Fun with Government Loans and Credits
Parents are inundated with a myriad of choices for funding their child’s college education and how they approach this important investment will seriously impact their finances for years to come. From special plans to tax incentives and federally-subsidized loans, the number of options offered by the federal government can be overwhelming. In this article we’ll handle two major elements of government financial aid: student loans and special educational tax credits.
Hope and Lifetime Tax Credits
The federal government doesn’t want you to feel like you’re all alone in the struggle to fund your child’s education, so they’re providing some help. Part of their assistance comes in the form of tax credits. There are two credits available from the government that are intended to help offset college costs by reducing the amount of income tax. The Hope credit enables parents to claim a credit of up to $1,650 for qualified education expenses paid for each eligible student. Keep in mind, this is a tax credit not a deduction. That means it reduces the actual tax you have to pay, as opposed to a deduction that simply reduces the amount of income that’s taxable. The good news is it could potentially reduce your income tax to zero, but it won’t refund you any money if the credit is more than your tax.
Another tax credit called the Lifetime Learning Credit allows parents to claim a credit of up to $2,000 for qualified education expenses for all students enrolled in eligible educational institutions. Like the Hope credit, it reduces the amount of income tax you may have to pay.
The differences between these two credits are significant. For one, the Hope Credit can only be claimed for two years, while the Lifetime Learning Credit is available for an unlimited number of years. A student must be pursuing an undergraduate degree or other recognized credential in order to use the Hope, and students cannot have a felony drug conviction. The Lifetime Learning Credit can only be applied to all eligible students in your family. The Hope is calculated per eligible student and can therefore potentially be more advantageous.
As there are income limits and other qualifications that must be met to utilize education credits, we recommend talking with a tax professional or visiting the IRS Web site for more information.
Federal Loans
A great many students heading to college rely on loans to help pay for their education expenses. Once again, the federal government has taken some steps to make the prospect of taking out a loan for college more palatable. Stafford loans are federal student loans that are available to students, regardless of their credit history. There are two variations of Stafford loans: subsidized and unsubsidized. Subsidized Stafford loans are the more beneficial of the two, since the government pays the interest on the loan while the student is in school, as well as during any deferment or grace period. The unsubsidized version makes the student responsible for any interest that accrues. Qualifying for the subsidized type depends on a student’s household income. When your child applies for financial aid he or she will be informed about their eligibility for a particular type of Stafford loan.
PLUS Loans
If your son or daughter has maxed out on financial aid and Stafford loans, but still needs assistance, you may want to consider taking out a PLUS loan. This loan option allows parents to borrow money for education expenses at federally guaranteed low interest rates. Unlike Stafford loans, your credit will be factored in when deciding eligibility. The upside is that they are not need-based and the credit check is minimal. Parents can borrow up to the cost of attendance minus any other aid their child is receiving. There are fees for taking out this type of loan and repayment can start 60 days after disbursement or 6 months after the student’s graduation.
We suggest you talk with a financial aid officer for more information on the options available from the federal government that can help lessen the burden of skyrocketing education expenses. The best way to reduce the costs of college is to utilize as many of these federal programs as possible, whether it be tax credits, federal loans, or free financial aid.
A Mountain of Debt: The Truth About Student Loans
The rising cost of tuition, housing, food and books has made student loans more prevalent in today’s society. In fact, according to Nellie Mae’s 2002 National Student Loan Survey, over 70% of students say that student loans were very or extremely important in allowing them access to education after high school. That same survey found the average undergraduate debt is $18,900. Students attending graduate school increase their debt even further to a whopping $31,700. And lawyers and medical students suffer from the most debt at $91,700. So it’s no surprise that the National Association for College Admission Counseling (NACAC) and the Project on Student Debt found that 63% of parents of current college students say students today graduate with too much debt. So what happens when your son or daughter graduates and you’re both faced with all that debt? How do you keep yourself or your children from defaulting on loans?
Pay the Piper
If your children are taking out student loans to supplement the amount you’re able to provide, they may want to consider paying some of it off while they’re still attending college. It may sound difficult, but even if they can make small payments, they’ll help bring down the total amount of debt they’ll be facing come graduation day. If they have difficulty finding a high-paying job after graduation, they could pursue a deferment of their student loans. This allows students to push off repayment for a few years, but keep in mind that interest will likely continue to accrue. The other alternative is to lower payments by extending the term of the loan, which may also result in additional interest. Like credit cards, you’ll want to recommend that your children pay more than the minimum payment whenever possible. This helps bring down the total cost of interest on the loan by shortening the term. Of course, all of this depends on your financial situation and to what extent you are contributing to the cost of their schooling.
Consolidation Nation
It is likely that students will have to take out multiple loans to pay for college and that results in a several different student loan bills after graduation. Keeping track of all of the loans can prove difficult, so you might want to talk to your kids about consolidation. Consolidating loans is not only a convenient way for repayment, it may also help lower payments. Depending on when your kids took out their student loans their interest rate may be higher than the current rate. By consolidating at a lower rate they can bring down the interest on the loans, which would then affect the size of the monthly or quarterly payment. Of course, this is a strategy you can consider as well if you decide to go with loans, like the federal PLUS loan program. Also, if you own a home, you may have the option of using equity in your home to help your child pay for college. There are advantages and disadvantages to both federal loans and home equity loans. Talk with financial professional for more information.
Forgiving Your Debt
There are a few ways the federal government helps minimize or eliminate student loan debt. The first method is to have the student in debt work in impoverished areas. This is an option often available for graduates in occupations like law and medicine. If their interested, have your kids check with the school’s career office for more information on these special programs. Another way to have debt forgiven is to perform volunteer work through organizations like AmeriCorps. Students can also have their debt significantly paid down by joining the military. For example, the U.S. Navy will pay for up to $65,000 of qualified loans acquired for a post-secondary education.
Budgeting Yourself
Once your kids are out of school and inundated with student loans budgeting becomes a major commitment. Now that they have their share of college debt they’ll want to consider any way they can save money, including lifestyle changes like sharing an apartment or biking to work. They should also avoid accumulating additional debt through the use of credit cards. Another crucial tip is to never miss a payment, since it can result in late fees and damage their credit rating. Talk with them about being responsible for their debt situation and contact the loan company if they fall on difficult times. And always remind them that although the thought of accruing debt can seem overwhelming, student loans give them the opportunity to attend college and secure their dream job…Hopefully, that makes
Show Me the Money: The Facts About Scholarship Finders
With college tuition skyrocketing, many students are looking for outside help to fund their education. Of course, the first and most reliable place to seek out assistance is through financial aid programs. But if your kids don’t qualify for financial aid, they can always apply for a scholarship. Scholarships are financial gifts that don’t need to be paid back, and are awarded based on certain criteria. There are academic scholarships, religious scholarships, scholarships based on ethnicity–the list goes on and on. With millions of scholarships available in the United States, the chances one fits your child’s qualifications are high. But how can you help your kids find one with their name on it?
The Research Search
Research is the best way to find that special scholarship. Unfortunately, many students don’t have the time to look or just haven’t had much luck in their search. There are services available that do the searching for them. These scholarship finders charge a fee to compare a student’s profile with a database of scholarship opportunities. They often print or email a specialized report that lists all the potential scholarship opportunities available for which a student may qualify, along with information on how to apply, deadlines, etc. The key to getting the most for the money is to be persistent in the scholarship hunt. If your kids do decide to go this route, make sure they utilize the list provided to them by the company, and if some of the scholarships don’t match their qualifications be sure to talk with the company about the discrepancies.
Do-It-Yourself
In addition to paid services, there are also free Internet search engines that can help match students to appropriate scholarships. Collegedata.com offers a search engine that takes the most common eligibility criteria like GPA, gender, residency, ethnicity, religion, and area of study, and matches it to the scholarships in their database. The drawback to relying on this kind of search is that it is often too broad. Students establish their criteria, then wind up with a long list of potential scholarships, many of which will likely be outside their realm of qualifications. Other sites that offer free comprehensive scholarship searches include scholarship-monkey.com, brokescholar.com, and collegeboard.com. For more links to free scholarship search engines head to www.college-scholarships.com and click on “Free College Scholarship and Financial Aid Searches.”
Not-So-Free Money
Though there are legitimate companies that offer these services for a fee, there are a lot of scam artists who claim to have secret information, guarantee your money back, or make other outlandish promises. The Federal Trade Commission recently launched an investigation into these unscrupulous activities and released an alert with information on how to avoid these scams. According to the FTC, the following advertising lines are red flags:
• “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.
The FTC suggests parents and students looking into paid scholarship finding services should investigate the organization, get references, and request the offer, services, and policies in writing. To learn more about these scams, visit the ftc.gov/scholarshipscams, and, if you do encounter a scam artist, file a complaint on the FTC website.
If a company is legitimate and does deliver a comprehensive list of scholarships, you have a very good chance of recouping your investment in the service. But it will take a lot of action on your child’s part to find the scholarship and complete the application process. They’re giving your family the map and directions to the rainbow, it’s up to you to find the other side…but there may just be a pot of gold waiting.
