

But can the program distinguish between those who need it most and those who don't? According to Stephen Curtis, president of CCP, the grants are almost always a real deal-maker.

"Students here are already at the cheapest college available," he said. "If they didn't get a Pell Grant, they probably wouldn't be able to attend college at all." Tuition and fees at the Community College add up to $2,490 a semester, based on a 13-credit load.

As a consequence, Romney's budgetary austerity can't count on much support at CCP and, for sure, many other colleges.

"Even now there isn't enough money," said Stewart, the CCP student. He received a $5,500 grant and got a part-time job to pay for his college education.

"If I have had some difficulties, sometimes, to pay my bills, how do you think the situation is for a student having a family with two children?" he asked.

His remarks are echoed by John Braxton, a biology professor and co-president of the teachers union.

"Last year I had a student who dropped out of college because of a lack of funding," he said. "She worked during the night, came straight to classes in the morning, and then still had to take care of her family, too. It was too much for her."

It isn't just the students who need the Pell funding. The school needs the grants almost as much. With state and city funding sinking from two-thirds of the school's total revenue in years past to less than 40 percent today, the school leans more and more on students to pay for the college's education. The Pell Grants provide about one-third of CCP's revenue, Curtis said.

Thus there is no doubt in the CCP professors' minds which candidate to support. In the teachers' union's office, there is a poster of President Obama.  "Romney and [vice presidential running mate Paul] Ryan support slashing social services," Braxton said. "With Obama, at the very least, we know that things won't go backward."

But what about the Republican argument that there is no money for Pell Grants?  "It's too convenient to say: 'There's not enough money, so something's got to give,' " Curtis said. "At every level of government, education needs to be a top priority. A society can't move forward if it's not educating its citizenry. It's 'Pay me now, or pay me later.' "

Peter Vanham is a Belgian economist and a fellow of the Pascal Decroos Fund for investigative journalism. He is writing for The Inquirer this summer.

Source: The Philadelphia Enquirer

---

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THE NEW SOLUTION FAMILIES USE TO HELP PROVIDE THE EDUCATION YOUR LOVED ONES DESERVE!  It’s natural to worry about whether your loved ones can afford a college education.  According to the College Board, earning a degree can now cost from $52,000 to more than $130,000 – and the cost is rising faster than the rate of inflation!  If these statistics cause you some alarm, you may be surprised to discover one of the ways you can help fund a college education. 

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Survey: Parents Say Hardest Part of Sending Child to College Is Figuring Out How to Pay for it

NEWARK, Del., August 24, 2012— The transition from high school to college evokes a range of emotions from parents according to a new survey from Sallie Mae, the nation’s No. 1 financial services company specializing in education. Most parents of this fall’s incoming college freshman class feel excited (75%) to send their child to college, and many express mixed emotions including feeling anxious (30%), nervous (28%) or stressed (20%).

For 60 percent of parents the most difficult aspect of sending a child to college is figuring out how to pay the costs of college. Nearly half have a pay as you go mentality with 31 percent expressing some concerns but feeling sure they’ll “figure something out.” Only one-third say they’re ready to pay for college this fall, while one-fifth express concern or misgivings.

“Entering your freshman year in college is a significant transition for the entire family,” said Joe DePaulo, executive vice president, Sallie Mae. “Getting ready to hit the books also means final financial deadlines are arriving. The good news is there are smart options to help make ends meet.”

Sallie Mae recommends the following last minute tips as freshmen and returning college students pursue their college careers:

Apply for federal aid. It’s not too late to complete the FAFSA, or Free Application for Federal Student Aid to apply for federal financial aid.

Pay as you go. Hundreds of colleges offer interest-free tuition payment plans that spread out payments over a number of months rather than one lump sum at the beginning of the semester.

Educate yourself on the best borrowing options. If you need to borrow, explore federal student loans first and fill the gap with responsible private education loans. Sallie Mae’s Smart Option Student Loan offers families the choice of fixed or variable rates and in-school payment plans, as well as zero origination fees and family-friendly rates and safeguards.

Use financial aid refunds wisely. If your college issues you a refund from grants or loans to cover your out-of-pocket educational expenses, choose the refund method—check, automatic deposit or debit card—that works for you and your banking habits. Be sure to understand any associated fees and steps you can take to avoid them. Keep careful track of your budget to use funds for their intended educational purpose, and, if you received more than you need, return the extra immediately to reduce your borrowing.

Safeguard your tuition investment. For many young adults and their families, college is the second-largest financial investment they’ll make. Families have the option to protect their investment with tuition insurance, yet 65 percent of students and parents say they are unaware of such an option. With Sallie Mae’s program, up to 100 percent of the lost cost of attendance is reimbursed if a student has to withdraw from his or her studies for medical or mental-health-related reasons.

Set expectations with your college-bound kid. More than half of parents have had frequent conversations with their child about keeping up with academics (59%). More than one-quarter of parents said they will contribute to college with “no strings attached,” but most parents have stipulations such as maintaining a minimum GPA (40%), staying out of trouble (28%) or working while in school (19%). Meanwhile, whether it is catching up or checking in, 40 percent of parents plan to stay in touch with their college student via daily text messaging.

Sallie Mae also released an infographic, “How Parents Feel About Their Children’s Transition to College.”

About the survey: Sallie Mae conducted an online survey of more than 500 parents of high school seniors graduating in spring 2012 and headed for college in fall 2012.

Five States Where College Tuition is Soaring!

For parents concerned about the rising cost of college, financial advisers have traditionally recommended public universities. After all, they almost always carry much smaller price tags than private universities.

But many state schools are now raising tuition at double-digit rates—sometimes with very little advance notice. Here are the five states where the cost of a public four-year college education has seen the steepest increases over the past few years.

California. Average tuition and fees for in-state student: $9,022 in 2011-12, up 20.5% from a year prior and 98.3% from five years ago.

And the worst could be yet to come. If state residents vote against state tax increases in the November elections, the school system will have to come up with money fast to fill the $375 million budget gap that would ensue, says Dianne Klein, a spokeswoman for the University of California's Office of the President. Under that scenario, tuition could rise 20.3% for the second semester of the upcoming academic year.

Arizona: Average tuition and fees for in-state student: $9,428 in 2011-12, up 16.8% from a year prior and 101.7% from five years ago.

This year, state funding will total $708 million, down from nearly $1.1 billion for the 2007-08 academic year, says Katie Paquet, spokeswoman for the Arizona Board of Regents.

Georgia. Average tuition and fees for in-state student: $6,808 in 2011-12, up 15.9% from a year prior and 74.2% from five years prior.

Last year, the state also reduced the amount of money it doled out through its merit-based Hope Scholarship.

And it's looking at cutting direct funding to higher education. Georgia Governor Nathan Deal recently proposed a $54 million cut through June 2014, which if enacted would reduce spending over that period to roughly $1.7 billion. A decision is expected early next year.

Washington. Average tuition and fees for in-state student: $9,484 in 2011-12, up 15.7% from a year prior and 67.3% from five years prior.

Income from sales taxes (the state doesn't have an individual income tax) slumped during the recession, leaving the state with less money to go around. So the state granted permissions to its public universities to raise tuition.

In June, the University of Washington announced a 16% increase in tuition and fees for the upcoming year.

Nevada. Average tuition and fees for in-state student: $6,044 in 2011-12, up 3.7% from a year prior and 65.8% from five years prior.

Over the past five academic years, Nevada raised tuition and fees at its community colleges by 48% on average, according to the College Board. Costs at four-year public colleges rose 66%. During the last academic year, the state approved an 8% tuition increase for all undergraduates, which kicks in this fall.

Source: Wall Street Journal

—AnnaMaria Andriotis 
SmartMoney.com

Countdown to College: Parenting hurting more than they're helping!

By Lee Bierer

Parents behaving badly – it happens all the time in the college admissions process. Moms and dads on both ends of the parental spectrum often make a mess of things.

Hovering parents try to control every step of the process, simultaneously sheltering and smothering their children. At the other extreme, you find the “You’re on your own, figure it out” parent. Plenty of evidence demonstrates the damage caused by helicopter parents (next week’s column), but what I’m seeing more frequently is a pendulum swing to the other side, with parents choosing not to be involved.

Here’s a fairly typical scenario: I receive a phone call from a parent who briefly describes the child’s academic standing. I’m told, “We haven’t done a thing about college. We’re lost. Please help us.”

But then they walk away, absolving themselves of any responsibility in their child’s college research and selection. The child, who hasn’t thought much about college, often feels overburdened and stressed. The parents think they’re empowering their children, but all too often their children aren’t ready to tackle this assignment on their own.

Parents need to understand the complexities of the college admissions process. There are colleges to research, campuses to visit, applications to complete, essays to write, letters of recommendation to request. And don’t forget the pressure of standardized tests. This is not the time to tell students who have been coddled since preschool to fly on their own. They need parental guidance, support and, most of all, encouragement.

Parents should evaluate where their child needs assistance. If you haven’t had this conversation with your child, ask what areas they’re anxious about and how they’d like you to help. Don’t assume your experience is irrelevant because it has been a few decades since you applied to college. It’s a learning process for everyone.

Bierer is an independent college adviser based in Charlotte. www.collegeadmissionsstrategies.com

Source: www.charlotteobserver.com

Colleges Pay Students to Graduate Faster

By STEVE YODER, The Fiscal Times

July 23, 2012

 

In Nina Kadjar’s sophomore year at the University of Texas, her mother ran across a webpage describing a new source of funds to pay for school. A little-known state program, called B-on-Time, could provide her daughter a zero-interest annual loan of between $6,000 and $7,000, with payments to start after graduation. That would make a significant dent in the $24,000 a year that Nina Kadjar needed for tuition and expenses. But the program had an even better twist—if she could get her degree in four years and maintain a B average, the loan would be completely forgiven. 

As the federal government and states look for ways to control rising tuition and student debt, they’re focusing increasingly on schools’ “degree productivity,” or how often and how quickly they move students to graduation. States are experimenting with how to help more students matriculate, and a few are trying something new—using the power of the purse to motivate them to get their bachelor’s degrees in four years.

Productivity is the new frontier in higher education. Back in the 1940s after the G.I. Bill passed, the focus was on ensuring access to college, says Stan Jones of Complete College America, nonprofit that advocates reforms designed to graduate more students. But with average tuition up 63 percent just since 2000, the conversation has turned from access to efficiency, with students in need of more financial aid than ever at a time when the federal and state budgets are in dire straits. “If we could get more folks to complete on time, we could make college much more affordable for families and lessen taxpayer costs,” says a source at the U.S. Department of Education.

Jones says universities and colleges need to do more than get people into school—they must turn out graduates, and quickly. In 1972, students took 4.3 years on average to get a bachelor’s degree; when a followup study was done in 1992, that had increased to 4.6 years. Today, the government uses a different metric to calculate graduation time, but data released earlier this year show that today’s four-year graduation rate across colleges is just 38 percent. “You always see [schools’] press releases about how many students they enrolled in the fall,” says Jones. “But they never tell you their graduation rates.”

There’s evidence that at least part of the increase in graduation times stems from students applying themselves less than in the past. A 2009 paper by two economists at the University of California found steep declines in the average weekly study time of full-time college students at four-year colleges—from about 24 hours per week in 1961 to about 14 hours per week in the 2000’s.

But many students are also working significant hours to pay for school and so find it hard to take a full load—45 percent of students at 4-year schools work more than 20 hours a week. Working that amount hurts their grades, according to one study. A 2010 report by the Southern Regional Education Board also documented schools’ failure to offer courses in a workable sequence. And students are taking too many credits—Complete College America’s data show that they’re graduating with 136.5 credits instead of the 120 they normally need for a four-year degree. That could be because at flagship schools like the University of Massachusetts, many students change majors or graduate with more than one.

Read more at http://www.thefiscaltimes.com/Articles/2012/07/24/Colleges-Pay-Students-to-Graduate-Faster.aspx#Ud2Mpw6o3KmWuQ12.99