How to Afford Rising College Tuition Costs

Need Based Financial Aid

How to Afford Rising College Tuition Costs: Need Based Financial Aid

In general I’m a pretty big nerd when it comes to all things financial.  I love a good spreadsheet, and really enjoy analyzing a solid set of statistics.

Since I do a lot of this in my day job, it’s rare for me to be truly surprised by individual statistics.  But I came across a few recently that really boggled my mind, and they all have to do with college planning:

  • Student loan debt in the U.S. has increased 510% over the last 10 years
  • Across the country, we’re taking on $2,701 in student loan debt every second
  • 16% of student loan borrowers are currently in default, and another 27% are either delinquent or in postponement

These are some pretty astounding numbers.  You may have already heard that tuition costs are going up 7% each year, or that as a country we now have more student loan debt than we do credit card debt.  But a 510% increase over ten years is astronomical.

Since saving for & affording college is relevant to the majority of parents, I thought it’d make a great post on the blog.  So, today’s post covers affording college & need based financial aid.

To get to the bottom of the issue, I’d like to welcome Melissa Ellis to the blog.  Melissa is the founder of Sapphire Wealth Planning, a CERTIFIED FINANCIAL PLANNER, and a subject matter expert when it comes to education planning.

Welcome Melissa!

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What Every Parent Should Know About Saving for College

 

Join us this Tuesday for a free online training on saving for college!  We’ll cover far more than the typical cliches about starting early or using 529 accounts.

Click here to register

Date: February 21, 2017
Time: 10:00-11:00am
Event: What Every Parent Should Know About Saving for College
Public: Public
Registration: Click here to register.
More Info: Click here for more information.

Saving for College: 529 Plans vs. Everything Else

Saving for College: 529 Plans vs. Everything Else

If you’re a parent or a grandparent, chances are that at some point you’ve woken up in a cold sweat thinking about college tuition costs.  College tuition is rising 6-7% every single year, and given the astronomical amount of student debt that current grads are facing, it’s enough to make you shiver.

As you may know, my wife and I now have a beautiful baby boy at home.  As I write this he’s about six months old.  And given that I’m a total financial nerd, I’ve been spending some time recently thinking about how best to save for his college tuition costs.  Popular opinion will tell you that 529 plans are by default the best choice for this purpose.  But since to date all my posts on college costs have to do with student loans, I figured it was high time to cover the “other” end of the equation: saving for college before incurring any debt.

So today we’ll review the most common types of college savings accounts, and try to determine whether 529 plans are really your best choice.  As you compare and contrast college savings vehicles on your own, be sure to incorporate how financial aid plays into the equation.  Financial aid is awarded based on both you and your kids’ income and assets.  Savings in some types of the accounts we’ll cover are included on the FAFSA (Free Application for Federal Student Aid) form, while others are excluded.

Students that have more assets to their own name won’t end up receiving as much financial aid as those who don’t.  Every school operates a little differently, but if they think your kid is independently wealthy rest assured they won’t receive any financial aid.  Your income and assets count as well, just to a far lesser degree.

Here’s the rundown.

 

529 Plans

529 accounts have been around for quite a while, but became really popular after the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  The EGTRRA of 2001 expanded the tax benefits from the account, by exempting qualified distributions from income tax.

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Wiping the Slate Clean: The Ins & Outs of Student Loan Discharge

Wiping the Slate Clean: The Ins & Outs of Student Loan Discharge

One of the murkier areas of student loans is the various ways you can get rid of them without actually paying them back.  As you might know, there are pretty helpful forgiveness options in the federal student loan system.  But what about getting your loans discharged in other extenuating circumstances?  Can you shed your loans by declaring bankruptcy?  What if you become disabled?

This post will cover the lesser known “out-clauses” (also known as dischargeability) for both federal and private student loans.

 

Federal Student Loans

You may have heard before that the federal student loan system is actually quite accommodative to borrowers.  This is true.  The federal student loan system has several different repayment options to make life easier on borrowers, like extended repayment periods and income driven repayment schemes.  But on top of the various repayment options, the federal system gives borrowers a good number of “outs” where your debts will be erased under certain conditions.  This includes both forgiveness, like PSLF, and dischargeability, if you were to become disabled or die.

Here’s the breakdown:

Wiping the Slate Clean: The Ins & Outs of Student Loan Discharge

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The Doctor’s Handbook on Student Loan Forgiveness

The Doctor's Handbook on Student Loan Forgiveness

Loan Forgiveness for Doctors

It’s no secret that most doctors graduate from medical school with mountains of student loan debt.  $183,000 on average in fact, according to the AAMC.  And while its easy to assume that you’ll make plenty of money to repay student loans once you become an attending physician, there are many forgiveness and repayment assistance options available to help.

This handbook is a comprehensive review of student loan forgiveness options available to doctors.  Even if you expect to have the capacity to repay your loans, forgiveness and repayment assistance can help you get there faster, with less pressure on your bank account.

 

Public Service Loan Forgiveness

Many doctors these days are pursuing public service loan forgiveness (PSLF).  And for good reason.  By working at a qualified employer for 10 years, PSLF forgives your federal loans – tax free.  Only federal direct loans qualify for PSLF though.  FFEL, Perkins, and private loans do not.  For this reason, if you’re considering PSLF make sure you consolidate any FFEL or Perkins loans right after you graduate, since federal consolidation loans do qualify for the program.  Private loans are simply not an option.

The common misconception about PSLF is that it only applies to teachers or social workers.  It’s actually far wider reaching, and depends only on who you work for – not what type of work you do.  You can qualify for PSLF by working full time (at least 30 hours per week) at:

  • Any government organization at the federal, state, or local level
  • Non-profit organizations that qualify for tax exempt treatment under 501(c)(3)
  • Other types of non-profit organizations that provide certain types of public services

For doctors, this means that work in a tax-exempt hospital or medical school will likely qualify.  To find out, you can submit an Employment Certification Form with the Department of Education.  Rather than working for ten years and hoping your employment qualifies for forgiveness, the DoE will verify your status with this form.  The form requires the signature of someone  familiar with your service record.  Since tracking down the signatures of old bosses can be a major pain, best practices are to submit it every few years or whenever you change employers.

Technically you’ll need to make 120 qualifying monthly payments while working at a qualified employer in order to receive PSLF.  A qualifying payment is one made under an income driven repayment plan.  The standard 10-year repayment option does qualify for PSLF, but after making 120 payments there wouldn’t be anything left to forgive.

If you’re interested in PSLF, run the numbers on the various income driven repayment options and find the one where you pay the very least out of pocket over the next ten years.  Once you make the 120 qualifying payments, you’ll need to submit a an official PSLF application in order to receive forgiveness.

 

The Doctor’s Loophole

The combination of PSLF and several of the income driven repayment options creates a nice “loophole” for doctors. Pay As You Earn (PAYE) and Income Based Repayment (IBR) calculate your minimum monthly payments based on a percentage of your discretionary income.  Residents earning around $55,000 per year with $183,000 in debt from med school certainly qualify.

The catch with PAYE and IBR is that there’s cap on monthly payments.  Even though your income will jump significantly as an attending, your monthly payments will never be more than what they would have been under the standard 10-year repayment plan when you entered the program.

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Public Service Loan Forgiveness: Everything You Need to Know About PSLF

Public Service Loan Forgiveness: Everything You Need to Know About PSLF

The Public Service Loan Forgiveness (or PSLF) program forgives any of your student loans remaining after making 120 qualifying payments while working full time for a qualifying employer.  While the income driven repayment options also offer forgiveness after 20 or 25 years of qualifying payments, forgiveness under these plans is counted as taxable income.  Forgiveness under PSLF is completely tax free.  Win-win!

 

Qualifying Employment

Contrary to popular opinion, employment qualifying for PSLF has nothing to do with what you do.  It only matters who you work for.  If you work full time for any of the following employers (defined as 30 hours per week or more), your employment will qualify for PSLF:

  • Any government organizations.  This includes state, federal, and local governments.
  • Non-profit organizations that qualify for tax exempt treatment under 501(c)(3).
  • Other types of non-profit organizations that provide certain types of public services.

There are a few exceptions too.  Labor unions and political organizations do not qualify for PSLF.  But, qualifying employment reaches much farther than only teachers and social workers.  Anyone working full time for the government or a 501(c)(3) non-profit can qualify:

  • Lawyers working as prosecutors and public defenders
  • Physicians working in teaching hospitals & medical schools
  • Firemen & Police Officers
  • Soldiers

Some estimates count 33 million public service employees who could qualify for PSLF.  As of June, 2015, only 335,520 people were enrolled in the program, or barely more than 1%.

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Federal Student Loan Consolidation: What It Is & When You Should Use It

Federal Student Loan Consolidation: What It Is & When You Should Use It

 

Financing college and grad school these days is no small task.  With tuition costs rising every single year, graduates today are exiting school with laundry lists of student loans.  Each one with a different rate, a different servicer, and often with different terms.  Sounds confusing, no?

The Federal Direct Consolidation Loan repays your existing federal student loans and replaces them with one loan at a fixed rate.  This can be beneficial for a few reasons.  It reduces the number of loan servicers you’ll need to deal with, replaces variable interest rates with fixed, and helps you qualify for flexible repayment options your original loans may not have been eligible for.

 

How it Works

The direct consolidation loan replaces your outstanding federal loans with one combined loan at a fixed rate.  This can be very convenient.  Loan servicers are prone to making clerical errors, so dealing with only one will probably make your life a whole heck of a lot easier.

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REPAYE: Revised Pay As You Earn Student Loan Repayment

REPAYE Revised Pay As You Earn Student Loan Repayment

 

What is REPAYE Student Loan Repayment?

After making the Pay As You Earn (PAYE) student loan repayment system available to borrowers in 2012, President Obama expanded the program by enacting the Revised Pay As You Earn (REPAYE) repayment plan in December of 2015.

While REPAYE has many of the same features as PAYE, the updated plan has several key improvements.  Not the least of which is that it’s available to any borrower with qualifying loans – which opens the plan up to an estimated 5 million additional borrowers.  This is a huge step up from PAYE, which is essentially only available to the class of 2012 and later.

 

How it Works:

Monthly payments under REPAYE work basically the same as Pay As You Earn and Income Based Repayment.  Your monthly payments are 10% of your discretionary income, which is calculated using the difference between your AGI and 150% of the poverty line in your area.  There are also a few key improvements and differences though.

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PAYE: Pay As You Earn Student Loan Repayment

PAYE Student Loan Repayment Pay As You Earn

 

What is Pay As You Earn Student Loan Repayment?

The Pay As You Earn (or PAYE) student loan repayment program was passed in December of 2012, and is President Obama’s spin on income driven repayment.  Understanding that student borrowers faced significant challenges once they entered repayment, the President used PAYE to improve on the preexisting Income Based Repayment in several different ways.

Although it has rather strict qualification standards (only the classes of 2012 and later qualify), PAYE is a terrific option for those who can use it.

 

How it Works

Pay As You Earn is just like Income Based Repayment in how your monthly payments are calculated.  Monthly payments under PAYE are 10% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty line in your area.

Again, poverty guidelines are set by the Department of Health and Human Services, and are updated annually.  You can look up the poverty line in your area here.

Like IBR, PAYE has an interest subsidy component and forgiveness of any remaining balances after 20 years of qualifying payments.  But, remember that any amount forgiven is taxable as income unless under the public service loan forgiveness program.  If you’re counting on forgiveness outside of PSLF, it’s best to plan for the resulting tax bill.

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ICR: Income Contingent Student Loan Repayment

Income Contingent Repayment ICR

 

What is Income Contingent Student Loan Repayment?

Income contingent repayment (or ICR) is the oldest of the four income driven student loan repayment options.  Originally passed by Congress in 1994, ICR was the government’s first attempt to reduce the burden of student loans by tying monthly payments to borrowers’ adjusted gross income.

While helpful when it was first introduced, ICR has been overshadowed by the other four options rolled out since then.  Today, ICR is all but obsolete unless there is a Parent PLUS Loan involved.

 

How it Works

ICR gives borrowers another option if the monthly payments from the 10 year standard repayment plan are too costly.  When borrowers enter ICR, their monthly payment is calculated based on their adjusted gross income and the amount they’d otherwise pay over a 12 year repayment plan.

More specifically, monthly payments under ICR are the lower of:

  • 20% of your discretionary income, or
  • the amount you’d pay under a standard 12-year repayment plan, multiplied by an income percentage factor

This income percentage factor ranges from 55% to 200% based on adjusted gross income: the lower your AGI, the lower the income factor and the lower the output.  It’s updated each July 1st by the Department of Education, and can be found with a quick Google search.

An interesting point to note here is that the income percentage factor ranges all the way up to 200%.  It’s possible (whether using 20% of discretionary income or the second calculation) for your monthly payment under ICR to exceed what it would be under a standard 10 year repayment plan.  This differs from IBR and PAYE, where your payment is capped when this happens (at what it would have been under the standard 10-year plan).

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