529 Accounts and Tax Reform

In this video, we talk about the recent tax reform, 529 accounts, and how it may not be as great over the short term as people hope.

Topics:
1. Provision of the tax from allowing families to withdraw $10,000 for private tuition.
2. Tax treatment of 529 on the federal and state level.
3. States playing catch-up to the tax reform.

As always, check out collegeandretirementplan.com for more information or email me at ncarmany@thewatermarkgrp.com.

 

Planning for College and Your Expected Family Contribution

Planning for college gives families the opportunity to send young adults into the world on the best footing. Not only do these young work warriors learn technical skills to follow a career with a livable income, they also learn social skills by interacting with a new set of people. When not carried out properly, students and parents often see the end of academic careers with debt and no diploma. Creating a better understanding of how college funding works and the choices that are available help parents in the process of saving for, shopping for, and saving on the cost of college. This post will act as an introduction to saving on the cost of college, with a review of the family’s expected contribution.

First, let’s take a step back and look at the landscape as it exists today.

Google “student loan debt” and a barrage of articles and statistics fill your search results. As most families with college-bound students know, total student loan debt is well over $1 trillion. In fact, the most recent numbers show total student loan debt at $1.4 trillion (1.). In 33 out of the last 35 years, the cost of college has risen faster than the pace of inflation (as of October 2016) (2.)

The result has been an inflation rate of roughly 5% for the past 10 years. Compare this to the cost of college in Singapore over approximately the same time frame and you will see an inflation rate of 3.22% (3.) – more in line with what one would expect. Free tuition may also be available in countries such as Germany, which originally abolished tuition fees in 1971 (although it made a comeback from 2006-2014) (4.). Still, a free university education is not always as glamorous as it seems. For example, in Sweden, the government provides tuition to students, but students loans do pile up, with 85% of Swedish students graduating with debt (4.), though that debt does not compare to the growth or amount of debt US students incur.

Take a look at the cost of college and the median US household income.

Notice the growth rate of college costs and lack of growth in median family income.

Part of the American Dream is slipping farther away from parents wanting to see their children do better and from students wanting to experience a respectable standard of living. The math is simple; when the rate of change for college costs increases faster than incomes rise, more borrowing takes place, totaling $1.4 trillion.

New Trends

I hope we start waking up to the current realities and start looking at the picture with a different set of assumptions and planning techniques. The students who recently graduated or who will be graduating soon must start looking at student loans in the same way Boomers have started looking at Social Security to maximize lifetime income. However, instead of looking for ways to increase lifetime income, graduates and parents with student loans must find ways to reduce lifetime expenses.
Students in high school or middle school, and their parents, should closely examine ways to fund college. Start with the basics. (Click here for a timeline associated with the last two years of high school.)

First step

We must look at the larger, more basic formula for college as outlined below.

Cost of Attendance – Expected Family Contribution = Student Financial Need

Most families have this basic formula down. If you have a high school student, how many conversations have you had with him or her about the cost of in-state versus out-of-state tuition and public versus private university costs? Most families try to keep the cost of attendance down without focusing on other aid that may make more expensive universities competitive, in terms of cost, with public in-state institutions.
For example, if private university tuition is $50,000 and a public school costs $25,000, the easy choice (on the surface) is a public university. However, when private schools see that a student has significant financial needs, those schools will likely offer more scholarships, grants, discounts, and money to the student (assuming the college is seeking the student’s attendance).
Only 11% of private school students pay full price for their education (6.). Private universities spend $0.42 of every tuition dollar and revenue on scholarships and grants (6.). Recent years have shown record scholarships and grants issued from private universities.
In the end, the net cost to parents and students matter not the sticker price.

Learning how the formula works for a family’s expected contribution should be the second step.

What is the Expected Family Contribution, or EFC?

It seems easy to not worry about how to pay for college until the bill comes.

In simple terms, this number is the amount of money the government feels your family can reasonably contribute to funding a college education. The formula, while more complicated, is listed below:

(Parent Income + Parent Assets)/# of Children in College + Student Income + Student Assets = EFC

Parent Income – Between 0-47% of total income may be expected minus all taxes and allowances.

Parent Assets – Up to 5.6% of qualifying assets may be counted, such as brokerage accounts, college savings, and savings accounts. Assets such as the family home, retirement plans, and an asset protection allowance do not affect the EFC calculation.

Number of Children in College – If you have more than one child in college, your Student Financial Need changes because assets will cover multiple individuals.

Student Income – 50% of income over the protection allowance counts toward the family’s EFC.

Student Assets – 20% of all assets, including custodial accounts and savings accounts. As with parents’ assets, the EFC calculation ignores family homes and retirement plans. As mentioned before, students also get an income protection allowance.
(Stay tuned for another blog post discussing income protection allowances.)

Now what?

As you can see from the formula, simplicity quickly gets lost and families start ignoring the EFC part of the college funding formula. Here are the next steps for parents and students.

Parents:

1. Starting when your child is in middle school, project your income through high school and college to better understand cash flow and to examine ideal accounts to save college funds.
2. If you own a small business for which your student works, create a plan early for the student’s income to avoid a higher EFC.
3. Create a plan for the gifting of assets to the student while he or she is in college, or a few years before college. Remember that up to 20% of a child’s assets count for the EFC and that only 5.64% may be expected for a parent’s qualified assets. If Grandma and Grandpa gift stock to the kids, you may want to rethink this for a while, or Grandma and Grandpa may want to gift the stock to Mom and Dad instead. (Watch out for the annual gift exclusion amount. Talk to your tax advisor for specifics about your situation.)

Students:

1. If you work, project your income over the next few years before and while you’re in college. You may end up working more your sophomore year versus your junior and senior years. This accomplishes two items: A.) It gives you a longer timeframe for your money to compound, and B.) Because prior-year tax returns are used, a lower income will be reported on the FAFSA.
2. Be careful about receiving gifted assets. See #3 under “parents.”
3. As you plan for college, closely examine whether you will be a better candidate for merit-based or needs-based scholarships and grants.

As always, if you have any questions, use the “contact us” page to let us know what is on your mind or contact us at 317-805-0840.

Sources

1. “U.S. Student Loan Debt Statistics for 2017.” Student Loan Hero. N.p., 11 July 2017. Web. 01 Aug. 2017. https://studentloanhero.com/student-loan-debt-statistics/
2. Clark, Kim. “College Costs Hit Record High in 2016 | Money.” Time. Time, 26 Oct. 2016. Web. 01 Aug. 2017. <http://time.com/money/4543839/college-costs-record-2016/>.
3. “College Access and Affordability: USA vs. the World.” Value Colleges. N.p., 01 Nov. 2016. Web. 01 Aug. 2017. <http://www.valuecolleges.com/collegecosts/>.
4. Mithcell, Michael, and Michael Leachman. “Years of Cuts Threaten to Put College Out of Reach for More Students.” Center on Budget and Policy Priorities. N.p., 29 July 2015. Web. 01 Aug. 2017. <https://www.cbpp.org/research/years-of-cuts-threaten-to-put-college-out-of-reach-for-more-students>.

The Current Reality of Paying for College

We want the best for our children, and we seek to lead them towards lives that are better than our

Pay for college is complicated and gets many families into trouble.

own. Culturally, we accept the pursuit of the “American Dream.” We measure success in terms of a house and white picket fence, a steady nine-to-five job, and a sizeable bank account. As parents, how do we put our children in a position to achieve this dream? What if our children want something other than this dream?

These questions lead me back to the current reality. To help our kids prepare for this next exciting phase of their lives, what should we as parents be doing now? For most families, “college” is the answer. However, the reality of achieving it remains a challenge. It’s like watching a crowd pay to stand in line for a box of goods and the promise of a great future, but not knowing how long the line is or what the box contains.

The American Dream

We hear about the goods in the box being the American dream – buying a home with a white picket fence, having two children, working at a nine-to-five job, and having a sizeable bank account. These traits are measures of success. The American Dream tells us that a pension awaits us when we reach the age of 65, and that our children will get college degrees, putting them on track to have better lives than ours. Yet somehow, in some way, the dream feels out of reach.

Consider Generation X. They bear the once-shared responsibility of creating a retirement pension while caring for elderly parents and helping pay the inflated cost of college – all on stagnant wages. The financial planning community tells this generation, “Save more, work more, save for your retirement first. Kids can borrow money for college; you cannot borrow for retirement.”

What is the result? A lack of retirement savings, student loan debt that both parents and children will be working to pay off for decades, and high levels of stress and anxiety. Where can we start building momentum that helps parents and acts as a springboard for our children and communities? College planning. Here, we can start with one of Gen X’s biggest concerns. First, we must gain perspective on the current landscape.

Student Loan Bubble

One of the most disturbing clocks is the student loan clock (found at collegedebt.com). Take a moment to venture over there and wait for a few seconds. It likely feels similar to watching the national debt clock. Consider the growth in student loan debt over time with just federal student loans outstanding (3.)

Or how about the increase in parent plus loans versus federal loans to undergraduates(4.)

Several studies have shown that parents tap into their retirement accounts to help pay for college. Even as parents sacrifice their own retirement over time, we sit with $1.4 trillion of student loan debt, on which one generally cannot file for bankruptcy. Experts state that the student loan bubble is coming.

Is it coming or is it already here? In a recent article, Forbes noted that the percentage of borrowers not paying on their federal student loans within three years of graduating college has increased to 11.5% (1.). Compare this to the mortgage delinquencies from the great recession, which topped out at 11.53% in the first quarter of 2010 (2.). How can the bubble be on the way? It is already here.

For several reasons, we should not be surprised by the lack of conversation on this topic:

– The Department of Education does not penalize universities until their student loan default rates exceed 40% in one year or 30% over three years. Remember how terrible things were during the Great Recession? Universities would need to become three to four times worse in terms of their default rates before the school has skin in the game.

– Think about the fact that you cannot easily declare bankruptcy to eliminate student loans. Why would the student loan industry care much about defaults? The interest will continue accruing; it only becomes a question of when they will collect. The longer it goes, the more compensation they will receive. The interest does not stop piling up.

– Let us not forget the standard advice of the financial planning industry: Prioritize saving for your retirement. “Kids can borrow money for college, but you cannot borrow money for retirement.” Think about how we pay for advice. Most advisors or financial salespeople receive compensation from commissions and/or the assets they manage. The larger this pool of assets, the more money they make. Why wouldn’t they prefer that you and your child take out student loans instead of paying for college from accumulated assets? While this does not apply to all financial professionals, based on my experience it is most often the case. This is not always a prudent financial move. In 2015, Mark Kantrowitz wrote an article that discusses situations in which putting your retirement first does not work best.

New Mindset

Does the world seem bleak, as though all is lost? There are new and developing trends. We must

Families need a new way to pay for college and pay off existing student loans.

understand both sides of the student loan issue.

The first is students who have already graduated and are working to pay off their loans. These individuals must look and plan for their student loans using the same mindset Boomers have toward Social Security planning. As you look back on retirement income planning, not much thought was given to maximizing Social Security to increase lifetime income. However, as Boomers aged, they explored the rules and started developing strategies like file and suspend, or restricted claim to help increase lifetime income. These strategies were innovating. They became so popular that Congress had to change the rules on Social Security. In a comparative way, new planning tactics must be developed for current holders of student loans. People like Heather Jarvis and younger financial planners are leading the way.

The flip side involves preventing student loans from being an issue. This means that as college education consumers, we must change the way we save for, shop for, and save on higher education. Most of the time, financial services will tell you to save for college (provided you have taken care of your retirement first), but it will not tell you how to save on the cost of college. Those individuals who talk about how to save on the cost focus on getting scholarships. However, there are other ways, like smart shopping, making the schools compete for your student’s attendance, and using the tax code to create “tax scholarships.”

Next Step with College Funding

– If you face the first scenario, study the innovators who specialize in student loans. If you are a do-it-yourselfer, check out Heather Jarvis’ site: http://askheatherjarvis.com/. For those who are delegates or validators, check out the screening tool on the XY Planning Network and look for advisors who specialize in student loans.

– If you are a parent of a high school student seeking some level of education beyond high school, look for advisors who specialize in the financing of college funding, not just the filing of the FAFSA or CSS and finding scholarships. I’m talking about using the tax code to create “scholarships,” having universities compete for your attendance, coordinating contributions from family members to avoid negative impacts on aid, helping coordinate distributions from accounts, developing a smart borrowing plan, and helping families explore ways to cover any college funding shortfall. To see what this process can look like, follow this blog over the next few months.

– Check out my other college funding articles.

Give me a call at 317-805-0840 or email me at ncarmany@thewatermarkgrp.com to discuss you will pay for you student’s higher education.

Sources

  1. Friedman, Zack. “Student Loan Defaults Rise – What To Do Now.” Forbes, Forbes Magazine, 6 Oct. 2017, www.forbes.com/sites/zackfriedman/2017/10/06/student-loan-default/#1f1cc56928de.
  2. “Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks.” FRED, St. Louis Federal Reserve, 27 Nov. 2017, fred.stlouisfed.org/series/DRSFRMACBS.
  3. Eisenhart, Maddie. “Student Debt Is Going to Be A Huge Problem for Millennial Marriages | A Practical Wedding.” A Practical Wedding: We’re Your Wedding Planner. Wedding Ideas for Brides, Bridesmaids, Grooms, and More, 17 May 2016, apracticalwedding.com/student-loan-debt-relationships/.
  4. Mitchell, Josh. “The U.S. Makes It Easy for Parents to Get College Loans-Repaying Them Is Another Story.” The Wall Street Journal, Dow Jones & Company, 24 Apr. 2017, www.wsj.com/articles/the-u-s-makes-it-easy-for-parents-to-get-college-loansrepaying-them-is-another-story-1493047388.

Important Dates for College Planning

College affects the daily lives of Gen X parents, either through children who have just graduated from college with student loan debt or through children who will soon be attending college. As their careers become settled and they earn higher incomes, parents with toddlers also focus on college. The idea of funding college moves up their list of goals.

As an industry, financial planning still has room to improve in terms of college planning. While financial services communicate the dates for retirement planning, the opposite seems true for college planning. Here, we discuss many of the dates and explain a few of the ideas associated with college planning.

FAFSA and Associated Timeline

FAFSA is an acronym for Free Application for Federal Student Aid. Parents and students complete this form every year to determine eligibility for financial aid. From the information listed on this form, an Expected Family Contribution is established to help fund the student’s education. For this article, students and parents should know that to file for the 2017-2018 academic year, the FAFSA must be filled out by June 30, 2018. However, the earlier you file, the better your chance of qualifying for grant, scholarship, and work-study money (1). Ideally, you would have filed on October 1, 2016, for the 2017-2018 school year.

Families should complete the FAFSA as close to October 1 of their senior year of high school.

States and colleges have their own deadlines for the FASFA filing (1). You can find the date by visiting FAFSA.edu.gov (2). The dates will not necessarily agree with the federal deadline already discussed. For example, Indiana’s deadline for the 2017-2018 academic year was midnight on March 10, 2017

When checking your desired university’s deadline, make sure you define the deadline. Is it submission of the FASFA or the date when it has been processed (2)?

As you can see, the FAFSA-related dates complicate the situation. The simplest action is to file your FAFSA form as close to October 1 when the application opens for the academic year in the following calendar year. In other words, for the 2018-2019 academic year, file the FAFSA on October 1, 2017. Many states and universities give out money on a first-come, first-served basis.

College Application Deadlines

While families stress about the financial aid they may receive, it is easy for them to forget about the college application deadline. As with the FAFSA, a few deadlines may apply to you. The result of not applying on time may lead the university to not even look at your application (3).

First, understand that the college application can be an early application or regular application. Colleges divide early application into early action or single choice early action. For purposes of this article, send an early application to the university during the first semester of the student’s senior year of high school, typically October to mid-November (3, 4). Early acceptance announcements may occur from November to early February (5).

Universities typically accept regular applications between January 1 and February 1. Students who plan to fill out a regular application should have letters of recommendation and essays completed by mid-November. Students should receive acceptance letters by mid-March or April (4).

SAT and ACT Tests

The ACT and SAT tests cause strike fear in many high school students. A high score means getting into the student’s dream college … or so many think. Many colleges now take a holistic approach to admissions and look at civic engagement, secondary student activities, and work experience as factors influencing admissions. However, the ACT and SAT are still important factors in the admissions process.

As a best practice, students should take one or both tests a couple times starting their junior year of high school. Students can take test several times throughout the year. The best time to take the tests will depend on your needs; typically, a study time of at least 40 hours is recommended for ACT and SAT preparation (6). Depending on class load, extracurricular activities, and scheduling, a student may take one to four months to prepare. Some do not recommend starting too early because the student may forget some of the material.

For general planning purposes, start with two months of lead time for test preparation and then adjust your schedule as the date gets closer.

Parents and College Planning

For parents, college planning will involve time spent reviewing and analyzing assets, as well as cash flow for account contributions.

College Savings Accounts

Parents typically save money in one of three types of accounts for college.

Custodial account- Money placed in this account is the child’s  asset(s). A custodian, typically a parent, oversees and invests the money. Contributors do not face deadlines for but funds will be considered higher on the list for college funding. The account also has a greater effect on funding expectations versus, say, a 529. The upside to a custodial account remains the flexibility with which the funds may be taken out. The money must be used for the benefit of the student. On a side note, some states require that the money is turned over to the child (i.e., the custodian is removed) once the child reaches the age of majority – a situation some parents do not favor. No tax advantage may be realized in funding these types of accounts.

Coverdell Educational Savings Account- This type of account is also known as the Educational Savings Account, or ESA. It focuses mainly on college with a cap on the contribution limit of $2000 each year until the student reaches the age of 18. The contributions are not tax-deductible but grow tax-free as long as the money is used for qualified expenses. Contributions can be made until the due date of the contributors’ return (April 15) without extensions (7). Income limits apply to the account. Individuals may contribute if their modified adjusted gross income is below $110,000 ($220,000 for married filing jointly) (7).

529 College Savings Account- The most popular college savings account is the 529. The deadline for most 529 contributions is December 31. However, seven states allow contributions up to mid- to late April for the previous tax year. These seven states are Georgia, Iowa, Mississippi, Oklahoma, Oregon, South Carolina, and Wisconsin (8). Many states offer a deduction or credit for account contributions. Please see your advisor for details related to your specific state.

Tax Returns

As we know, April 15 remains a dreaded date for most Americans, as tax returns are normally due. The date does adjust every once in a while, when April 15 falls on a weekend and to accommodate Emancipation Day (normally on April 16), which celebrates the end of slavery in Washington, D.C.

Some parents do not complete their taxes on time and file an extension. When this happens, the taxpayer must complete the filing by October 15. Filing an extension affects the FAFSA. Parents need to send a copy of the 4868 (extension form) with the FAFSA. Often, the university wants copies of W-2’s and a signed draft of your tax return. The institution may offer a temporary extension on the financial aid award until the FAFSA has been updated and completed.

 Shifting Income

Strategic planning for recognizing income or shifting it from one year to another may have an effect on your capacity to receive aid. In the same way, parents may look at shifting income for other reasons; many of the same tactics apply.

Gifting appreciated stock is one example which shifts income from a parent in a high tax bracket to a child (who sells the security) in a lower tax bracket at a young age. Parents need to gauge how this income shift affects financial aid. The focus should be on the income allowance and trying not to exceed it.

Understand that your income from this year will not affect aid for two years. For example, in the new changes on the FAFSA filing, the form asks for the “prior prior year’s” tax information. A 2015 tax return will become the basis for the 2017-2018 academic year.

Avoid recognizing large amounts of income through retirement account distributions or exercising stock options or capital gains. Offset capital gains with losses.

All the activities listed above normally have a deadline of December 31 at the close of the tax year. Please see your tax advisor for specifics about your situation.

If you have questions or would like to talk more about your student’s college funding, use the “contact us” section to let us know what you would like to discuss and when you are available.

Sources:

  1. Nykiel, Teddy. “When Is My FAFSA Deadline.” NerdWallet. N.p., 13 Sept. 2016. Web. 19 June 2017. <https://www.nerdwallet.com/blog/loans/student-loans/fafsa-deadline/>.
  2. “Student Aid Deadlines.” Student Aid Deadlines – FAFSA on the Web – Federal Student Aid. N.p., n.d. Web. 19 June 2017. <https://fafsa.ed.gov/deadlines.htm#>.
  3. Services, University Language. “College Application Deadlines at US Colleges and Universities.” The Campus Commons. N.p., n.d. Web. 19 June 2017. <https://www.universitylanguage.com/guides/us-university-and-us-college-application-deadlines/>.
  4. Services, University Language. “Early Application: Applying to US universities early or regular decision.” The Campus Commons. N.p., n.d. Web. 19 June 2017. <https://www.universitylanguage.com/guides/early-application-applying-to-us-universities-early-or-regular-decision/>.
  5. Blank
  6. Zhang, Dr. Fred. “SAT / ACT Prep Online Guides and Tips.” How long before the SAT should you study and prep?: 3 Factors that Affect the Hours. N.p., n.d. Web. 19 June 2017. <http://blog.prepscholar.com/how-long-ahead-of-the-sat-you-should-begin-studying-and-prepping>.
  7. “Coverdell ESA Contribution Limits & Deadlines.” 2016 and 2017 Coverdell (ESA) contribution limits and deadlines. N.p., n.d. Web. 19 June 2017. <https://newdirectionira.com/ira-info/contributions/coverdell-esa>.
  8. Flynn, Kathryn. “7 States Where You Can Still Claim a Prior-year 529 Plan Tax Deduction.” Savingforcollege.com. N.p., 21 Feb. 2017. Web. 19 June 2017. <http://www.savingforcollege.com/articles/6-states-where-you-can-still-claim-a-prior-year-529-plan-tax-deduction-915>.
  9. “Office of Student Financial Aid.” IRS Tax Transcript FAQ | Office of Student Financial Aid – University of Wisconsin–Madison. N.p., n.d. Web. 19 June 2017. <https://finaid.wisc.edu/557.htm>.

Student Loan Debt: 2000 and Today

Thisthatandthose.com
Helping Gen X parents plan for college and retirement.

Topics:
1. Student loan debt from 2000 and 2016
2. Playing from a weak position
3. Balancing financial priorities

Work Cited:
1. http://money.cnn.com/2002/03/08/college/q_studentdebt/
2. http://www.morningstar.com/advisor/t/114659614/how-student-debt-affects-retirement-wealth.htm

What is the right amount of student loan debt?

Simple; the answer should be $0, but for most families that is not a reality. So, the question needs to change: What student loan debt can I support?

First, a quick look at a few important numbers.

  1. The past few years have seen 70% of graduating students leave college with a loan (or loans) (1.)
  2. The average graduate holds $37,172 in student loan debt (1.)
  3. Fifty-nine percent of millennials do not know when their student loans will be paid off (1.)

How does this affect other financial behavior?

According to a study from Jake Spiegel, “we found that student loans do appear to have a small crowding-out effect on retirement savings.” In fact, using data from HelloWallet, Speigel found that each dollar of student loan debt results in a $0.17 decrease in retirement savings. Data from the Survey of Consumer Sciences revealed similar results, with a $0.35 decrease in retirement savings (2.)

A Navient report shares data showing that people are less likely to have children if they still have student loans (3.) This is the trickle effect of student loans. Less spending takes place because of higher debt that must be paid off. The same survey goes on to note that 32% of people who borrowed for college did not feel financially stable (3.)

From a behavioral standpoint, a lack of confidence often results in the halt of financial progress. Preserving and gaining a reasonable confidence level helps build financial momentum, leading to success. Student loans are a big factor inhibiting younger workers from building motivation and confidence when it comes to their finances.

What about after the loan is paid off?

In a separate but related article, Spiegel notes, “I found that workers who had paid off their student loans contributed nearly 12% more to their retirement accounts than workers who had not yet finished paying down their loans. This evidence reinforces our theory that there is significant interplay between student debt and retirement savings.” He goes on to discuss evidence compiled by HelloWallet that workers who do not have student loans spend less and save more for other priorities than do workers with student loans.

Even though the 12% increase helps retirement account balances, workers miss the compounding effect of higher contributions to retirement accounts from the start of their careers. As time passes, the differences between those who saved more versus those who did not create a widening gap because of this compounding.

Reality Check

The evidence clearly shows an inverse relationship between saving and student loan debt. However, most families cannot pay for college easily out of current assets or cash flow. Even if a family saves much of its income, competing priorities may take money away from college savings. The biggest competing goal: retirement, of course.

Joseph Hurley notes in a post on savingforcollege.com, “A realistic goal for many families is to aim to save 25% of projected college expenses” (4.) The article discusses a few of the assumptions behind the goal of saving for 25% of college expenses. One example reveals that, on average, a public four-year school offered $5880 in grant and tax benefits (4.)

Of course, the later a family starts saving, the more money it will need to put away every month.

The Right Amount

In an article posted last year, Mark Kantrowitz notes, “student loan debt is affordable if half of the after-tax increase in income that a student gains from obtaining a college degree is sufficient to repay that student’s loans in 10 years or less.” Mark continues, noting his rule of thumb later in the article that total student loan debt at graduation should be less than the starting salary of the student (5.)

The Chicken or the Egg

While Mark gives great information about how to gauge where you end, this information is most helpful to the parents of a young child, who have a longer time frame during which to save. What if you or your child will be attending college soon? Worse yet, what if you are in college now?

As you can imagine, the normal “save as much as you can” advice will not be new or groundbreaking. What students can do is start working during the summer months to amass funds for college. Since the admissions process is less focused on grades and more dynamic, emphasizing extracurricular activities, including work, will help in several ways:

  1. Acquire increased savings for college.
  2. Create experiences that students can use for writing admissions essays.
  3. Gain lifelong work skills that will be helpful in landing internships and possibly jobs.
  4. Increase confidence. A few students become nervous while asking questions about schools during visits or class. Universities are big and intimidating. A work history forces most of us to ask clarifying questions when we do not understand a task or situation. Gaining the confidence to seek clarification helps a young student make informed decisions.

In College Now:

  1. As noted before, start working to reduce the amount of student loan debt required for current or future semesters.
  2. Take stock of your current student loan debt. Are you on pace to meet the guidelines noted above? If not, are there similar fields of work through which you can increase your pay so the debt load will be serviced easily?
  3. Still feel overwhelmed? Start building a small emergency fund of $500-$1000. This small act helps address most emergencies after you graduate and gives you the freedom to aggressively start paying off your student loans.

Should you have questions or concerns, you can contact me at 317-805-0840 or ncarmany@thewatermarkgrp.com.

Sources:

  1. “10 Student Loan Facts College Grads Need to Know | Paying …” N.p., n.d. Web. 11 Feb. 2017. <http://www.usnews.com/education/best-colleges/paying-for-college/slideshows/10-student-loan-facts-college-grads-need-to-know>
  2. Speigel, Jake. “How Student Debt Affects Retirement Wealth.”Morningstar Advisor. N.p., 16 Apr. 2016. Web. 11 Feb. 2017. <http://www.morningstar.com/advisor/t/114659614/how-student-debt-affects-retirement-wealth.htm>
  3. Kitroeff, Natalie. “Four Ways Student Debt Is Wreaking Havoc on Millennials.”com. Bloomberg, 10 Dec. 2015. Web. 11 Feb. 2017. <http://www.bloomberg.com/news/articles/2015-12-10/four-ways-student-debt-is-wreaking-havoc-on-millennials>
  4. Hurley, Joseph. “The Magic Number for College Savings.”com. N.p., 08 Feb. 2017. Web. 11 Feb. 2017. <http://www.savingforcollege.com/articles/the-magic-number-for-college-savings>
  5. Kantrowitz, Mark. “Why the Student Loan Crisis Is Even Worse Than People Think.”com. Time, 11 Jan. 2016. Web. 11 Feb. 2017. <http://time.com/money/4168510/why-student-loan-crisis-is-worse-than-people-think/>

Student Loan Forgiveness

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As a college graduate from the class of 2000, I was fortunate enough to limit my total student loan borrowing to $2500 through a combination of grants, and academic scholarships, and living at home.  Today, the average student is not the benefactor of similar circumstances.  If fact, the total amount in student loans in 2004 was $260 billion (1).  A rather large number, but the amount of 2004 is still small in comparison to the $1.2 trillion in outstanding loan debt as of 2014, with average graduate borrowings of $33,000 (1.)   Personally, we all know or have heard stories of young workers trying to figure out how to find their way out of the crater created by their student loan borrowings.    Here, I will outline a few options for student loan debt forgiveness, starting with the two most popular programs.

Public Service Loan Forgiveness

In order to qualify for this program, a person needs to be on a qualifying repayment plan, work at an approved service organization for ten years while making student loan payments, and will need to submit paperwork annually to the student loan provider (2.)

A qualifying employer is almost any level of government, 501 (c) 3 organization, or private company that provides public services. Additionally, the loans need to be issued through the Direct Loans Program.  Federal loans through Perkins, FFEL (prior to 2010), Parent PLUS, and private loans do not qualify.  However, one can consolidate FFEL and Perkins may be consolidated into the Direct Loan Program (3.)

Teacher Student Loan Forgiveness

This program states the person needs to teach for a minimum of five years and teach at a Title 1 school where 30% of the students are classified under Title 1 (2.). (Title 1 passed in 1965 as a means to reduce “students at risk of failure and living at or near poverty.” (4.)) This plan will only forgive up to $17,500 and the loans cannot have a default status (2.)  As a side note, Perkins loans under this structure are treated differently.

State Level Forgiveness Programs

Some states offer an annual debt reduction amount to borrowers employed in specific jobs.  Typically, these areas include health services, social work, veterinary services, and legal work (3.)

Perkins Loans

These are loans normally made by colleges and universities for students in financial need.  Cancellation of the debt may take place if you are employed in education, on active military duty, health services, or public safety (3.)  As noted earlier, these loans may be consolidated to the Direct Loans Programs which may increase the options for student loan forgiveness.

Military

Individuals in the National Guard, Army, Air Force, and Navy may be covered if serving and holding student loans.  Even former military service persons may see relief if there was a transition to the health services field.

Income-Driven Repayment

After 20-25 years of making on time payments on an income repayment plan, students can get the remaining balances of their student loans forgiven.

Final Thoughts

The programs listed above may be helpful if you qualify, however, most student loan borrowers will see minimal if any benefit.  Each of the programs have numerous details, and the intent of this post is to share the information on a high level.

While completing the research for this post, Gradible.com was found.  It is a site that walks someone through the debt relief programs by having one fill out a profile and answering questions.

 

For those looking seek assistance, the website mentioned above may provide a starting point.  It may also help to discuss your details with an advisor, who is knowledgeable about student loans and repayment programs.

Here is an article for Indiana residents

http://www.insideindianabusiness.com/contributors.asp?id=2210

 

Sources:

1.       https://www.debt.org/students/

2.       http://www.forbes.com/sites/robertfarrington/2015/01/12/the-dangers-of-student-loan-forgiveness/

3.       http://www.businessinsider.com/how-to-get-your-student-loans-forgiven-2015-8

4.       http://www.brighthubeducation.com/teaching-methods-tips/11105-basics-of-title-1-funds/

ESSENTIAL PLANNING FOR FAFSA CHANGES

As we slide into the last two weeks of the year, many people begin their tax planning. This often includes setting goals for the new year.  The end of 2015 brings with it changes to college funding that are substantially different from previous years.  President Obama recently announced changes for the Free Application for Federal Student Aid, aka FAFSA. While the announcement came late, there is still time to look make adjustments lessening the impact of the new direction.

NEW THIS YEAR

Two changes start with the 2016-2017 FAFSA.  Firstly, the form will no longer share the list of colleges that students place on the application. On a recent teleconference call, Mark Kantrowitz discussed the unspoken practice of colleges reviewing the list of colleges placed on a student’s FAFSA form.  The reviewing institution prefers to see their name listed in the top 3. Students typically list colleges on the form in order of preference (1.)

The second and larger change deals with the timing and tax returns used for FAFSA filing.  First, please note there are NO CHANGES for the 2016-2017 filing for parents and students (2).  However, starting with the 2017-2018 school year FAFSA,  parents and students will no longer be using the prior year tax returns and they may submit the form as early as October  1st.  The information from tax returns from two years ago will be used for the application.  See the table below (2).

Fasfa changes

After reviewing the table,  note the 2015 tax return will be used for two years and the submission date is earlier. Earliest submission is recommended by financial aid advisors because colleges can choose to decrease the amount of funds available as the application period progresses.

REVIEW OF EXPECTED FAMILY CONTRIBUTION FOR COLLEGE FUNDING

The Federal Student Aid office uses personal and family income as an important determinant of the amount of funding  a student may receive.  Better understanding of that formula helps parents and students  develop strategies that  increase the amount awarded. Kids and Money

The funding formula may require zero to 47% of a parent’s income  (minus taxes and allowances) to fund a college education plus  5.6% of reportable assets (not including the family home, retirement accounts, small family businesses, or assets
up the protected amounts (1.)) The number of children in college adjusts the amount of expected family contribution.  Students should be ready to use half of their income over the income protection allowance plus 20% of all reportable assets (typically UGMA/UTMA, and other savings accounts (1.))

PLANNING OPPORTUNITIES

  1. As noted above, 2015 will play in important role in college planning for the next two years. Since the calendar year closes soon, here are a few items to consider for reducing your income.
  2. If you have large realized capital gains, consider selling your losers to reduce income.
  3. Contribute as much as you can to tax deferred accounts (IRAs, 401ks.)
  4. Consider placing your dividend and interest paying investments in your tax-deferred and Roth accounts. Consider the potential gains paid out by mutual funds.
  5. Make two years of charitable contributions in 2015 (up to the allowable limits.)
  6. Make your January house payment at the end of December to claim the extra interest on your 2015 taxes.
  7. If you itemize deductions,  pay your state taxes by year-end.
  8. Some states allow deductions for contributions to your state sponsored 529.  Here is a link for more information.  http://news.morningstar.com/articlenet/article.aspx?id=718471

WRAP UP

As you head into the end of 2015 and examine the story you tell the IRS, keep in mind the potential impact on your college funding for the next two years.  Any income deferred may help increase the chances of receiving aid. Please check with your financial or tax professional for additional information and questions about your situation.

Sources:

  1. 10/20/15 Teleconference  with Mark Kantrowitz.  The Fundamentals of FAFSA & College Planning
  2. https://studentaid.ed.gov/sa/about/announcements/fafsa-changes. Information accessed 10/22/15