My Eyes Glaze Over. This used to be the trademark teenage response to all things dull and boring. Such as math, french literature, and especially money issues. Today’s approximation for MEGO would be “meh”.
So as I thought about making a video to explain the difference between Federal Direct subsidized and unsubsidized student loans….guess what happened…yep MEGO!
BUT WAIT! If you, dear reader, are in the hunt for more college money, you must understand student loans. Why? Because when college bills are looming, it may be that there is no choice but to take out some student loans.
If you were offered subsidized loans and unsubsidized student loans in your college’s financial aid award letter, then it’s time to know the difference between these loans. You’ll need to know how to use their attributes strategically.
Most importantly use these Federal Direct subsidized and unsubsidized student loans FIRST (they have certain dollar amount limits) before considering any private student loans.
These are the best student loans you can get. Here’s why:
Federal Direct student loans offer the best repayment programs. Watch some of my other videos on this subject for more info.
Here is an example:
Really, after all this, you could not be blamed for drifting into MEGO and thinking about cute puppy videos.
February 2016 – I challenged myself to do a video explaining Parent Plus Loans in under 3 minutes. Here it is:
In the process I learned something about this loan that makes it remarkable. There are features affecting Parent Plus Loans in the current structure of the Education Department’s loan repayment plans that could allow almost all low income families to send their children to college free or nearly free…no matter how high the cost of attendance. In fact, the higher the cost of attendance, the more families further up the income scale can participate!
Yup! Parents can legally borrow money to pay for their child’s college education UP TO the “Cost of Attendance” minus any scholarship or grant money their child receives for each year of undergraduate study.
Colleges: Let’s Just Make-up a Cost-Of-Attendance!
The cost of attendance is whatever the college says it is (!), and includes tuition and fees, room and board, books, personal supplies and travel. Students, on their own, can borrow subsidized and unsubsidized federal student loans up to certain limits each year of undergraduate study. The total amount is capped at $31,000. That’s not nearly enough for four years at most private non-profit institutions or larger state universities. It’s barely enough for smaller public colleges either, even if the student lives at home. Most students can borrow additional funds from private lenders, but the repayment terms are not nearly as good as Federal student loans.
“Adverse Credit” Is What We Say It Is!
Most parents are eligible to take out Parent Plus Loans to help their students. The only thing standing in the way of getting these loans is if the parent-applicant has “adverse credit” as revealed through a credit report.
After much negotiation, rule-makers recently came up with new definitions of “adverse credit” regarding Parent Plus Loans. Applicants will be considered to have an adverse credit history if he or she has debts greater than $2085 that are 90 or more days delinquent as of the date of the credit report, or any debts that have been placed in collection or charged off in the previous two years.
Some provisions for extenuating circumstances, like having large medical bills, are available. And, having a co-signer who is not the student and who does not have adverse credit, can overcome most obstacles to obtaining a Parent Plus loan.
Demand for Parent Plus loans has been rising steadily, barely dented by the new adverse credit rules. The harm caused to low and moderate income families by this loan has been rising as well. The trouble is that there are no limits in place regarding a parent’s ability to repay their Parent Plus loans. Credit counseling, which would help parents understand this loan, is either ineffective or unavailable. Or both.
Parents with very low incomes can and do borrow enormous amounts to pay for their child’s education. Interest rates for Parent Plus loans are currently at 6.84% for the 2015-16 school year. There is an origination fee of about 4% for each Parent Plus loan. Interest rates change for new loans every year according to a formula based on the 10-year Treasury yield. The Department of Education is the lender, and has an ever- increasing number of parent-borrowers in some stage of financial distress due to these loans.
Finally, The Secret Sauce… But, You Have To Dig For It!
Back in 2005, in an effort to unify the terms of income dependent repayment plans, the Department of Education made the Parent Plus loan eligible for one of the more borrower-friendly repayment plans through the transformative power of loan consolidation. But few parents know about this path to making their child’s college dreams come true (without wrecking the family’s finances). Here’s the scoop and it’s available for viewing on the Department of Education’s student loan website. https://studentaid.ed.gov/sa/repay-loans/understand/plans
Here’s a screen shot of the important part (lower right corner):
Borrowers of one or more Parent Plus loans can consolidate their loans into a Federal Direct Consolidation Loan in order to be eligible for the Income Contingent Repayment plan. This strategy applies only to those borrowers who started repayment in 2006 or later. It’s important to note that Parent Plus loans should not be consolidated with any other types of Federal loans. Doing so causes non-Parent Plus loans to lose their eligibility for more favorable repayment plans like IBR, PAYE and REPAYE. Federal Direct Consolidation is a free service offered by the Department of Education.
Under the Income Contingent Repayment plan, most borrowers get lower monthly payments (as compared to regular Parent Plus payments). These payments are determined by a formula which includes a percentage of the borrower’s adjusted gross income, the borrower’s family size, and the amount of the loan left to pay. Some very low-income borrowers could even end up with zero dollar monthly payments for the entire length of the loan!
The repayment period for ICR is 25 years. At that time any remaining principal and interest balance would be forgiven. However, today’s rules would tax the forgiven amount at the borrowers future tax rate.
Bonus! – Meaningful Use Of Public Service Loan Forgiveness
Also, under the Income Contingent Repayment plan, former Parent Plus borrowers with new Federal Direct Consolidation loans can take full advantage of the Public Service Loan Forgiveness program. Parent-borrowers working in public service jobs may be able to get a substantial portion of their loans forgiven in as little as 10 years with no tax consequences.
Oh, And Let’s Throw In “Married-Filing-Separately”!
In 2012, President Obama mandated that the ICR plan would no longer require married borrowers to declare the income of both spouses, as long as the parent-borrower files taxes separately. That move by the President made the Parent Plus loan even more flexible when consolidated into the ICR plan.
The Hazard Of Omission
Some education writers and experts may opine that the Parent Plus loan is a hazard for borrowers. Well yes, it will continue to be a hazard if the Education Department doesn’t tell everyone about the repayment plan that can potentially help so many borrowers.
Why not advertise the heck out of it? The Parent Plus consolidation-to-ICR feature is not a mistake. It was put there to help parent-borrowers, wasn’t it? Surely those who negotiated this feature knew they had designed a way for low-income families to send their children to the same colleges as wealthier families. Right?
But, even if these parent-borrowers do get a taxpayer-funded deal for their children, they are not going to have an easy journey. For 25 years they will have to make on-time payments, follow the rules carefully, keep every scrap of paperwork, and stay on top of any changes. What’s more, they will have to be their own experts and advocates in the face of recalcitrant loan servicers.
Not many people have this level of discipline. I know I would slip up who-knows-how many-times during a quarter century of payments. And it’s well known that loan servicers can trip borrowers up at any moment for no good reason.
So, here is a list of several things that could happen if word gets out about the Parent Plus loan being almost a free ticket to college for low income students. For this list I am putting my mind on the “free-range” setting, which is good for a laugh or two. Mull these over:
1. The private loan industry would be crushed. Sorry about that! (Not!)
2. Private non-profit colleges would be less (or not at all) motivated to use their endowments to help low-income students. No more grants and scholarships, just go get a Parent Plus loan!
3. More low-income students would feel empowered to apply to top colleges. Colleges would find it easy to admit well-qualified students from across the socio-economic spectrum (no strain on the endowment funds!).What a concept!
4. Colleges of all types would accelerate increases in their stated costs of attendance, but wealthier families would force a reversal of this trend. At least for top-ranked schools.
5. The Department of Education would become permanently linked with the IRS. For a preview of this, see the President’s new College Scorecard. Eventually, all Parent Plus borrowers would have their loan payments automatically deducted from their paychecks or tax refunds thus reducing mistakes and the need for interaction with loan servicers.
Sound far fetched? Maybe.
But seriously, could the Parent Plus Loan be the pathway to universal low-cost college in America? And is that even a good thing?
Let me know what you think by commenting below this post. Or, contact me at TheCollegeMoneyMom@gmail.com
This change in the FAFSA start-date starting on October 1st 2016, along with the recently announced College Scorecard system, are game changing aids for families with college-bound children.
All at once, families will have the information they need to make college lists that are actually affordable for their financial circumstances. The College Scorecard is a complementary tool that will allow a family to use their actual federal financial aid eligibility to compare school costs before their student applies.
Never before has this been possible, and it makes me wonder why the college financial aid system ever got to the point where students were applying blindly to schools they could not afford if they were accepted. When you think about it, that’s pretty much the definition of a disfunctional system. Hate to put it so bluntly, but there you have it.
There has been a lot of fear on the part of institutions of higher education everywhere. Changing the FAFSA start-date encountered a lot of political push-back. It took a lame-duck president, looking for legacy, to pull the plug on this systemic bottleneck.
This change will cause a rapid re-examination of business plans in colleges across the country. Recruitment, budget cycles, processing aid applications and issuing awards all must happen a lot earlier.
At this time we are in the one year countdown. Next year on October 1, 2016, if all goes well, the very first “early” FAFSA applications will be filed.
Will the FAFSA-only colleges be ready? There could be a tsunami of applicants, many of whom had never considered filling out the FAFSA because of it’s complexity. There might be a lot more Pell Grant recipients, who knows? The whole FAFSA system may slow down or even malfunction (like you know what!) under the weight of applications. But, in the long run processes will smooth themselves out. Meanwhile college students will be making “aid aware” college choices that might keep the Student Loan Monster at bay!
But still, the question remains: why did we, the parents, allow such a crazy system to persist for so long? Hmmmm….
The new College Scorecard website was built on a data dump the size of Mt. Denali…in fact, it’s like data heaven for college data geeks!
HA! Try to put THIS genie back in the bottle.
Watch my video for a demonstration of College Scorecard’s main features.
Well, if this isn’t some fine payback by the Obama administration for all those who scuttled the President’s new college rating plan. And it’s so sincere and sounds so well-meaning that even the opposition is mumbling grudging kudos. But the word is out on colleges that don’t live up to their promises.
So much data, in such an easy-to-use format, built for mobile devices, rolled out just in time for students and their families to make critical decisions about colleges. Whatever the quality of the data, there will be some significant changes in the world of higher education. Tah dah!
Just in my ramblings around this new College Scorecard website at collegescorecard.ed.gov, I could not resist making a search for all medium and large “for-profit” schools. I kind of knew what the results would be, but it was worse than I thought. Apparently, nobody bothered to tell the University of Phoenix that their search results would show that EVERYONE who had attended their schools on all their campuses made salaries of $53,400 dollars after 10 years. Yep, everyone. Clerical error? Or, maybe Phoenix wants it that way.
And then I was wondering about where that data on the salaries of former students came from. And how about the data showing how former students were progressing with their loan repayments?
Well, turns out this info is new, never before seen in public. The federal government, apparently working for the common good, decided to combine the data from federal student loan borrowers with data from their tax records. This data produced lots of useful information. Some of it makes certain schools look good and some of it is very damaging for others. The data is out there for all to see and use.
I didn’t get to vote on the idea to combine this information, nor on the distribution of it. Did you?
Supposedly the personal identifiers have been removed from the data. Hope so.
Here are the assurances of privacy put forth in the data documentation for College Scorecard:
“All National Student Loan Data System (NSLDS) and Treasury elements are protected for privacy purposes; any data not reported in order to protect an individual’s privacy are shown as PrivacySuppressed.”
Is “Privacy Suppressed” what they really meant to say?
I don’t know about you, but I felt like my privacy was suppressed when my data was compromised at Target and at Home Depot!
Okay, what the heck! Why can’t colleges just be clear about their financial aid offers.
All across the nation, high school seniors are receiving their financial aid award letters from the colleges to which they have been accepted.
Students and parents alike will be overjoyed as they take a first glance at these letters. After all, real professionals have carefully formulated these documents for maximum obfuscation.
Many who receive these well-crafted offers will believe that their top choice college dreams have been fulfilled.
The celebrations will commence. The heady feelings will go on for days. Then, someone may point out a questionable figure in the offer, and the clouds of doubt will move in.
The family will be confused, and as usual it will fall to Mom to interpret the meaning of the cryptic line item.
Mom, the detective, must now spend hours and days on the internet seeking out experts. She will repeatedly call the college or colleges asking questions, the answers for which she has no background to make an informed interpretation.
When, through enormous effort, the bad news is revealed, and it is determined that the dream college is unaffordable, there will be WAILING. And that’s not all…there will also be DOOR SLAMMING. Shall I go on? No, I think you get the picture…
Why, why, why can’t this information be made clear right away. Get the bad news out there and move on.
Do colleges really think that families will somehow make magic money appear? Well, yes. But it will probably be the magic money known as soul-crushing student loan debt.
It’s time for all financial aid award letters to be standardized to help consumers. So far, the only thing out there is the Education Department’s Financial Aid Shopping Sheet. Thankfully, it’s being adopted, albeit slowly, by some correct-thinking colleges.
My hope for the future is that all colleges and universities get on the transparency bandwagon!
Now that the President has decreed a new “Student Aid Bill of Rights”, the ship of state will turn slowly toward a better way for student borrowers to manage all their loans through one portal. A new centralized complaint system will give more borrowers the ability to resolve disputes with loan servicers and debt collection agencies.
Thanks to the National Consumer Law Center and it’s Student Loan Borrower Assistance project, a prototype of this new system exists now. Watch this video to get a guided tour of how the Student Loan Borrower Assistance (.org) website links the pieces of the new system together.
If I was asked to magically build a new system to get student loan help, I would create the new loan management portal using the building blocks provided by the the National Student Loan Data System. Currently, this system provides credentialed visitors with access to all their Federal student loan information. However, the visitor cannot find information about his/her private student loans. This is the next important task. But it’s just too hard to think about compiling private student loan information, so my magic wand would just “Make It So”!
As for the centralized complaint reporting piece of the new “Student Aid Bill of Rights”, I would just (poof!) combine the best parts of the two existing Student Loan Ombudsman offices. The Department of Education now handles complaint arbitration for Federal student loan disputes. The Consumer Financial Protection Bureau’s Student Loan Ombudsman office makes a specialty of resolving private student loan disputes. Cue the magic MixMaster!
And finally, just like the Student Loan Borrower Assistance website, I would have a whole list of free legal help right there on the new centralized complaint system website. Hey, not every student loan complaint can be resolved in a tidy fashion. What’s more, the rule against discharging student loan debt through bankruptcy looks like it’s on the table for revision. New bankruptcy rules will produce a tsunami of borrowers who will need legal guidance. Or a fairy godmother!
The 529 College Saving Plan just got about 7 days of the finest publicity you can’t even buy…the free kind! All this, courtesy of the President of these United States, no less.
Way to go, Mr. President, apparently you scared the socks off of middle America as a way of galvanizing public attention. Well done…that is, IF proposing to tax 529 College Saving Plans was just a clever ploy!
Before you read on, take a short refresher course in 529 plans by watching my video on the subject:
It was during the State of the Union address that the President introduced his budget proposals which included ways to fund his ideas to improve college access for millions more students. One of those ideas was to make tuition for community colleges free. But, nothing is really free, so where would the money to pay for this come from? Well, how about taxing the college savings of millions of American Moms and Dads? It’s all right there in those lovely 529 plans. Those Moms and Dads would gladly give up their tax-free earnings to help others, right?
At this point I thought you might like to see what the President looked like when he was putting forth his proposal. Pretty calm, right?
Let’s assume for a moment that he actually knew what he was doing…raising awareness about the 529 College Plan. Let’s also assume that he really wanted folks to wake up and notice that it’s time to save for college. Moreover, maybe he wanted to make sure this plan would be around for a long time to come. Free publicity, people!
Wow! Genius! Look at the firestorm of tweets on the subject. And this went on for days!
Newspaper articles were written, TV and radio guests discussed, and blogs got posted, endlessly explaining the facets of the 529 College Saving plan. If you were alive at all you could not miss the clamor. And you could not avoid thinking about getting a 529 plan for YOUR kids’ college years.
The publicity also had an unforeseen destabilizing effect. People thought that the 529 College Saving plan was permanent and could not be changed. Faith in the system was shaken. Commentators wondered aloud if their Roth IRA’s would be raided next.
Then came the anger and the political wrangling, followed by the online petition drives. The No529Tax.org petition built up enough steam to gain White House attention. And finally a bi-partisan effort was launched to convince the President to remove the 529 Plan tax proposal from his budget. Thus, on day 7, the President decided his little ruse had run it’s course, and BOOM the proposal was gone!
Now, nobody likes to be called stupid, even an outgoing President. But that’s what the pundit people and even the real people were saying about him. Maybe crazy-like-a-fox might better describe whatever happened. Or not. I’m just glad that about the results. People are awake and ready to fight. Realizing that the 529 Plan could go away was huge (contributions would have dried up if the proposal had become law, effectively killing the plan).
In the near term, I will wager that 529 plans get a blast of new contributions. Plus, people are now on the alert to make sure retirement plans and health savings accounts don’t become threatened. Hey, that’s another great result of the President’s public awareness ploy! Well played sir, well played. 😉
Brush up on the topic of Federal Work-Study programs by watching my video. Then please read my blog entry to get the latest info!
The Federal Work-Study program has been a feature at a large number of colleges for many years. But lately a report done by the student advocacy group called “Young Invincibles” and funded by the Bill and Melinda Gates Foundation, has called for reforming the system.
The report says that too much of the federal work-study money goes to large private colleges that have been in the system the longest. For-profit colleges get a hefty amount based on their numerous Pell Grant students. Newer community colleges get the least money, even though they also enroll low-income students.
The report studied how this large pot of Federal money (more than $1 billion) could be better used.
It recommended that the Federal Work Study program should reward schools that enroll low-income students, graduate them at high rates, and make sure they have the skills to get good jobs.
Read between the lines and you’ll find that the notorious for-profit colleges get righteously excluded from work-study funds, even though they “serve” more needy students than anyone else!
The Young Invincibles report also emphasizes the need for work-study jobs to better relate to a student’s field of study. If these reform recommendations were implemented, many of the jobs traditionally grabbed by students who want to work AND study at the exact same time, would disappear. No more manning desks in dorm lobbies or library entrances. Instead, work-study jobs might look more like paid internships where students get real-life career experience.
I can’t see a downside to this. Let me know what you think.
Please watch this video and see how nerdwallet.com offers a FAFSA tutorial in it’s education section that is the most complete I’ve seen. There are other good tutorials out there and I’ll link you to one that I think is very user friendly further down in this week’s blog.
As I write this entry, it is just a few days before Christmas 2014. Doesn’t it feel like you haven’t gotten everything done yet? But if you are on the hunt for college financial aid, then you’ll need to keep your mind on just one more thing: January 1st at the stroke of 12:01am you can start filling out the 2015 FAFSA form! WooHoo! Just what you wanted to do on New Year’s Eve, right?
Okay, last FAFSA season I wanted our family to be at the head of the line for financial aid, so I actually started my FAFSA in the early morning of January 1st. I ran into a whole lot of website trouble, which compared eerily to the healthcare.gov launch. Nothing was working correctly and my progress would simply disappear for no apparent reason. I slogged on for hours, saving after each tiny entry. Eventually, I wrestled the FAFSA to the ground and made it submit, literally! Not very fun.
So, my advice is to wait for January 2nd, which is not a holiday. Government offices will be open and the website elves will have the gears oiled up and running smoothly.
Take a moment in the days between Christmas and New Year’s Eve to study the nerdwallet.com video, and another great tutorial produced by the University of California system. Here’s that link: http://www.finaid.ucsb.edu/fafsasimplification/ and here’s a screenshot of it:
College student voices guide you through a series of mini-tutorials on each major section of the FAFSA form. You’ll need to launch each part by clicking the tabs at the top of the page. Notice how well my dog can draw a big red arrow pointing to the tabs!
Yes, I know you don’t have your 2014 taxes done yet. Never mind that little concern. Just go right ahead and use your 2013 tax return. If it’s likely to be nearly the same as this years’ return then you will be just fine. It’s important to get in line for college financial aid early. The FAFSA helps you qualify for more than just federal aid. State aid is linked to this form as well, and funds can run out the longer you wait. Not only that, but colleges that also use the CSS Profile form to hand out their institutional funds, will want to see the results of your FAFSA to help guide their decisions. So don’t wait!
When you are eventually able to file your taxes, you can log back into your FAFSA and use the IRS Retrieval Tool. With slightly disturbing ease, the Retrieval Tool connects the FAFSA directly to the IRS (!), which will kindly merge your new tax return information into the FAFSA form.
Filing out the FAFSA early assures your place in line. Using the IRS Retrieval Tool almost always keeps you out of the verification process. Do this and the schools that you named to receive the results of your FAFSA will not require you to send them your actual tax returns! One less step for beleaguered parents and students.
Kids binging on filling out college applications is not a pretty sight. Five new completely different essays each night after school, and when that gets old, then out comes the old “cut and paste” routine. Pretty soon a high school senior starts to think his own personal story is a work of fiction.
Exactly why this is happening has an easy answer…because they can!…thanks to the Common Application which is making it possible to crank out college applications in unprecedented numbers.
Now the hard-to-swallow answer: Nobody is helping these high school seniors, as bright as they may be, to sort through their college application lists. So with no help, seniors are not taking any chances of getting shut out of college.
As long as Mom and Dad will allow their credit cards to get filled up with application charges (at $40-90 a pop!), then students will keep applying. With no counselor to help kids understand which schools they are most likely to be accepted by, and most importantly, to help families understand which schools they might be able to afford, the binge fest will continue.
In this video, I use about one minute more than my normal three, to go down those two critical roads: acceptance probability and family affordability. Please watch to see if I nail it. Please give me comments here or email me at TheCollegeMoneyMom@gmail.com.