Let’s Stop Calling Student Loans ‘Financial Aid’

May 03, 2018

One of the more common calls we take on our Financial Helpline these days is young professionals looking for guidance on paying down massive student loans. One recurring theme we’ve noticed is that many of these people didn’t actually understand what they were getting into when they accepted these loans. They had completed the Free Application for Federal Student Aid (or the FAFSA), which by its very name leads you to believe that it’s “aid” you’re receiving and not just a loan application in many cases. This leads me to state what seems obvious, but is often missed in this process: student loans are NOT financial aid. They are a financing mechanism. Those are two different things.

Defining ‘financial aid’

What is financial aid? Aid is money directly applied to reduce the tuition and related costs of a college education that does not have to be paid back if the conditions of receiving the aid are met. For those families with a zero or low expected family contribution (EFC) as determined by the FAFSA formula, they may be eligible for federal student aid in the form of a Pell Grant up to the annual limits. For those Pell-eligible students, their university may also determine that they are eligible for a Federal Supplemental Educational Opportunity Grant of $100-$4000. There is also a federal work study program where the student can earn money to cover books and incidental expenses.

Some colleges and universities offer additional direct aid, either needs-based or merit aid (scholarships). Keep in mind that non-federal aid, especially merit-based aid, often requires that the student maintain a certain grade point average (GPA) in order to be eligible. In general, the lower the family’s EFC, the more likely the student is to be eligible for direct, needs-based financial aid.

When not enough aid is offered (if any)

However, direct aid is often not enough to cover the full cost of tuition, housing and expenses, and the student and/or parents are offered the choice of borrowing the difference. Most university financial aid departments describe student loans as financial aid, but yet a loan is something that has to be repaid by the borrower. Even studentaid.ed.gov, the federal website on student loans, describes federally-backed student loans as something to, “help cover the cost of higher education.” It would be more accurate to say, “finance the costs of college or career school.”

The different types of student loans

Under certain circumstances, Federal Direct Student Loan interest may be subsidized, meaning that interest accrued on the loan is paid while the student is in school. There are also federally backed PLUS loans for parents with good credit. In addition, a parent or student may seek a private loan through a bank to meet financing requirements.

In almost all cases, the borrower must repay the loan plus interest. There are certain exceptions such as loan forgiveness for students who enter public service. Student loans stick with the borrower forever and generally cannot be discharged in bankruptcy. According to a U.S. News and World Report study, 68.8% of students who graduated in 2014 have student loan debt, with an average balance of $28,077.

Let’s call that for what it is – financing. That’s not aid. So what can students and parents do to maximize their eligibility for aid, as opposed to just financing?

Maximizing your eligibility for receiving aid

Start the financial aid application process early. Create your FAFSA ID and begin assembling a file as soon as financial aid season opens, which is October 1st of the year prior to your student starting the school year. Earlier is better, especially for applying for merit-based aid and scholarships. Your target school may have internal deadlines that are sooner than federal deadlines.

Run some numbers, and discuss them with your student. You can forecast your expected family contribution and even run a net price calculation for a particular college. Make sure your student fully understands the costs of college and what borrowing will mean for your child’s financial future.

Cast a wide net. Financial aid officers say that the most merit aid goes to students who will be in the top 25% of their class in terms of grades and test scores. Your student may get a much better financial aid package, with more aid and less loans, from a good school where they are a strong recruit. It’s normal for a student to fall in love with their top school, but if their second choice gives them a much better deal, that is well worth considering. Check out these tips for maximizing merit aid.

Research alternatives for paying for college. It pays to do your homework. Websites like Fastweb.com and ScholarshipExperts.com are helpful online tools. Check out your school’s guidance department, your local library, and community organizations for additional resources.

Most importantly, judge a financial aid package offered to your student by the amount of actual aid, not including student loans. Let’s stop calling student loans “financial aid.” After all, would you rather get a gift or a loan?

 

 

You Got Your Financial Aid Packages – Now What?

March 07, 2017

I was recently talking to a friend at a party about college. Her daughter is a senior and will soon be going off to college. Her daughter was accepted to four different schools, all with varying financial aid packages, and her daughter’s first choice did not offer the largest package so she was considering her second choice. I told my friend to consider doing the following:

1. Review all of the financial aid packages to determine which package is the best vs. the largest. Consider how much of your need is being met along with how your need is being met. Is the largest package with the most loans really better than the smaller package with more grants and a small out-of-pocket expense? Luckily, the CPFB web site has a tool that can help you compare the financial aid packages of up to three schools.

2. Your financial aid award package is not written in stone. My friend recently filed for divorce so her reported income on the financial aid form is vastly different from her upcoming income. I encouraged her to contact the potential college financial aid offices and appeal the award. She can do this in writing and I also encouraged her to ask for a follow-up appointment.

If your financial situation has or will change, consider appealing. Most colleges have a formal appeal process. Contact the college for more details.

3. Use the best award packages to leverage a better financial aid award package from the desired school. Since my friend’s daughter was accepted to multiple colleges and she was going to appeal all of the packages anyway, I told her to use the best packages to get a higher award package from her first choice school.

Review the award packages and what they mean for your family carefully. Consider appealing if you feel you have a case based on a changing financial need or if you can leverage multiple offers. As you go through the process of picking a school, remember the old adage, “You don’t get, what you don’t ask for.”

Can You Deduct Your Student Loan Interest?

February 22, 2017

Don’t you just hate making student loan payments? Besides the fact that your student loans (hopefully) enabled you to earn a degree that allows you to command a higher income than you would without it, at least there is a small tax benefit to those loans for those who qualify. Here’s the skinny on what you need to know to maximize your deduction:

There are income limits. If you’re single and your AGI exceeds $80,000 or you’re married and your combined AGI is over $160,000, you can’t take any deduction at all. There are also phase-outs, which means you can still take some of the deduction but not all of it. Those limits start at $65k for single and $130k for married people. If you use tax software or a tax professional to prepare your taxes, the amount will be figured for you.

You can only deduct the first $2,500 paid in interest each year. Probably the biggest mistake I’ve seen here is when people think they can deduct payments. It’s actually only the interest you can deduct, so even if you’ve made well in excess of $2,500 in actual payments, you may not have a $2,500 deduction.

Your loan provider will tell you how much interest you paid. You don’t have to do the math to figure out what portion of your payments were for interest and which went toward the principal. Just look for Form 1098-E from each of your lenders. If you’re signed up for electronic delivery of statements, then you’ll probably have to log in to find your form. Look for a link to “Tax Documents” if your lender doesn’t make it obvious on their home page.

You can deduct interest from multiple loans, but they have to be qualified. If you have multiple loan accounts or lenders, you can add up all those Form 1098-E amounts for your total deduction. But the loan has to be considered a qualified student loan. If you refinanced by taking out a home equity  or 401(k) loan or even just borrowed from a family member to lower your rate, you can’t deduct that interest.

If you claim student loan interest on your tax form and the IRS doesn’t receive a corresponding 1098-E from a lender, you can count on getting a letter asking you to prove the interest was paid on a qualified student loan. If you’re not sure if your loan is considered qualified or not, ask them for your Form 1098-E. If they are unable to provide one, it’s not qualified.

I know that paying student loans is no fun. Hopefully, this small tax benefit will offer a little silver lining though. (In addition, reflect on what your finances would be like if you hadn’t earned that degree.)

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

How to Choose a Student Loan

February 07, 2017

With the average cost of college being north of $20,000 for a public in-state school, student loans have become a big part of student’s financial aid packages. The two types of student loans are federal and private. There are important differences between them and knowing the difference can help students make the most informed decision.

Federal student loans are loans made or guaranteed by the government and private loans are essentially non-federal student loans made through lenders such as banks, credit unions, state agencies or schools. With the benefits of federal student loans, comes harsh consequences for default such as wage garnishments, difficulty discharging if you file for bankruptcy, possibly lost tax returns, and even Social Security payments. The three main types of federal student loans are:

Direct student loans, sometimes called direct Stafford loans, have low fixed interest rates and offer a variety of repayment options and forgiveness programs. They have limits as to how much of a loan you can get, which is different for undergraduate and graduate students. There are two basic types of direct student loans:

  • Direct subsidized loans are available to low income undergraduate students. Interest typically does not accrue while the student attends school, during the 6-month grace period after college and if student loan payments are delayed. Loan limits tend to be lower than the loan limits of unsubsidized loans.
  • Direct unsubsidized loans are available to undergraduate, graduate and professional students regardless of financial need. Interest accrues while the students are in school, during the grace period and during any student loan payment delays.

Perkins loans are fixed low interest loans for low-income undergraduate, graduate or professional students with financial needs. Like the subsidized loans, interest doesn’t accrue while you are in school and during your grace period, which is longer than the grace period for direct loans. Perkins offers a ton of cancellation options for a variety of situations and professions. You also have to attend a school that offers Perkins loans and the school determines the loan amounts.

PLUS loans are fixed rate loans for graduate or professional students and parents of dependent undergraduate students. To qualify, the borrower must not have an adverse credit history and interest accrues even when the student is in college. PLUS loans are eligible for nearly all of the repayment options offered by the US Department of Education. Parent PLUS loans are eligible for most of the repayment options.

Private loan interest rates and benefits vary per institution. Some offer a variety of repayment options and programs if you experience a hardship, so compare loans before making a decision. Typically, with private loans:

  • The interest rates tend to be higher than most federal student loans
  • They offer almost no loan forgiveness programs, cancellations or the variety of repayment options offered by federal loans
  • A credit check and possibly co-signing may be needed to get a loan
  • You can generally borrow a higher amount than you can with a federal loan

As you weigh your options consider the following:

Can you demonstrate a financial need? If so, you may qualify for a direct subsidized loan or a Perkins loan, which typically offers the perks of low interest rates, not accruing interest while you’re in school, and a variety of repayment options. However, both loans have limits to the amounts you can borrow.

What degree are you pursuing? If you are pursuing a graduate degree, you generally do not qualify for a direct subsidized loan, so if you have limited finances, a Perkins loan may be a consideration. A direct unsubsidized loan is a consideration if you do not qualify for a Perkins loan and may have adverse credit. A graduate student can also get a graduate PLUS loan, which typically has higher borrowing limits (cost of attendance minus any financial aid) but takes your credit under consideration. The loans offer forgiveness programs and a variety of repayment options

How much money is needed to pay for college? Federal loans typically limit the amount you can borrow. Private loans can offer a higher amount, but they generally come with higher interest rates. Evaluate your needs and if possible, tap into the federal loans before getting private loans.

What are your career aspirations? Perkins loans offers a variety of cancellation options, including options for teachers who serve low-income children, certain medical professionals, and even librarians who work in certain schools and libraries.

Student loans can be confusing. Don’t just take the first one offered though. Researching the features can help you make the best decision.

 

How to Pay College Bills Not Covered by Financial Aid

January 18, 2017

Worried about paying college bills? Considering that the average balance in a 529 college savings plan is only $21,000, it’s no surprise that one of the most frequently asked questions we get at Financial Finesse is, “How should I pay for my kids’ college?” Here are some ideas, along with the benefits and pitfalls of each.

529 College Savings Plans

529 plans have become the most popular way for parents to save for future college expenses due to the tax advantages of both tax-free growth (as long as funds are used for qualified expenses) and in some cases, state income tax deductions for contributions.

Pros: They offer tax advantages, ease of saving, and have less of an effect on financial aid than savings in the child’s name.

Cons: They must be used for qualified education expenses to avoid a 10% penalty plus taxation of withdrawals. Funds held in a grandparent’s or other non-parent’s name are treated as income in the year distributed, which can affect future years’ applications for aid.

UTMA/UGMA Custodial Accounts or Other Savings in Your Child’s Name

Any account in your child’s name, even their own savings from summer jobs, will have the greatest impact on the availability of aid. If these assets are intended to be spent on college anyway, consider transferring them into a 529 plan to reduce the impact. Otherwise, spend what you’re going to spend from these accounts first to lower that impact.

Pros: Any capital gains from the sale of investments are treated as income to your child instead of you (beware kiddie tax rules though) and funds can also be used for things like a new laptop for school or eventually, your child’s first home or wedding.

Cons: 20% of the value is counted in aid formulas, potentially reducing the amount offered to your child. Once your child reaches the age of majority in the state where they are going to school, they’ll have unfettered access to the funds.

Taxable Investment Accounts

Any investments you own outside of retirement accounts are included in the financial aid formula and should be spent before dipping into retirement savings. If you have to sell investments for a gain, consider gifting them to your child first so that they could potentially pay a lower capital gains rate than you would. Doing this right before your child enters college, but after you’ve counted it as your asset on the FAFSA, nets the best benefit in terms of how it affects financial aid as the income won’t come into play until your child’s junior year package. However, if your investments are at a loss, keep them in your name to reap the benefit of up to $3,000 per year of capital losses.

Pros: There are possible tax benefits but no early withdrawal penalty.

Cons: Taxable gains could affect future aid offerings.

Home Equity

As long as interest rates stay low and you are able to deduct any interest paid on a home equity loan or line of credit, you may consider tapping this source if it’s available rather than having your child take out higher rate student loans. Of course you’ll be on the hook to pay it off even if your kid drops out mid-semester, but that’s a different kind of planning conversation to have with your child.

Pros: They have relatively low interest rates and there’s a potential income tax deduction for interest.

Cons: Your home is now collateral for your child’s education whether they graduate or not.

401(k) Loan

Rather than requesting a hardship withdrawal from your 401(k), which would incur income taxes and possibly an early withdrawal penalty if you’re under age 59 ½, borrowing from your 401(k) may be an option worth considering.

Pros: There’s no credit check, you pay yourself back the interest, and they generally have lower interest rates than student loans.

Cons: Your plan most likely limits the amount you can borrow to the lesser of $50,000 or 50% of your vested account value and you typically have to pay it back in 5 years or less. If you leave your job, you may also be on the hook for any balance due or risk negative tax consequences.

IRAs

Traditional and Roth IRAs allow penalty-free early withdrawals for qualified education expenses, although you’d still have to pay taxes on any traditional IRA withdrawals and any growth in your Roth IRA.

Pros: You don’t have to pay it back and there are no penalties for early withdrawal. Roth IRAs also let you withdraw up to the total amount of contributions without any tax consequences, so you could leave any growth in the account to continue growing for your retirement.

Cons: You can’t pay the money back as you’re still limited to annual contribution limits and most likely, you will have to pay income taxes on withdrawals unless you’re just using your Roth IRA contributions.

Student Loans

At the end of the day, you may need to ask yourself if you should even be contributing much at all, particularly if doing so would compromise your ability to retire at a reasonable age. As our CEO Liz Davidson likes to say, they don’t give out loans for retirement and you can’t “work through” it either. I also like to remind parents that sacrificing retirement so that your child can graduate debt-free may be a great way to negate the possibility that they’ll end up back at home sleeping on your couch, but it could mean that one day you’ll find yourself sleeping on THEIR couch.

Student loans are there for a reason (and no, they’re not “financial aid,”) and have provisions in place to account for the fact that your child may not be earning a ton of money right out of school or they may face difficulty in finding a job after graduation. Help your child reduce these chances by helping them choose a lucrative major. Then consider this college funding plan that many of my friends are choosing for their own children: they plan to fund about half of their kids’ educations on a semester-by-semester basis and expect their child to fund the other half either through working, loans, work-study programs or whatever means work for their student. This method worked to keep them motivated to do well and graduate on time and the hope is that it will serve the same purpose for their children.

 

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3 Things You Can Do About Student Loan Debt

May 27, 2016

One of the biggest things that we see not only in our research but also in day to day conversations is the impact that huge student loan balances are having on people of all ages, especially younger employees or those who went back to school during the “Great Recession.” My biggest piece of advice to anyone would be to avoid student loans as much as you can by working first and/or part-time, going to a less expensive state school or community college for the first couple of years, or any number of things. But for those that have already rung up a hefty student loan bill, there is still hope. Here are a few things that you can try with little or no pain involved.

1. Focus more on your student loans now but contribute just enough to get the company match to the 401(k) and sign up for the rate escalator feature if available. By putting the majority of your money towards your debt, you can focus your energy and efforts on the here and now but also have your 401(k) running on autopilot in the background. This way, if it takes you 10–15 years to pay off your loans, you are still in a great spot towards retirement instead of being debt free but with no savings.

2. Make your own “matching program” for your student loans. Look at each bill that you have and research to see if you can find a less expensive alternative and then set up automatic extra payments to your highest rate or smallest balance student loan equal to what you will be saving. So if you cut the cable and just use streaming services and it would save you $50 per month, “match” that saving to an automatic increase to one of your student loan payments. This could be a great project on an evening or weekend when rainy weather keeps you inside. If you don’t have the time, look at services like BillCutterz to do the work for you but you have to share the savings with them.

3. Ask your employer if they have any programs to help with student loans. While many employers do not currently have a student loan repayment plan, more and more companies are offering special deals on student loan refinance programs like SoFi or  actual repayment plans like Tuition.io or Student Loan Genius. There is even a bill before Congress to make a certain amount of student loan repayment tax free to the employee, similar to tuition reimbursement programs, so hopefully this will become a common benefit in the future.

Don’t get me wrong. There may not be a magic solution to your student loan issues. However, these steps can help you not just survive but thrive while you balance paying off the debt and engaging in life along the way.

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The 3 Most Important Things Resident Physicians Can Do With Their Money

May 25, 2016

Updated for 2019 numbers

You’ve made it through eight grueling years of schooling, been accepted into a residency program, and you finally have a salary. Even though the average salary for a first year resident is a little over $50,000, it can still feel like hitting the lottery. It’s easy to start thinking about how you’ll spend that money on luxuries you’ve postponed like a nice car or an apartment in an upscale neighborhood while deferring your student loans until you’re making real money in your chosen field. After all, your friends who chose business or law have been living it up through their 20’s and you’re ready to join them.

Not so fast

Before you find room in your budget for things you may not be able to enjoy to the max while working 80+ hours per week, first make sure you’re setting yourself up for optimal financial success. I’m not saying you shouldn’t treat yourself to that luxury car you’ve been dreaming of ever since that first day of class, but first make sure you’re making the most of the savings opportunities you may not have available after residency.

I ran these past my physician husband just to make sure I wasn’t being unrealistic and he agrees. Here are three really important things you should set up before you make your residency budget.

1. Max out your Roth IRA. Take advantage of your lower salary by contributing the full $6,000 allowed into a Roth IRA. There are income limits that could eventually prohibit you from depositing to this account (they start at $122,000 for single people in 2019), so use it before you lose it. A Roth gets money into savings after tax, then allows the money to grow tax-free for life. For eventual high income earners, it’s especially critical to contribute while you can and you’re young, when the money has lots of time to grow.

2. Start paying your student loans. It can be tempting to postpone those payments as long as you can, but I caution against waiting until you feel like you can better afford it. First of all, you’re probably going to be working so much over the next three to four years that you won’t really miss the money, but second of all and more importantly, you’ll avoid throwing money away on interest. It’s all about making your money work harder for you, and using it to pay down loans with an interest rate of 6% or more in some cases can even exceed what you might earn investing the money.

3. Contribute at least to the match in your hospital’s 401(k) or 403(b) plan. Just because you don’t plan to stay at your residency hospital for the rest of your career doesn’t mean you can’t or shouldn’t participate in their retirement savings plan while you’re there. You get to take that money with you when you leave.

Most hospitals offer some type of match for employees who contribute and unless they have a longer than average vesting schedule, that match will be yours when you’re done as well. That’s free money, so don’t pass it up. If you can afford to save more than the match, consider doing so. Time is on your side right now and the more you can save while you’re young, the more the effect of compound interest will have on your future savings.

Becoming a physician in the first place is a great way to ensure a prosperous future for yourself and your family. But even doctors are prone to over-spending and under-saving, especially as the competing costs of real life (buying a house, kids, college, travel, etc.) set in after residency. By buckling down for these last few years, you can doubly ensure your long-term financial security. After all, I’ve never had anyone tell me they regretted saving more money.

 

 

The Number New College Students Need to Know

May 16, 2016

What’s the most important number for a new college student to know? Is it the Expected Family Contribution calculated based on a family’s Free Application for Federal Student Aid? The number of credit hours needed to graduate? The time the library closes? While all of those are important, the critical number that a student needs to know is the HCC, the “hourly cost of college” or the total amount it costs a student for each hour of school.

Why does this matter? Let me give you a personal example. When I was a freshman at Georgetown University, I had an early morning French class three times per week. The professor was quite strict, and students who were even a few minutes late were locked out of class.

I was an immature 18 year old who spent many evenings my first year of university at fun, social events instead of getting to bed at a reasonable hour. It won’t come as a surprise that I missed my fair share of morning French classes because I did not arrive on time. What exactly did that cost my family even when I didn’t go to class?

Calculating the Hourly Cost of College

Using the credit hour method, the hourly cost of college is calculated by dividing the annual total tuition, room and board, books, fees and other charges by the total credit hours taken per year. Take Georgetown as an example. What would it cost a student who skips an hour of French class today? According to the university website, the total cost of undergraduate attendance in 2016 is $69,770. I did not receive any scholarships, but if any kind of direct aid applied (not loans), you would subtract it from the total.

A student needs at least 120 credit hours to graduate, and it typically takes at least 15 credit hours per semester or 30 credit hours per year. $69,770 divided by 30 is $2,325.67 per credit hour. You’ve paid for it regardless, so if you skip a class, you don’t get what you have purchased. That’s a pretty expensive hour to blow off!

An alternative method is to divide total college costs by the amount of total hours a student spends learning. At my alma mater, students are expected to spend at least 30 hours per week studying for a semester of 14 weeks (12 weeks of classes plus 2 weeks of exams). $69,770 total annual costs divided by 28 learning weeks per school year divided by 45 hours per week is $55.37 per learning hour. In this scenario, it’s not just skipping a class that’s an expensive waste of money. It’s avoiding the library when you should be studying to hang out playing Frisbee on the lawn.

Neither methodology for calculating the HCC changes if a student attends school close to home or goes to a public university or a less expensive private college. There’s an hourly cost of college no matter the school, and it’s important that students know what it is in order to avoid or moderate behavior – like showing up late for French class – which wastes huge amounts of money.

Borrowing Increases Your HCC

Many families who send their students to a university don’t pay the full cost of education out-of-pocket. If your student is borrowing to finance part of the cost of higher education, their HCC will increase. Remember, student loans are not financial aid. They are a financing mechanism, which increases the total cost of education.

Let’s examine what would happen if a student borrowed $20,000 at 6% interest to finance some of the annual costs in our example above. The loan will be repaid monthly over a ten year period beginning after graduation, with total interest paid of $6,645. Using the conservative method of calculating HCC in this scenario, borrowing the $20,000 increases the HCC by $221.50 per credit hour. Using the “learning hour” method, it increases the HCC by $5.27 per learning hour.

Most students aren’t used to thinking of the school experience as a consumer experience, something for which there is a clear financial cost and benefit. By helping your student calculate and understand their HCC, you are teaching them an important lesson about the relationship between their personal behavior and money. In the financial behavior change process, awareness and assessment usually lead to action (going to class instead of sleeping in) and thus are critical first steps for future financial success.

How about you? What was your hourly cost of college?  Email me at [email protected] or follow me on Twitter at @cynthiameyer_FF.

 

4 Things I Wish Someone Told Me Before I Graduated From College

May 10, 2016

As I talk to my friends’ graduating children, I am always struck by the hope in their faces. They believe that they control their futures and that their lives will be better. It makes me think about my own graduation and reflect on what I wished someone would have told me about finances:

#1- I will actually have to pay back the money I was taking out in student loans. I do not remember thinking about paying back my student loans. I probably thought that the student loan fairy dropped into my college’s financial aid office after graduation and deleted my debts. If I had known how long and painful it would have been to pay back my student loans, I may have made different choices. I encourage parents to sit down with their kids, calculate repayment costs, estimate their starting salary and give them a cold dose of reality as to what their paycheck may look like after taxes and deductions come out.

#2- The car I stupidly bought after college graduation will become the story I tell people about what not to do when you graduate. I worked so hard to graduate and my car was old so I purchased a car I really did not need. It was cute and in the showroom and the second I saw it, I said “I do.” What I did not realize was that I was also saying “I do” to a 5 year car loan that took almost a 4th of my income at that time. I wished someone would have told me that the car I get will dictate my ability to save money, take vacations and contribute to my 401(k) plan.

#3- A business wardrobe is not a reason to get into credit card debt. I was lucky enough to land a job with a large corporation but I realized that I needed to get business clothes. I used this as an excuse to run up $3,000 in credit card debt on a new wardrobe. I think this included a Coach bag and wallet that I never used. I wish someone would have told me that credit card debt is not necessary and worked with me on a plan to pay it off

#4 – The earlier you contribute to a 401(k) plan, the less you need to contribute. I wish someone would have told me how important it was to contribute early, the power of compound interest and how starting with even a small amount makes a big difference, especially when your employer is giving you free money in the form of a match to help you save for retirement. Talk to younger people about how your choice to save early has helped you or about your regret in not starting earlier. Run an estimate for them so they can see how a little makes such a big difference .

Looking back, I wished I would have gotten a cold dose of “adult” reality. I wished I would have known that being on my own meant that my financial choices had consequences that can easily be taken care of if I had been willing to buckle down and pay off my debts instead of using credits cards to upgrade my lifestyle. The best gift you can give a college graduate is to help them start off their futures on the right financial footing. Work with them on a budget, encourage them to pay off credit card debt, teach them the importance of contributing to a 401(k) plan and help them come up with a game plan to pay off their student loans before their children are in college.

 

 

Student Loans Are Not Financial Aid

December 28, 2015

The Free Application for Federal Student Aid (FAFSA) opens after January 1 for the 2016-2017 school year. Parents and students all over America will begin the difficult, agonizing process of figuring out how to fund an increasingly expensive American college education. In honor of the start of the financial aid season, I’d like to point out the obvious: student loans are NOT financial aid. They are a financing mechanism. Those are two different things. Continue reading “Student Loans Are Not Financial Aid”

Here’s Your Next Superhero!

September 25, 2015

I was talking with a young man today who was facing a rather large debt load and was looking for a way to effectively manage that debt so that it doesn’t ruin his life or at least make it difficult to feel anything other than trapped by his debt. He bought a relatively inexpensive ($20,000) car, has around $8,000 in credit card debt and about $80,000 of undergraduate and graduate school loans. His salary today basically allows him to pay rent, his debts and a little bit of discretionary money for entertainment. He said that his life was not very much fun right now and he feels like he is suffocating. He sounded very frustrated and he joked that at this stage, he’d be willing to sell an organ to raise cash to pay off some of the debt.  Continue reading “Here’s Your Next Superhero!”

How Far Would You Go To Get Rid Of Student Loan Debt?

September 17, 2015

A colleague of mine recently shared this article titled “How Far Would You Go to Get Rid of Your Student Debt?” that focused on the extreme lengths many people were willing to go to get rid of their student loans. It’s not surprising when you consider that the average college student graduated this year with over $35k in loans. If they pay just the 4.66% interest rate on federal student loans for undergrads, they’ll pay almost $9k in interest by the time they pay it off in 10 years. But if they can put an extra $300 a month towards their debt, they’ll pay it off in under 5 years and save more than half the interest. They can then put those payments towards buying a home or becoming financially independent. Continue reading “How Far Would You Go To Get Rid Of Student Loan Debt?”

Just Say No

August 18, 2015

I am a child of the 80s. I grew up on Happy Days, Falcon Crest, and Family Ties. In between these shows, inevitably a commercial would come on with a child being pressured into using drugs, refusing and looking into camera and saying no. Continue reading “Just Say No”

Un-Crushing Student Loan Debt

June 26, 2015

Very often, I talk to people who have financial concerns that are weighing on them. I’ve noticed a correlation between the age of the person and the concern. Lately, a lot of people who are within a few years of retirement have been concerned about the stock market and relatively new hires who are just establishing a career have been concerned about their level of debt impairing their ability to make progress toward their important life goals.  Those are two mini-trends I’ve been seeing lately.  Continue reading “Un-Crushing Student Loan Debt”

Would You Turn Down All 8 Ivy League Schools?

May 21, 2015

That’s what a high school senior named Ronald Nelson did to accept a free ride at the University of Alabama. While very few students will be in Nelson’s enviable position, many families will have to decide between a more expensive higher-ranked school and a lower-ranked but less expensive school. With both education and student loan debt increasingly important factors to many young people’s financial well-being, this is not always an easy decision to make. Here are some things to consider: Continue reading “Would You Turn Down All 8 Ivy League Schools?”

How to Choose the Best Student Loan Repayment Plan

May 08, 2015

I had a conversation with a young man in his early 20’s recently who had just started his first “real job” and was about 60 days from his student loans going out of deferral. He was panicking because there are a whole lot of options to repay student loans today that didn’t exist when I had student loans. (My son would like to add that they also didn’t have electricity or cars when I had student loans.)

Looking at the options in front of him, I could understand his dilemma.  I had 2 options when I graduated – a straight 10 year term loan and a “graduated” payment plan that started with small payments and increased every 2 years to a level well above the standard monthly payment. Both of those options still exist today, but there are also many other choices. It is a very tough decision, and it can impact the next 10-20 years of cash flow. This is one of the biggest financial decisions a new graduate will make.

The young man I talked to had about $80,000 in student loan debt and had no idea what to do. So he came in and we talked through some options and did some number crunching.  Here are a few of his options, along with some financial highlights:

  • As a starting point, the fixed payment over 10 years would be about $925/month. A graduated payment for him would start at a more manageable $530 and eventually rise to $1,593/month. The flat payment costs $111,000 over 10 years while the graduated would require $119,000 over that 10 year window.
  • He has the option to do extended term payments, either at a fixed payment or a graduated payment. By extending from 10 years to 25, his fixed payment drops to $555/month but the total payments over the life of the loan increases to $166,000. In the graduated plan, he starts at $453 and increases over time to $793, and the total payments are $180,000. Lesson learned:  Extending the payments can help reduce cash outflow for those at the start of their careers, but the total cost of the loan rises substantially!  If there’s any way to afford the higher payments by not extending, don’t extend.  It’s a very expensive extension.
  • A relatively new type of option is an income-based repayment (IBR) plan. These loans are popular because the payment is limited to 15% of the borrower’s “discretionary income.” Discretionary income is defined as the gap between adjusted gross income and 150% of the federal poverty guidelines. For this young man, his IBR payments based on his $50,000 salary would be $400-$900 over the 225 month term of his loan as his income rises. He would pay $155,000 in total, which is more than the 10 year loans but less than the extended term loans. Lesson learned:  IBR is the “hot option” right now, but it isn’t always better than a straight standard term loan. Know your numbers and you may see a better option. This could be a much better option for borrowers who hope to grow their income over time than the extended payment plans.
  • Another relatively new option is the “Pay as You Earn” repayment plan. It is similar to the IBR but with a few differences. It’s more difficult to qualify for PAYE than IBR but the payments are 10% of discretionary income rather than 15%. Looking at his numbers, his payments would start at $270 and eventually move to $825.  After 20 years, he would have paid $121,000 and would have $66,000 forgiven at the end of his term. Lesson learned: This is a tough loan repayment plan to qualify for, but it eases the cash flow and makes the risk of default quite low. Of all the options, this one made the most sense for him. He can qualify for the lower initial payments and he can increase his payments as his income rises. He can also, with a low initial payment, add principal to each payment with the hopes of paying off the loans well in advance of the full term.

When looking at student loan repayment options, know that the world has changed.  These options are available through the Department Of Education and there are other newer options out there like www.SoFi.com, where borrowers can refinance without a bank being involved through peer-to-peer lending. This can be a great way for borrowers to get out of high-interest student loans. What I learned during my conversation with him is that the right answer is going to be different for everyone.  There is no single “best option.” Factors like current income, expected future income, cash flow constraints and other goals (buying a house or car) should be considered as well as things like affordability today, total interest paid over the loan’s life and total lifetime payments. It’s a complex web of options, but if you understand which factors are most important to you, the right repayment option should become clear once you start analyzing your real numbers. This post was originally published on the Financial Finesse column on Forbes.com.

Should You Sacrifice Retirement to Pay For College Expenses?

April 27, 2015

Should you focus your financial plans on funding your children’s college education out-of-pocket or through parent loans? This is a question on the minds of many parents that I speak with on a regular basis (and also a question that I personally have to deal with having a third grader and a kindergartener growing up too fast). The retirement vs. education question gets even more challenging when children reach high school and the time horizon to save gets shorter. Continue reading “Should You Sacrifice Retirement to Pay For College Expenses?”

College is NOT a Right

January 21, 2015

Today I met a man who is taking a rather practical approach to teaching his kids about college planning. This gentleman has three kids, the oldest of which will be going to college in a few years. He said something rather profound that made me reconsider how I’ve been talking to my own kids about college. He said, “College is not a right.” Continue reading “College is NOT a Right”

Doing the Math on College Planning

January 06, 2015

During the holidays, I had so much fun visiting family as did many of my colleagues. So as we all got back into the groove of working, we shared stories of those sometimes amusing family encounters. Tania, our Atlanta-based CFP, talked about how it was wonderful seeing her cousins, who only a few years ago she was bouncing off her knee, now that they are all taller than she is (which isn’t a stretch since she is barely above five feet tall).  Here’s her story: Continue reading “Doing the Math on College Planning”