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Newsletter for the College Bound
Comments on Important Trends with Advice You Can Use: Winter 2008

by Don Betterton, Principal in Betterton College Planning LLC and former Director of Financial Aid, Princeton University

If you are among the 75% of American families that cannot afford to pay for the cost of your child’s college education without additional help, is important for you to stay on top of the current status of the many different financial aid programs. Over the last few months there has been considerable activity with many changes taking place. It is difficult for the average family to keep track of what has been going on so I am using this issue of the newsletter to summarize where things now stand.

Student Loans

Let’s start off with a look at educational borrowing and see if we can make sense of what is happening in this very important area of paying for college.

For better or worse, about 2/3 of all college students find it necessary to borrow to pay the college bill.

The good news: Interest rates on need-based (or subsidized) Stafford student loans are scheduled to decrease according to the following:

• 6.8 % for loans first disbursed July 1, 2006 to July 1, 2008
• 6.0 % for loans first disbursed July 1, 2008 to July 1, 2009
• 5.6 % for loans first disbursed July 1, 2009 to July 1, 2010
• 4.5 % for loans first disbursed July 1, 2010 to July 1, 2011
• 3.4 % for loans first disbursed July 1, 2011 to July 1, 2012

Other Good News

The yearly amounts that an undergraduate can borrow have been increased.

• First-year loan limit went from $2,625 to $3,500
• Second-year from $3,500 to $4,500.
• For third and fourth-year students, the limit remains at $5500 each year.

To offer relief to students with large loans and modest incomes, there is (as of July 1, 2009) a new “income-based” repayment option.

• Loan payments are limited to 15 percent of a borrower's income. Furthermore, unpaid interest on an outstanding loan balance is forgiven after 25 years of repayment.
• After 10 years of repayment, any outstanding balance may be forgiven if the student is working in a public service job defined as a full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education, social work, public interest law services, child care, or public library sciences.

Not So Good News

To meet budget guidelines, the federal government saved $20 billion by reducing the subsidy paid to lenders on the loans they make. This has caused a ripple effect through the industry with some banks dropping out, some eliminating interest reductions during the repayment period (called borrower benefits), and a number making it more difficult for students to borrow private loans. (These are supplemental, non-government loans some students rely on once they have reached the federal limits.) There are, however, a few lenders “hanging in there” and maintaining prior benefits such as waiving the origination fee. In sum, the current loan landscape is a very uneven one. That is why it is important to get good advice before signing for a loan (see below).

The other piece of not so good news is that recent federal regulations restrict greatly the prior relationship that financial aid counselors on the college campus had with lenders. Previously an aid counselor was allowed to help a student answer the “How do I select a lender?” question by referring the student to the college’s list of approved lenders. Things have now changed and for the most part, the student is on his own when it comes to choosing a lender. This has led to a large increase in direct mail solicitation by lenders to potential borrowers. As with other examples of direct mail contact, families have to be wary of clever promotional materials and the possibility of misleading promises.

In my view the best source of good information about how much to borrow and which lender to use remains with the college aid counselor. Depending on how that relationship works out, the next alternative is to rely on an independent evaluator of different loan possibilities. In this area, I recommend SimpleTuition as a reliable source of good and easy to access loan comparison information.

Once you’ve carefully compared what you can come up with (from family resources, scholarships, grants, work-study earnings, etc) to pay the yearly cost of college and determined there is a shortfall, it is likely that you will have to look into loan options. (If the student has received an aid award, the recommended loan types and amounts will be shown.) But before you start down the path of borrowing for college, I suggest you follow the below “loan ladder” that starts with the least expensive loan and proceeds to those that are more costly. It is generally good advice to borrow up to your yearly limit in a cheaper loan before moving on to a more expensive one.

1. Student Federal Perkins (5%, no interest payments due while in school)
2. Student Federal Subsidized Stafford with strong borrower benefits (6.8% now, see reduction table above, no interest payments due while in school)
3. Student Federal Subsidized Stafford with lesser borrower benefits (6.8% now, see reduction table above, no interest payments due while in school)
4. Student Federal Unsubsidized Stafford with strong borrower benefits (6.8% now, see reduction table above, interest payments due while in school)
5. Student Federal Unsubsidized Stafford with lesser borrower benefits (6.8% now, see reduction table above, interest payments due while in school)
6. PLUS parent loan (8.5%, interest payments due yearly)
7. Student Private loan. Interest rate will almost always exceed PLUS. Look very carefully into terms. Having a co-signer, like your parents, may reduce the interest rate. Some lenders may require a credit check.

Notes:

1. Some colleges participate in the Direct Federal loan program instead of Stafford. Overall, the terms are similar. If you attend one of these schools, your federal loans will be the Direct type.
2. There are organizations, such as military aid societies and religious groups (and some employers), that offer their own college loans, often at favorable rates.
3. For some of the loans indicated above, part or all of what you owe may be forgiven if you pursue a certain career. If you have a specific career in mind, mention that fact to an aid counselor and ask for the loan type that will benefit you the most.

Grants and Scholarships

Federal Grants: Pell
The largest federal grant program is Pell. In the same bill that made the loan changes mentioned above, the maximum amount of the Pell Grant was increased. Realize, however, when it comes to future spending legislation, Congress can always change its mind. But for now, here are the award maximums.

2008-09 - $4731
2009-10 - $5221
2010-11 - $6311
2011-12 - $7001
2012-13 - $8091

With regards to Pell Grant eligibility, you should understand that it is essentially a low income program. To receive the maximum award, the typical family would have to earn less than $30,000. As your income increases, the size of the award decreases, with the typical family losing eligibility for a Pell at about the $50,000 to $60,000 income level.

Academic Competitiveness Grant
For Pell recipients in the first and second years in college who have completed a rigorous high school program (first year) or maintain a 3.0 (second year). The award is $750 for year one and $1300 for year two.

Smart Grant
For Pell recipients in their third and fourth years in college who are maintaining a 3.0 and majoring in physics, engineering, computer science, math, technology, or a critical foreign language. The award is for $4000 each year.

Teach Grant
Beginning July 1, 2008, the TEACH Grant program will provide up to $4,000 a year in grant aid to undergraduate and graduate students enrolled in a teacher credential program. Undergraduates may not receive more than $16,000 and graduate students may receive no more than $8,000 total.

In exchange for TEACH Grant aid, students must agree to serve as a full-time teacher at specified schools and teach in a specified field for four years within eight years after completing the college course. TEACH Grant recipients that do not fulfill their teaching obligations must repay the grant as if it were an unsubsidized student loan.

To be eligible for this grant, undergraduates must have a 3.25 GPA (high school GPA for first year undergrads) or score in the 75th percentile on at least one admissions test.

College Scholarships and Grants
In spite of the large size of all federal grant programs (about $16 billion yearly), colleges award even more in both need and merit aid (about $20 billion yearly).

As is the case with federal loans and grants, there has been lots of recent activity in how colleges give out their own money to students.

College Merit Scholarships
All but about 3 dozen of the nations roughly 2000 4-year colleges give merit scholarships. The primary requirement is to have one of the strongest academic records (usually in the top 20-25%) among the college’s applicants. You may also receive a college merit scholarship if you possess talent in one of the areas in which the college gives awards. The most common categories are athletics and the arts.

College Need Grants
Eligibility for these awards depends on a measurement of the family’s financial strength. The lower the family income, the greater the amount of need-based aid you are likely to receive. Unless you are certain you will not qualify for need aid at any of your colleges, it is a good idea to determine whether or not you might qualify. There are need estimators on Web sites such as finaid.org or collegeboard.org. If you do show need, the amount of grant you will receive depends on three main factors:

• The percent of need the college fills with aid. Only about 75 colleges commonly meet the full need of all eligible students. Keep in mind that the amount of unfilled need, called the “gap,” has to be covered by the family in addition to the Expected Family Contribution that is set by the college.
• Whether the college makes its own reductions in the standard Expected Family Contribution that comes from the need estimator. Some selective private colleges are making it easier to pay their costs by asking families to contribute less than the level that is calculated by the central need formula.
• How much loan is included in the aid “package.” Given the same amount of total aid awarded, the less the loan, the more the grant.

Other Scholarship Sources

There are two categories here.

• State scholarships and grants. Check the Web site of your state’s department of higher education for program information.
• Private scholarships. This group contains all awards that are not federal, college, or state. They vary from large and very competitive awards like National Merit Scholarships to small, local awards. To see if you might be eligible for one of the larger awards, you can access a free internet scholarship search program such as the one on finaid.org. For local scholarships, check with your high school guidance office, library, and town newspaper.

Tax Benefits

In addition to the financial aid programs mentioned above, there is an indirect way to reduce the college bill through federal tax reductions. There are four tax breaks for college students and recent graduates. As the April 15 deadline for filing your federal return is approaching, here is a quick review. Some benefits have income and other restrictions. More information can be found in IRS Publication 970, Tax Benefits for Higher Education.

1. Student Loan Interest
Current college students paying interest on unsubsidized loans and graduates who are repaying their loan can claim a tax deduction of up to $2500. There has been a ruling that interest paid on the parent PLUS loan also qualifies, but I recommend that you check with a tax expert before taking that deduction.

2. College Tuition
There are two programs, the Hope Scholarship Tax Credit and the Lifetime Learning Tax Credit. They are both tax credits, which means you subtract the amount for which you are eligible right off your tax bill. You do, however, have to pay taxes to qualify.
Hope Scholarship Tax Credit.

For the 2007 tax year, a family may claim a Hope credit up to $1,650 for each eligible dependent for up to two years. The Hope credit is only available for a student's first two years of postsecondary education.

A student or family may claim a tax credit of up to $2,000 per year with the Lifetime credit. The amount of the Lifetime credit is 20 percent of the first $10,000 of qualified educational expenses paid for all eligible students. The Lifetime credit is available for all years of postsecondary education and for courses to improve job skills.

3. Tuition and Fees Tax Deduction
This is a deduction (not a credit) which can reduce taxable income by as much as $4,000 in 2007. This deduction may benefit students who do not qualify for either the Hope or Lifetime Learning tax credits.

4. Moving Expenses
Students who are required to move to take their first job qualify for a deduction for the cost of moving themselves and their possessions.

About the Author

Don Betterton was an admission committee member and director of financial aid at Princeton for 30 years until his recent retirement. Now, as the principal in Betterton College Planning LLC, he is in the business of advising families on all aspects of the college-going process. Besides extensive experience in both admission and aid matters, he is also a Certified College Planner,having completed a course in all aspects of making the task of paying for college easier, from need-based aid for low and middle income families to tax savings for the more affluent.

Read more:

Newsletter for the College Bound, Volume 1: Admissions, Aid and Planning
Newsletter for the College Bound, Volume 2: Trends in the Student Loan Industry
Newsletter for the College Bound, Volume 3: Student Loans and Admissions
Newsletter for the College Bound, Volume 4: Paying for College for Current Students