How financial literacy helps with college affordability

There’s no doubt that college is expensive.  Just ask any parent helping their son or daughter enroll this fall, or even file the FAFSA in preparation for next year.  College affordability is at the heart of the issue, but real potential solutions to the problem can be swept away under the daily sound bytes generated during this aggressive political season.  But politics aside, there is no easy fix for college affordability regardless of voter preference, leaving families to decide on their own how to navigate.  Let’s consider how financial literacy helps manage decisions about college affordability.

“It’s cheaper to save than to borrow”: Parents that recently started a family, and even more recently paid off their student loans are very debt conscious, perhaps spurring the trend of greater college savings.  The “How America Saves for College 2016” report from Sallie Mae shows that a full 57% of families are now saving for college, a 9% swing in just the past year.  screen-shot-2016-10-05-at-9-54-01-amIn particular, it’s millennial parents taking the lead on goal setting and developing a plan to pay for college, all hallmarks of financial literacy teachings.  It’s inferred from these findings that new parents recognize the importance of education, but are wary of student loans.  While Washington needs to work out the student loan mess, families are taking control of their savings plans to make a smarter and more affordable investment in higher education.

Using college financial calculators: It’s easier now than ever to make and compare estimates on college costs, student loan repayment and savings, helping families look at the big picture first.  Before zeroing in on a college choice, it’s wise to take a look at a wide variety of options for perspective.  Consider questions like potential financial aid eligibility versus the sticker price of select schools, or if the lowest priced option is really the best fit.  These questions are simplified with use of financial calculators as reasonable comparisons are grounded in logic, ensuring informed decisions on college choice.

Power of compound interest: Long term savers know one big secret. Over time their money can grow with the power of compound interest.  Financial literacy helps families harness the power of compound interest through simple knowledge, like demonstrated with the “Rule of 70”, to show how money can double over time.  While financial calculators help with the details, the impetus behind saving begins with the motivation to start early, rather than later, to make college more affordable.

Identify college value: Know thyself! If financial literacy can teach us one thing, it’s that everyone needs to make their own choices based on their own needs.  Financial literacy helps with perspective on this issue, recognizing that college value really depends on individual factors managed on the personal level.  When weighing the many variables, from majors, school reputation, and internships and compare them to facts like costs, student loan debt and out-of-pocket expenses a pattern is revealed.  Some colleges will be too expensive while others may be a bargain relative to the needs of the student.  Using practical teachings from financial literacy promotes sound decisioning through the process to make the college experience an affordable one.

What you need to know about the 2016-2017 Parent Plus Loan

Summer is student lending season, as many are preparing to handle bill payment leading up to the new fall semester.  This can be a stressful time for parents managing an outstanding balance for college, especially if it’s a larger bill than hoped for.

July Parent Plus
Few more weeks, then back to school!

Even after scholarships and financial aid are made available, it’s not uncommon for families to rely on a Parent Plus loan to supplement the remainder of the bill.  Here are a few key things to consider when applying.

Interest Rate: For the 2016-2017 year, Parent Plus carries a 6.31%.  This is actually a lower rate when compared to prior years in this federal program.  It’s also a fixed rate loan meaning that the rate will not go up or down.  There has been ongoing discussion about the pros and cons of fixed rate loans given the very low interest rate environment of the past several years.  While locking in a fixed rate provides the security of a very predictable repayment process, if the fixed rate is rather high, it also guarantees the interest costs during repayment. It’s a matter of personal preference, but Parent Plus is only using a fixed rate.

Origination Fee: 4.276% This is an area of concern as a 4.276% origination fee seems pretty high for most consumers, especially when compared to other financial products. (Imagine if a mortgage had a similar fee…) The fee is taken out of the gross loan amount, actually reducing the loan disbursement to the school.  So if you apply for a $10,000 disbursement in the Fall semester, $427.60 is deducted from the amount, leaving $9,572.40 to pay the account.

Credit Criteria: The only requirement is that the parent borrower not have “adverse credit history.” This is defined as not having any 90+ day delinquencies on more than $2,085 in debt and not having any loan defaults, bankruptcy discharges, foreclosures, repossessions, tax liens, wage garnishments or had a federal student loan write-off during the past five years.  This allows for many to gain approval for the Parent Plus loan, as the application approval does not depend on the borrowers actual credit score or debt-to-income ratio.

Who is the lender? The lender is the Department of Education through the Direct Loans Program.  This is a government based student loan program.

What happens if denied?   When a parent is denied for Parent Plus, the student becomes eligible for an increase in Direct Unsubsidized Loans in the amount of $4,000 for freshman and sophomores and $5,000 for juniors and seniors.  Immediately inform the office of financial aid of the circumstances to coordinate the increased direct loan in the student’s name.  This has been an especially helpful way for some students to gain additional funding to cover a small balance when necessary.

More Parent Plus Tips:

Run a loan repayment calculation to estimate costs: It’s always a good idea to be aware of of future loan payments to make sure they fit in the budget. For example a $10,000 Parent Plus loan at 6.31% would require monthly payments $112 and cost about $3,509 in interest. If your a parent of a new freshman, take those figures and project them over the next 4 years.  You can quickly estimate about $40,000 in total loan disbursements, about $450 per month in payments and about $14,000 in total interest over total repayment, and that’s if the interest rate stays at 6.31%.  Remember to always look at the big picture of debt and consider what’s needed for the whole education, not just one year.

Increase the Parent Plus loan amount to compensate for origination fee: As noted earlier, the origination fee is deducted from the gross loan amount, reducing the actual disbursement to the school.  If using Parent Plus, make sure to increase the loan amount so that it can still cover the bill even after the fee is removed.  This avoids an end of semester problem of having an unpaid balance that everyone thought would be covered by the Plus Loan.  Some families end up scrambling for an extra $500 in cash just to pay that bill and get cleared for next semesters registration.  Instead, make it easy and apply for a larger loan.  If the school receives more loan money than needed, they can send the excess in the form of a refund check to the parent, and they can then make a payment to Direct Loans to lower the loan balance.

Compare to private loans or home equity: You have options.  Private loans are provided by banks and financial institutions and may offer an appealing program for some families.  They do have more stringent credit standards using the student as a primary borrower with a parent as a cosigner to establish approval. Some families prefer the private loan because it allows the parent the opportunity to utilize a cosigner release from the application once the student borrower makes a certain number of on-time payments after graduation. Not all lenders offer cosigner release, so pay close attention and compare during your application process. This differs from Parent Plus, that remains only in the parent name until repayment is achieved.  Home equity is another option for some families, especially where low rates can be made available.  This should be handled with care, as putting up home equity comes with it’s own unique risks as well.  Additionally, the debt would only remain with the original parent borrower, there would be no easy way to transfer the total debt back to the student like in a private loan with cosigner release.

 

 

 

 

 

How do I save for retirement AND college?

Finding balance between retirement savings and college savings represents a challenge most families need help managing. If you feel overwhelmed, you’re not alone. Consider some eye-opening statistics from Roger Michaud’s recent article “Financing Education is a Retirement Issue “

  • When it comes to financing a college education, 21% of parents would delay their retirement and 23% would withdraw money from their retirement account to help fund college
  • 94% of parents believe college savings will impact their ability to save for retirement
  • 56% of parents with children in the home are currently saving for retirement

The struggle is real, especially when parents would actually withdraw from their retirement savings to help fund college. Early withdrawals face taxes plus potentially a 10% early withdrawal penalty making it less of a financial plan and more of a knee-jerk reaction.

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Find Your Balance

Why? Let’s consider the circumstances. Retirement is most often cited as a goal for long-term savings, but the rise in college costs has emerged as a financial challenge as well. Retirement planning extends beyond the typical 18 years leading up to college attendance, and parents may have started saving for retirement before they got married and had kids, giving them a head-start. This creates a false sense of security where a parent may simply feel comfortable pulling money for retirement to help fund their child’s college dreams, but this is unsustainable. Here’s how families successfully manage both.

Start with retirement savings: Securing your long-term financial goals puts you in best position to help your children over time without unnecessary financial sacrifice. Every dollar counts, and the tax benefits provided by Traditional and Roth IRA’s, 401(k) and 403(b) really help long term savers. While you cannot predict the future of your child’s academic plans, you do know and understand your own future financial needs better than anyone else. Once you’ve mastered your retirement plan you can more confidently pivot the remaining income towards college savings.

Play the long game with college savings: Take a big picture perspective, developing your patience and putting value on consistency. This is a relaxing exercise far removed from an overly busy day-to-day life, so enjoy it and you’ll thank yourself many years down the road. Stay motivated by reviewing savings progress as consistently as you would review your child’s report cards every semester / quarter. You’ll notice that as the savings grow, your child’s academic progress will help you zero in on admissions criteria for various colleges, further motivating you to stay the course. Maintain active engagement by using simple online tools like Invite Education’s Passport for Success that outlines college savings and academic planning all on one platform.

Enfranchise your child: Help your child develop their role as an active saver for college. During the key early years, its expected parents and perhaps relatives will make the lion’s share of deposits in college savings accounts. Once the child begins some part time work, have a portion of those earnings added to the college savings account to help them get involved. This helps develop an all-important habit of saving, a key lesson often overlooked but sorely needed for financial literacy education.

Forecast Financial Aid: Savings are accounted for as part of financial aid eligibility calculations, but the way the money is saved makes an impact. For example, cash in a checking account in the student’s name can weigh against financial aid eligibility by as much as 20% of full value on the Free Application for Federal Student Aid! There’s a better way. If you’re worried about financial aid eligibility, just remember;

  • It’s cheaper to save long term than to borrow and pay back loans later
  • On the FAFSA (Free Application for Federal Student Aid) money saved in a 529 plan owned by the parent is weighed against financial aid eligibility at 5.64% of full value, a great reduction from cash found in a checking account.

In other words, college savers are not punished for their efforts. It’s the income from work declared on the FAFSA that can reduce financial aid eligibility more dramatically. Always use a financial aid estimator to forecast and plan ahead, but you may quickly determine that your income would remove eligibility for Pell or State based grants. This reinforces the need for college savings with an early start date to allow greater time to compound, putting your family in better position to handle college expenses as they arrive. This is especially important for families considered “middle class” as they may have just enough income to reduce financial aid eligibility, but lack the actual cash to pay college outright. A dedicated college savings strategy is critical in such cases.

3 Tips for Smart Student Borrowing

When it comes to paying for college, the process can seem overwhelming. There are so many financing options out there and you might be feeling lost about how to choose the correct ones for your family. The key is to equip yourself with information so that you can have knowledge you need to make an informed decision.

One of the most common ways to pay for college is student loans. There are two primary sources of student loan funding: federal loans and private credit loans. The two programs differ in fundamental ways: the money for federal loans comes from the Department of Education whereas private loans come from places like banks, credit unions and other financial institutions.  Federal loans are much more standardized providing the same rates and fees to all borrowers. Most students tend to take advantage of federal loans before moving onto private loans if they still need extra money.

For some families, private loans are a good option because offer competitive rates and a cosigner option to help student-borrowers gain approval. Other families will choose federal loans, which can be easier to get and offer flexible repayment options, like income-based repayment.  Whichever type of loan you choose (and some families take out both private and federal loans), there are a few ways to borrow smart.

Don’t borrow more than you need. Many families get caught up in the availability of what may seem like free money and end up taking out a bigger loan than they need, just because the option is there. But a loan is not free money, even though it is labeled as “financial aid” on a student’s award letter. Every cent you borrow has to be paid back in the future, and often with interest, which can sometimes be up to a few thousand dollars on top of the loan principal. Don’t take out too much money from a student loan; it should be used for education costs only. Take a careful look at actual expenses and remember that interest will accrue on the total balance. You can use a Student Loan Payment Amount Estimator to get an idea of what your payments might look like once you’ve graduated. Be smart about the debt you’re taking on. Only borrow the amount you actually need, otherwise you could be quite literally paying for your mistake down the line.

Review federal loans first. They tend to have the most favorable terms and flexible repayment options, and you generally don’t need a co-signer. To receive federal loans, families must submit the FAFSA form, with the 2016 – 2017 version available beginning October 1. Even if you don’t think your family will qualify for need-based aid, you should submit the FAFSA anyway. Every family that files one, regardless of family income level, is eligible for some type of federal student loan. You never know what you might be eligible for or how your family’s needs will change before the fall. There are different types of Federal Direct Student Loans, including Direct Subsidized Loans, Direct Unsubsidized Loans, and Federal Direct PLUS, among others. We will cover the specific differences between these loans in an upcoming post, but all of them are managed by the federal government. Some can be covered by debt forgiveness programs, like the Public Service Loan Forgiveness Program, but when you’re taking out a loan it’s best practice to assume that you will be paying back the entirety of the balance.

If you need more money, look into private loans. Federal loans are limited year-to-year, and if facing a tuition shortfall, you may need to look into private education loans. One of the best known private loan lenders is the company Sallie Mae, but private loans also come from banks, credit unions, and other lenders. In most cases you’ll need a co-signer. All private loans differ, but their interest rates may be fixed or variable and some require a minimum payment while still enrolled in school. You can learn more about the differences between the two types of loans at Studentaid.ed.gov.

When taking out loans, make sure you understand the terms of the loan. How will interest be charged? What is the grace period on the loan, that is, how much time will pass between graduation and when payments are due? Who will be the co-signer on the loan, if you need one? There are many factors to consider and like most aspects of the college process, the answers will differ among families. But with some research, you’ll feel more equipped to make the right choices for you. Good student loan borrowing is about being smart, making the right decisions, and doing what’s best for you and your family.

Top 5 reasons for 529

April is #FinancialLiteracyMonth offering many reminders about the importance of saving. Thinking about starting a 529? Here’s 5 reasons why the 529 makes an excellent option.

1. It’s cheaper to save than to borrow:  It’s much more than “a dollar saved is a dollar earned” today, as many utilize student loans to cover the rising cost of higher education.  Having to borrow becomes a much more costly endeavor long term, where savings is a more attractive option.  For example, saving $100 per month averaging 4% rate of return compounded annually over 18 years would produce about $31,437.  If borrowing $31,437 at 4%, a 10-year repayment schedule would require monthly payments of $318.28 for a total of $38,194.24 repaid.  The $6,757.24 in interest costs may be a tax deduction in future years of repayment, but it’s clear that a little bit of early savings goes a long way to cover college costs.

2. No income limitations: Regardless of how low or high family income is, there are no income limitations associated with the 529 plan.  This is unlike the Roth IRA, a retirement savings program that is only available for single people making less than $116,000 per year or married couples earning less than $183,000 per year as of 2015.  Savers make saving a financial priority and are not limited by the 529 because of future gains on income.

3. Tax-free growth: Quite simply, 529’s offer a tremendous benefit of tax free growth.  Specifically, all earnings grow free from federal taxes.  Most states conform to the federal tax free treatment with 33 offering state tax deductions

4. Best savings option when considering financial aid: Families concerned their savings may affect their eligibility for need-based financial aid should take a look at the 529.  Ultimately, the way cash is saved is what’s most important. On the FAFSA (Free Application for Federal Student Aid) money saved in a 529 plan owned by the parent is weighed against financial aid eligibility at 5.64%. For example, $10,000 saved in a 529 could end up reducing financial aid eligibility by $564.  However, this is much better than having money in a standard savings account in the student’s name, where it can be weighed against financial aid eligibility by 20%. The 529 provides a superior vehicle for college savings given financial aid regulations for higher education.

5. Great for estate planning: Grandparents are finding creative ways to help fund college for their grandkids while retaining control of their assets as part of their estate.  Money put into a 529 is removed from the taxable estate, but grandparents are able to retain rights of control over the 529 account even when funding is typically used to cover future college expenses for their grandchildren.   Generally, the goal of estate planning is to reduce tax liabilities and provide assets to family members as efficiently as possible.  Under current tax law, you are permitted to gift up to $14,000 per year to another person for any reason without having to pay a gift tax or a generation-skipping tax (GST). This limit is sometimes referred to as the “annual exclusion amount.” With a 529 Plan, however, you are able to make a lump-sum contribution equal to five years of annual exclusion gifts to a beneficiary in a single year. This means that you can give up to $70,000 (if you are single) or $140,000 (as a married couple) at once, per beneficiary, without having to pay gift or estate taxes.

Learn more about Invite Education’s 529 search engine and college savings calculator, helping your institution provide families with savings strategies and grade-by-grade guidance every step of the way.

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