Source: ANNE MARIE CHAKER of wsj.com on July 9, 2007My comments
Student loans have replaced grants and scholarships as the primary source of financial aid.
Changes to the Bankruptcy Code in 1998 made student loans non-dischargeable, regardless of the age of the loan; unless the borrower can establish substantial hardship. Law changes in 2005 made even private student loans non-dischargeable.
Although Anne Chaker titled her article as “7 myths about college finances”, these myths are really about the student loans.
This past school year (2006 – 2007), average total tuition and fees at private colleges rose to $22,218 - almost 6% more than the previous year. Add room and board, and the cost climbs to $30,367.
Myth No. 1:
Financial aid comes only in the form of grants and scholarshipsWhile scholarships and grants certainly are the best form of financial aid, aid can also come in the form of federal loans that carry favorable interest rates and that can be available regardless of need.
The most common student loan is the Stafford loan (subsidized and unsubsidized). The unsubsidized type doesn't require the student to demonstrate need. But they are available only to those who have filled out the Free Application for Federal Student Aid (FAFSA), which is something many middle- and upper-income families don't bother to do.
The interest rate on Stafford loans is currently set at a maximum of 6.8% (after 1 July 2006). By comparison, the rate on loans from private lenders isn't capped and currently averages around 10% at some of the biggest lenders. For a $20,000 loan, that's a difference of about $4,100 over the typical 10-year life of a loan.
Federal student loans also carry more-flexible repayment terms than loans from private lenders. For instance, a borrower who is unemployed or facing economic hardship can request a deferment, which allows the borrower to postpone repaying the loan.
For subsidized loan programs, the government pays the interest during the deferment.
There are even loan-forgiveness programs available for borrowers who take some teaching jobs or who enter public service. The federal teacher loan-forgiveness program allows certain math, science and special-education teachers in low-income schools to qualify for up to $17,500 toward the repayment of their student loans.
In addition, many states offer loan-forgiveness programs for their resident teachers. The American Federation of Teachers maintains a list of state-by-state offerings at aft.org/teachers/jft/loanforgiveness.htm. Certain public-service organizations offer their own loan-forgiveness programs, such as AmeriCorps, which will grant volunteers with at least one year of service as much as $4,725 toward loan repayments or future tuition.
One drawback of federal student loans is that there are limits on how much can be borrowed this way. But Congress recently moved to raise the cap for some students. Effective this month (July 2007), the annual limits on Stafford loans for dependent freshmen and sophomores are $3,500 and $4,500, respectively, up from $2,625 and $3,500. Juniors and seniors can borrow up to $5,500 a year.
If student loans aren't enough to cover expenses, parents of undergraduates are also entitled to federal loans: The PLUS loan has the benefit of not carrying any set borrowing limits -- though the total can't exceed the cost of attendance minus other forms of aid -- and the interest rate is set at a maximum of 8.5%. Just remember it's the parent, not the student, on the hook for repayment.
Myth No. 2:
My retirement funds and my home will prevent me from getting need-based aid.Under the federal calculus for distributing aid, retirement plans are completely excluded. (However, you’ll have to report current year contirbutions.) So is the home you live in. On top of that, the federal government shelters a certain amount of general parent savings, for retirement purposes. This "asset protection allowance" varies based on age, but for a typical parent of a college-age child, the figure is around $45,000 to $50,000.
Many private colleges use a separate form to determine how much of their own aid to distribute. It also excludes retirement assets, but it does ask for the net home equity of the family's primary residence, capping it at two to three times annual income.
Myth No. 3:
I should choose a lender from the list of "preferred" lending companies recommended by my college financial-aid office.The New York Attorney General's probe and investigations by members of Congress suggest that lenders haven't always been recommended by financial-aid officers based entirely on students' interests. So you may want to do at least some shopping for loans on your own.
Lenders compete with one another largely by offering "borrower benefits" that lower the costs of their loans. But borrowers should be skeptical of some of these discounts, which can be easy to lose if a student misses a payment.
ExamplesCitibank offers a discount of one percentage point on the interest rate of a Stafford loan - but a student who misses a scheduled payment loses the discount and has to make 24 consecutive payments on time in order to regain it. Nelnet Inc. offers a 3.33% reduction on the original principal balance -- if the first 30 payments are made on time. Once the discount is lost, it cannot be regained.
Some deals are more forgiving. Northstar Education Finance Inc., of St. Paul, Minn., offers a month-by-month credit on its student loans that can amount to an annual rate reduction of up to 1.3 percentage points. Students lose the credit only if they fall 60 days past due on a payment. Once the borrower is caught up again on payments, the benefit resumes.
Because the discounting formulas vary markedly from one company to the next, it can be extremely difficult to calculate the best deal. Mark Kantrowitz, publisher of FinAid.org, a free guide to financial aid, has come up with a calculator on his Web site that allows consumers to punch in various criteria to compare discounts from the different companies.
Myth No. 4:
I'm doomed: I'll have two kids in college at the same time.
The federal assessment of aid eligibility is based on an "expected family contribution" -- the amount of money that parents are expected to shell out, based on their financial picture. That expected outlay stays the same no matter how many kids you have in college at the same time. So if you have two or more kids attending college, your expected contribution is split among them.
The upshot: You are likely to qualify for more aid when you have multiple children in college at once.
Myth No. 5:
The federal aid process is bound by a strict formula, and it's virtually impossible to have any special consideration out of college administrators.While it's true that everyone applying for federal aid must answer the same questions on the FAFSA, there may be special circumstances worth alerting the college financial-aid office to.
The Higher Education Act, which authorizes federal aid programs, gives college aid officers the authority to make adjustments when they feel it's warranted. If you have a solid case, backed up by documentation, it's definitely worth requesting a "Professional Judgment Review" in a letter addressed to the financial-aid officer and supported by documentation.
For example, if your income looks artificially high in the year that's being evaluated, explain why (perhaps it was due to an atypical bonus) and provide previous tax returns to show what it's normally like. Other instances not covered by the FAFSA and worth alerting the financial-aid office to: high medical costs, a death, private-school tuition for kids not yet in college, divorce, job loss, a big decrease in family income.
Myth No. 6:
Our brilliant/talented/athletic child will get plenty of privately funded scholarships, maybe even a free ride.92% of financial-aid officers said that parents overestimated the amount of scholarship and grant money their students received.
That is not to say you shouldn't search. In fact, there are several scholarship search services available free online. Sites like FastWeb (fastweb.com11) or the College Board's scholarship search service (collegeboard.com12) match student profiles to scholarship opportunities.
Myth No. 7:
The 529 college-savings plan offered by my state is bound to be the best for me.
Parents should shop around.
Some states offer their own tax breaks on these plans for state residents, so it is smart to take a good look at your own state plan.
But you should also take a hard look at the fees. Most experts say you should pay no more than 1.5% of assets in fees and other expenses. High-fee plans can easily cancel out any tax breaks that come with investing in your own state plan.
Morningstar Inc., the Chicago-based financial-information firm, rates the following state plans among the best because of their low fees and the performance of their investments:
- the Utah Educational Savings Plan,
- the Maryland College Investment Plan and
- the College Savings Plan of Nebraska.
