The Cost of a Good Education - Dollars and Sense

Chances are you’ve been told more than once in your life that to get a good job, you need an education. While many people got a good job without an education, there are many more who got a good job because they did have an education. “Consider the median wage of full-time workers who are at least 25 years old. At the end of last year, it was $986 a week for those with a bachelor’s degree or higher, versus $574 for those with only a high-school education, according to the most recent calculation from the Bureau of Labor Statistics.” (The New York Times, October 7, 2005.) A four-year college degree can be a solid investment, but there is no guarantee you will get that well-paying job as soon as you graduate so be prepared to be patient.

An education costs money. When you are trying to get out of debt, the last thing you want to do is create new unnecessary debt, but it is very difficult to complete an education without some form of financial assistance unless you or your parents planned for college many years ahead. Typical debt statistics for graduating college seniors is more than $19,000 at public institutions and nearly $22,000 for private colleges. Some undergraduates borrow as much as $35,000. Graduate students typically borrow even higher amounts, with the additional debt for a graduate degree ranging from $27,000 to $114,000 for a medical degree.

There are many things to consider before taking on education debt. Financing an education can take many forms. An education loan is a form of financial aid that you repay, with interest. Scholarships do not have to be repaid. There are three types of education loans: student loans (e.g., Stafford and Perkins loans), parent loans (e.g., PLUS loans) and private loans (alternative student loans). Federal laws establish the maximum interest rates and fees that can be charged for federally guaranteed loans. Lenders are free to charge lower fees, and so many offer some form of discount to attract borrowers.

Interest rates on federally guaranteed education loans are generally reasonable. For instance, Stafford Loans that were first granted after July 1, 2006, have a fixed interest rate of 6.8%. It’s important to know, however, that if you receive an Unsubsidized Stafford Loan, this rate also applies while you’re still in school. Interest accrues even if you are not yet repaying the loan. If you are able to get a Subsidized Stafford Loan, interest will not begin accruing until you graduate.

The fixed interest rate on new PLUS loans granted after July 1, 2006 is 8.5%. PLUS loans are designed for parents who are paying some or all of their undergraduate child’s college expenses. Parents must be creditworthy and may borrow up to the cost of the child’s education that remains after financial aid is deducted.

Repayment of PLUS loans also differs from repayment for Stafford loans. Parents must begin to repay a PLUS loan within 60 days after the student withdraws the loan money. Unlike a Stafford loan, repayment must begin while the student is still enrolled. The parent has up to 10 years to repay the loan with a $50 minimum monthly payment.

Becoming a Nontraditional Student

If you have not attended school since leaving high school, you have probably been told many times by well-meaning friends and family that one way to improve your financial stability is by getting an advanced education. We’ve certainly mentioned it in our FFEF publications. And chances are you have given some thought now and then to continuing your education. Because deciding whether or not to return to school can be a stressful decision to make and because the thought of going back to school can be daunting, this edition of the FFEF newsletter is dedicated to clearing the path a little and offering food for thought.

Chances are, if you were to return to school, you would be doing so as a “nontraditional” student. Just exactly what is a “nontraditional” student? The term is not a precise one and usually includes a much broader group than many of us think. Most people relate the term to age, meaning students who are older than 25. Although age is one of the defining characteristics, financial dependency status, family situation, and high school graduation status are also considered. Many colleges today offer information specifically for nontraditional students and there seems to be a general consensus among these colleges that nontraditional students have one or more of the following characteristics:

Does not enter postsecondary education in the same calendar year as high school completion
Attends school part-time for at least part of the school year
Works full-time (35 hours or more per week) while enrolled
Is no longer dependent on parents for financial support
Has one or more children and is a single parent
Does not have a high school diploma

You may be surprised to learn that large numbers of adults are making the decision to advance their education. If you were to enroll in a college course today, you would discover that many of your fellow students are adults. In fact, the population of college and university students over the age of 25 is at an all-time high with estimates that the nontraditional group of students makes up between 40% and 50% of all students. This large number of adult students entering or returning to college has led to many colleges offering support services geared specifically to nontraditional students.

Many adults are intimidated about returning to college because they feel that college is only for young people or they may feel too far removed from school. If you have feelings of apprehension, please keep in mind that college is for anyone who wants to learn. Many professors actually prefer to teach adult students because adults bring real world experience to the classroom and often have more motivation and desire to learn than younger students.

Retirement planning and education are taxpayers’ two most important financial planning concerns. The convenience of automatic deductions and tax-deferred deductions encourage us to fund our retirement plans while education accounts for our children are often forgotten until it’s almost time for them to register for college. The growing concern for many parents is whether or not they will be financially capable of sending their children to college. College tuition can range anywhere from $5,000 to $30,000+ per year, and the average bachelor’s degree requires at least four years to complete. Add the cost of room and board, textbooks, and activities, and you can be looking at as much as $50,000 per year. Pretty scary.

With the cost of living continually increasing, you will want to be sure that at least a portion of your children’s education costs will be covered. You will be happy to know that there are several ways to do that.

Over the last few years, the Federal Government has created some ways to help make saving for an education a little easier. In addition to more standard methods of saving, there are three plans that are geared specifically to financing an education.

1. Coverdell Education Savings Account (formerly known as Education IRA): A Coverdell ESA is an education fund that is a great way for parents, grandparents, and others to help meet the rising costs of a student’s education. You can set up an ESA for a designated individual (beneficiary) who must be younger than 18 years old when the account is opened. There are exceptions to this for individuals with special needs. You will have control over the account only until the beneficiary reaches his or her 18th birthday.

The maximum annual amount you can deposit in the account is $2,000. A nice feature of this account is that funds can be used to pay qualified expenses not only for college and university, but also for elementary and secondary school. Qualified expenses include activity fees, textbooks, supplies, equipment, and some boarding fees. A drawback is that if the beneficiary must apply for additional financial aid to pay for college, the funds must be declared as an asset.

While there is no tax deduction for amounts contributed to an ESA, the earnings are tax free and no taxes are due upon withdrawal if the guidelines are met. The funds must be withdrawn by 30 days following the beneficiary’s 30th birthday or the fund can be designated to a different beneficiary within the same family.

Benefits:

Qualifies as a tax shelter for parents for capital gains.
Up to $2,000 per child per year can be deposited, depending on your income.
Withdrawals are penalty free if they are for qualified education expenses.
Withdrawals are taxed at the beneficiary’s tax rate rather than at the parents’ rate.
There are flexible investment choices.
Funds can be used for elementary, secondary, and higher education qualified expenses.
Anyone who meets the income requirements can contribute to the account, including aunts, uncles, grandparents, friends, and even the beneficiary.
If the designated beneficiary doesn’t use all the funds, the remaining funds can be changed to any other family member younger than 30 years old. Qualifying family members include: son/daughter, stepson/stepdaughter, brother/sister, stepbrother/step-sister, father/mother, stepfather/stepmother, niece/nephew, any in-law, spouse of any of the above, and first cousins.

Drawbacks:

Contributions cannot be made after the beneficiary turns 18.
If the beneficiary applies for financial aid, the account funds are considered an asset for the beneficiary.
Funds must be withdrawn before 30 days after the beneficiary’s 30th birthday or be switched to another beneficiary.
If the funds are not used for education expenses, the earnings are treated as ordinary income and may also be subject to a 10% penalty.
You will have control over the account only until the beneficiary reaches his or her 18th birthday.
The beneficiary is then free to use the funds as he or she sees fit.

2. 529 Savings Plan: This is a plan that is provided by all 50 of the United States. It is intended to allow you to prepay or to contribute to an account established for the beneficiary’s expenses at a pre-established higher education institution. You should check with your bank or with the school itself to see what expenses qualify for payment from a 529 Savings Plan.

The nice thing about this plan is that there are no age or income restrictions, and although the plans are offered by individual states, there is no residency restriction, which means that if you live in one state, you are allowed to participate in a plan offered by another state.

Benefits:

A 529 Savings Plan can create a tax shelter for the beneficiary.
Interest and qualifying withdrawals are tax exempt.
Anyone can open an account, contribute, and be listed as the beneficiary.
The owner of the account (the donor) is always in control of the money.
Beneficiaries can be changed easily and as often as once a year.
The funds are not considered to belong to the beneficiary so they do not affect applications for college financial aid.
Some employers now partner with these programs so contributions can be deducted automatically from your paycheck. Check with your employer.
Contribution limits are high, as much as $300,000.

Drawbacks:

Investment choices are quite limited. The choice is generally between mutual funds or annuities.
In some cases, the choices are based on the age of the beneficiary.
The name of the plan refers to a tax loophole in the IRS code’s section 529

3. UTMA Custodial Account: This plan allows an adult to open an account using the beneficiary’s Social Security Number in the beneficiary’s behalf. The adult acts as custodian of the account. This is a more flexible account as the funds are not required to be used exclusively for education-related expenses. Contributions can be made up to $11,000 per year. The first $750 is not taxed. If the beneficiary is under 14, the next $750 is taxed at the child’s rate, but any contributions over $1500 are taxed at the parent’s tax rate. If the beneficiary is over 14, any contributions beyond the first $750 are taxed at the child’s rate, which can be considerably less than the parent’s rate.

Benefits:

Account does not have to be opened by a relative.
Funds are directed to a predetermined institution so savings amount needed can be better assessed.
Funds are flexible and can be used for expenses in addition to education-related needs.
A portion of annual contributions is not taxed.
There is no contribution limit.

Drawbacks

The beneficiary takes control of the account at age 18.
The account must remain in the original beneficiary’s name.
The funds are considered assets of the beneficiary so they affect applications for college financial aid.

Be sure to compare the plans carefully with the help of your financial advisor so you can decide which features and benefits are best suited to the educational goals you have.

It’s Important to Manage Your Student Loan Debt

If you do take out loans to finance your education, it is just as important to repay them properly as it is any other loan.

Be sure you understand just how much you owe and to whom you owe it. When you are worried about classes and homework, sometimes you may not think about just how much debt you are accruing. Those federal loans can seem pretty easy to qualify for, and if you’re not careful, you will have more debt than you can handle. Know which financial institutions hold your loans. It may only be one or it may be several.

Make your payments on time. Making your student loan payments on time will help you establish good credit and improve your credit rating. It will also decrease the amount of interest you pay. Student loans are just like any other loan—delinquent payments or defaulting on a loan will do damage to your credit worthiness. Not only that, if you default on a student loan, it will be turned over to the federal government for collection.

Make your payments affordable. Don’t accept the first loan and terms that come along. You have the right to negotiate. Many financial institutions will offer benefit programs to entice students to borrow from them. These benefits can include lower interest rates and repayment options. A common benefit is a reduced interest rate for payments that are automatically deducted from your bank account every month, or for a certain number of payments that are paid on time. Find the program that works best for you.

Some repayment options include:

1. Standard Option: Monthly loan payments have a fixed amount and can be paid back in up to 30 years, depending on how much you borrow. Ten years is a more common repayment term. Paying each payment on time for the life of the loan will mean you pay the least amount of interest of all your options.

2. Graduated Payment Option: This plan allows you to have lower monthly payments for the first few years and then the payments increase gradually over the life of the loan.

3. Income Sensitive Option: While this option may sound appealing, it can be a little risky if you’re not careful. With this option, the monthly payment amount is adjusted annually based on your income, but if you’re not careful, your monthly payment may not be enough to cover the interest accruing on your loan, and you are never able to pay off the principle.

4. Consolidating Your Loans: Usually you must apply for a new school loan each year you are in college. This means that when you are through, you may have three or more student loans. If so, you may want to consider consolidating your loans. Loan consolidation, in very simple terms, means you combine all your loans into one so you only have one monthly payment with a fixed interest rate. Because the combined total is higher, it also usually means you will have a longer repayment term. To really benefit from a consolidation option, your loans should total at least $10,000, and all the loans must be under your social security number.

Postponing Your Student Loan Payments if You Have Financial Trouble

You should know that federal student loans include the right to have your payments deferred if you cannot pay them. You will still have to pay the loan back eventually, and interest may continue to accrue while you are not making your loan payments. Under some conditions, you may receive a deferment or forbearance that allows you to temporarily stop making payments. For example, you may qualify for a deferment if you return to school at least half-time, are unemployed, or are experiencing an economic hardship as defined by federal regulations. If you don’t qualify for a deferment but are temporarily unable to make loan payments for reasons such as illness or financial hardship, you can still be granted a forbearance.

Forbearance means that your payments are reduced or postponed for a period of time usually in up to twelve month intervals up to three years, because you are experiencing financial difficulty.

You may be granted forbearance if you’re not eligible to have your payments deferred. Unlike deferment, interest accrues regardless of the type of loan you have, and you will have to repay it. You will have to apply to the financial institution that holds your loan to be granted forbearance.

It is also possible for parents to request deferment or forbearance on PLUS loans. Parents will be charged interest during periods of deferment or forbearance. If the interest isn’t paid as it accrues, it is added to the loan balance, which means the total amount to be repaid increases. You must repay your loan even if you don’t complete school or can’t find a job related to your program of study, or are unhappy with the education you paid for with your loan. The only ways a person is relieved of repaying their student loans is if he or she becomes totally and permanently disabled (additional conditions apply), or if he or she dies.

Financial Aid Possibilities You May Not Know About

Listed below are options for seeking money to fund a college education. Be sure that you investigate fully any of these means of funding to make sure you find the plan that will work best for you.

My Rich Uncle: An innovative company called Iempower began a program they call MyRichUncle. In this program, private investors provide funding to help students pay for their college education. In return, students give back a pre-determined percentage of their annual income to the investors for a certain number of years after graduation. For example, a student might receive $10,000 in funding in exchange for 2% of the student’s income for ten years after graduation. This program is most appropriate for students who are pursuing business, technology, finance or professional degrees. You can find out more about this program at www.MyRichUncle.com.

Scholarships: Unlike student loans, scholarships do not have to be repaid. Scholarships usually require that students meet certain qualifications. Springtime is an excellent time to apply for community scholarships. If you excel in science, athletic, or artistic ability and you have good grades in school, you have a pretty good chance of earning some form of scholarship. There are also community service scholarships and scholarships for average students that reward qualities other than academic abilities. Minority students also have a number of scholarship opportunities available to them. You just have to be willing to put the time into looking for scholarships to apply for.

Be sure you investigate a scholarship program thoroughly before you apply, and don’t rely on services that require you to pay a fee in order to find scholarships that match your qualifications. If you have to pay money to get money, it’s probably a scam. Scholarships that sound too good to be true usually are. Students who are lucky enough to earn a scholarship often think the scholarship precludes them from receiving other forms of financial aid. This is not true. Many scholarships don’t cover the cost of college and you can still apply for financial aid. You must, however, note the scholarship on your financial aid application. Receiving a scholarship does not preclude you from receiving additional financial aid.

Military aid: Many people join the armed forces hoping that the military education benefits will cover the cost of their education. You should be aware, however, that GI Bill education benefits pay only about 60% of the average cost of a college education. About 30% of eligible veterans fail to ever use their benefits when they return to civilian life.

Business and Professional Women, www.bpwusa.org: This organization makes scholarships available to disadvantaged women wishing to further their education for career advancement. More than $6 million in scholarships, grants, and loans to more than 8,000 women have been awarded

To be eligible to apply for the 2007-2008 scholarship, you must:

Be a female
Be at least 25 years of age by May 2, 2007
Be a U.S. citizen or U.S. national
Demonstrate critical financial need
Have an Expected Family Contribution (EFC) of $2500 or less
Be officially accepted into an accredited degree or certificate program at an accredited U.S. college or university, including those in American Samoa, Puerto Rico, and the Virgin Islands
Plan to graduate or receive certification between December 1, 2007, and August 31, 2009
Demonstrate clear career plans
Not be earning a doctoral-level or degree such as PhD, MD, DDS, DVM, JD, etc.

Talbots Women’s Scholarship Fund: The Talbots Charitable Foundation awards about $100,000 in scholarships annually to women trying to complete a college degree. Five women are awarded $10,000 scholarships, and 50 women are awarded $1,000 scholarships. Scholarships are based primarily on financial need and previous achievements for women who earned their high school diploma or GED at least 10 years ago. Only 1,000 applications are accepted annually so be sure to get your application in early if you want to apply for this scholarship. Applications for the 2008 academic year are expected to be available in fall 2007.

There are many scholarships and grants available for just about any type of student you can think of. If you do the research, you may be able to save yourself a lot of money.

Watch Out for Scams

The Federal Trade Commission warns students that there are unscrupulous companies out there who will guarantee or promise you scholarships, grants, or too-good-to-be-true financial aid packages. You may have already attended a seminar where high-pressure sales people told you that you must pay immediately or risk losing out on the “opportunity.”

These companies guarantee students that they can get scholarships in exchange for an advance fee. Many offer a “money-back guarantee” but the conditions governing the refund make it impossible to get the refund.

The FTC recommends that you watch out for these telltale lines:

The scholarship is guaranteed or your money back.
You can’t get this information anywhere else.
I just need your credit card or bank account number to hold this scholarship.
We’ll do all the work.
The scholarship will cost some money.
“You’ve been selected” by a “national foundation” to receive a scholarship, or
“You’re a finalist” in a contest you never entered.

If you attend a seminar on financial aid or scholarships, the FTC recommends that you follow these steps:

Take your time. Don’t be rushed into paying at the seminar.
Investigate the organization you’re considering paying for help. Talk to a guidance counselor or financial aid advisor who is not part of the company before spending your money. You may be able to get the same help for free.
Ask for a list of at least three local families who’ve used the services in the last year, then ask each if they’re satisfied with the products and services received. It’s just the same as being asked for references when you apply for a job.
Ask how much money is charged for the service, what exactly the services are that you can expect to receive, and the company’s refund policy. Get it in writing!

Remember: Legitimate companies never guarantee or promise scholarships or grants.