Students and parents are already gearing up for college payment decisions, so we put together a student loan miniseries on our Youtube Channel to help get the knowledge out there. #MyCollegeCorner features weekly updates, so subscribe to stay on track with your plan. Today’s episode covers subsidized and unsubsidized loans. Stay tuned for insight on Parent Plus in upcoming episodes.
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. In 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.
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.
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.
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.
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.
What is the “Rule of 70”?: This classic financial literacy concept provides vision for investors planning for college savings. (Also known as the Rule of 72)
At Invite Education, we help families apply that concept towards college planning everyday.
It’s simple: You can figure out how many years it will take for money to double based on a rate of return.
Take the number 70 and divide it by a growth rate.
Let’s try with an investment rate of return @ 7%.
70 divided by 7 = 10
10 is the number of years it would take for the investment to double.
So for example, a $10,000 investment would double to $20,000 in ten years at a 7% annual growth rate. Simple enough.
Yet for most families in the daily grind, this concept is easily missed. Especially during critical early years on an 18 year horizon to college.
Engage customers with simple solutions to complex college problems: Join our Demo
What we’ve learned:
Life moves fast while college planning remains methodical: Consistency is key when distractions become the norm. Providing your customers the means to achieve this defines superior engagement for financial services content.
There’s no time like the present, or the future: The power of compounding interest allows small investments to grow long term. It turns out that it’s cheaper to save long term than to borrow later for college costs.
Your customers “most thoughtful” data; their child’s academic and financial future: Higher education is high on the list for families with children. We recognize the challenges, the benefits and most important the emotions that move families towards making smart college choices. Isn’t it time to give your customers a better college planning experience?
The logical path: Once school choices are targeted, give customers the ability to plan step-by-step a clear path to college success while helping them recognize and compare choices based on costs and benefits.
Engage and deliver results with your organization’s products and services: Your product suite may be excellent, but until engagement begins with the customer’s mind space about the topic the competition will instead pick up business. Everyday more people search for solutions online to find answers to their most pressing college questions. If you have products or services targeted towards that group, give them a platform that answers all the questions they have and collects an email address for targeted follow-up. It’s just that simple.
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