A few years ago, I wrote about how my sister took advantage of a student loan forgiveness program for teachers. It’s a great program if you can participate because it helps the (former) student and it helps society as a whole by putting incentives and compensation more in line with the work performed. Today, I wanted to discuss the Income-based Repayment plan created by the College Cost Reduction and Access Act of 2007. It only became available/effective on July 1 of 2009.

What Is Income Based Repayment?

Income based repayment, IBR, is a system where monthly payments to federal student loans, such as Stafford, Grad Plus and consolidation loans (but not Perkins or Parent PLUS loans); are capped at 15% of your monthly discretionary income. Discretionary income is defined as the difference between your adjusted gross income (AGI) from the prior year and 150% of the federal poverty line for your family and state.

Calculating discretionary income: Let’s say you are in a family of 1 (single), you live in the 48 contiguous states, and your adjusted gross income is $40,000 a year. According to the 2009 poverty guidelines, the guideline is $10,830. You subtract $16,245 (150% of the guideline) from $40,000 to arrive at $23,755. 15% of $23,755 is $3,563.25, or $296.94 per month.

What if your income changes significantly? Since the equation uses last year’s AGI, your income this year might be lower because you lost your job or took a pay cut. Obtain an OMB approved IBR Plan Alternative Documentation of Income form from your lender for a more accurate calculation.

Who Qualifies?

There are no other qualification rules outside of the types of loans and your income. As long as you have a Stafford, Grad PLUS, or federal consolidation loan then you qualify. Perkins Loans are not included but if you have Perkins Loans consolidated into a federal consolidation loan, then it qualifies. Parent PLUS loans do not qualify.

Here’s a table from the Federal Student Aid website showing example payment amounts compared to family size and annual income, to give you an idea of whether IBR is right for you:

Unpaid Interest Waived

Your IBR calculated payment may be less than the interest that accrues on your loan. With subsidized Stafford loans, the extra interest is waived for the first three years of income-based repayment. On other loans, and Stafford loans after three years, the interest is still accrued and capitalized on a status change. You can always pay more than the IBR minimum payment.

Loan Forgiveness After 25 Years

You would think that the lowered payments would simply mean you’re paying longer, but the bill has provisions that forgive the debt after 25 years. After 25 years of payments, even if you haven’t fully paid off the debt, the loan is forgiven and the debt is discharged. The discharged amount will be considered as taxable income in the year it’s discharged, as is common with forgiven loans.

Are There Disadvantages?

Yes.

• You will pay more in interest. Since your payments are capped, you will accrue more interest on your loan as the year pass, especially if your payment is less than the interest each month.
• More documentation each year. Since the payment is based on your income, you’ll have to reset the payment amount each year and file documentation showing your much you earned and your family size.

How to Apply?

If you’re thinking about IBR and wondering how you can participate in the program, talk to your current lender.

That’s income-based repayment for student loans in a nutshell. While this program seems like it’s a benefit to students, it actually hurts future students. If the price of college is too high, the market should react by demanding less college (fewer students choosing to attend). By having this program, with the government taking on part of the burden, we’ve inflated demand because families will have to pay less in the long run. The economics of the situation sure are ugly, huh?

(photo by CarbonNYC)

Student Loan IBR Income Based Repayment Plans from personal finance blog Bargaineering.com.

There are six major topics and each major topic has a series of resources and article explaining various facets of that topic. For example, Money 101 has subsections titled Setting Financial Goals, Tracking Expenses, Budgeting, and Savings. Underneath each of those are several articles to get you on the right track. Along the side you get a bit of trivia too.. for example, the personal savings rate rose to 5% in the second quarter of 2009, vs. less than 2% all throughout 2007.

Give it a look, you might learn something.

University of Idaho Offers Free Personal Finance Courses from personal finance blog Bargaineering.com.

With dating sites flourishing and online education popping up everywhere, the stigma associated with the “online” versions of both have all but been washed away. Meeting someone online no longer means you’re meeting someone capable only with interacting with a computer and getting a degree online no longer means you took some cupcake classes and paid for a diploma.

However, just as how you still want to be careful with who you choose to meet in person from an online dating site, you’ll also have to be careful which online university you choose to attend. Like dates, not all universities are created equal.

Benefits of Online Education

The main benefit of online education is flexibility. When I attended Johns Hopkins for my MBA, I had to drive half an hour each way, pay for parking, just so I could sit in a classroom. Sure, I participated, but the vast majority of the time I listened to a lecture and then drove home. With online education, the flexibility of listening to courses when I wanted to would’ve been very appealing. Nothing replaces the classroom experience but when the majority of your other part-time classmates are looking to learn a little, get a degree, and get out – the classroom experience is limited. Plus, by taking it at my own pace, I free up an hour of my life that I can spend on something else.

While flexibility is probably the biggest benefit, a close second has to do with the speed of learning. The class always seems to progress at the speed of the slowest vocal student. This is bad for two reasons. First, if someone understands a concept quickly, they must wait. If someone doesn’t understand a concept quickly but is shy about it, the class continues on without him or her. Both students are done a disservice and that’s mostly avoided with online education.

Finally, the last big benefit has to do with cost. There are certainly plenty of other benefits of online education but cost is definitely one of them. Online programs are often less expensive than traditional programs strictly from a tuition perspective. With a lowered cost, students won’t need loans, which further drives down the cost of education. It’s a lot like the idea of online banks and brick and mortar banks, online banks don’t have the overhead that traditional banks do and they are able to pass that on to consumers.

Drawbacks of Online Education

As with anything else, there are pluses and minuses. Online education still suffers from a stigma because it’s not “traditional.” Some online universities are incorporating a classroom component, where you might have to attend a classroom session once a month, but some people still see it as “buying” your degree (which is still true with some institutions).

Another drawback of online education is that it’s self-paced. Self-paced learning is a double edged sword. For some, they learn at their own speed. For others, they learn at the last minute and don’t get the full value of the course because they’re trying to cram it all in at the last moment. Understanding how you’ll handle self-paced learning is important in understanding of online education is for you.

We’ve briefly discussed the benefits and drawbacks of online education, let’s look at how you should choose a an online education institution.

Educational Accreditation

The easiest measure of a university is whether it’s been accredited. Accreditation is a way to determine the quality of the education at a particular school. It’s performed by state and local private accreditation organizations, not the federal government. Fortunately, the Higher Education Act of 1965 required the U.S. Secretary of Education to publish a list of nationally recognized accrediting agencies and subsequently a database of nationally accredited post-secondary institutions and programs.

It’s important to note that not all accreditation’s are created equal, though all are recognized as equal by the federal government. It’s generally accepted that regional accreditation is the highest level of accreditation a school can get. There are six regional accreditating organizations:

• Middle States Association of Colleges and Schools
• New England Association of Schools and Colleges
• North Central Association of Colleges and Schools
• Northwest Commission on Colleges and Universities
• Western Association of Schools and Colleges
• Southern Association of Colleges and Schools

You can also go to the Council on Higher Education Accreditation to find out more about the accreditation body that accredited an online university you’re looking at. They track both legitimate and fraudulent claims.

Finally, individual programs or degrees of study are not accredited, the institution as a whole is put through the accreditation process. You can read more about educational accreditation, which includes any level of schooling, at Wikipedia.

You do not have to be accredited to open a school and award degrees. That’s a very important point to understand. A school may be authorized to operate and not be accredited, so you’ll want to check its accreditation and which organization awarded it.

Why does accreditation matter? Some employers and other universities may not recognize degrees you’ve obtained or classes you’ve attended at non-accredited universities because they can’t be sure of the quality of the education. By going to a non-accredited school, you run the risk that your degree or your classes aren’t recognized, so why risk it?

How to Pick the Right Online University

After accreditation, you’ll want to start doing the same research you would on a traditional university:

• Professors: Since you’ll be learning from them, do a little bit of background research on the professors that will be teaching your courses. See what their degrees are in, what their experience is, and what you think they bring to the virtual classroom.
• Cost: Online education is generally cheaper but it may not be, after you consider all the fees and charges they may add on (cost of software should be included in tuition).
• Classroom size: It may seem kind of silly to look at classroom size when you aren’t in a classroom, but this will give you a better idea of how stretched your professor may be. Remember that these professors will be reading your work and giving you feedback, if he or she has 50 students, then you won’t get as good an experience as one that only needs to interact with 20.
• Software requirements: If the online university uses software that requires you to have a newer computer, you’ll need to add that to the cost of attending.
• Classroom attendence: Some universities will require you to regularly attend a classroom session, perhaps once a month or once ever two weeks.

Free Online Courses

If you’re not concerned about getting “credit” for classes or degrees but are instead focused on expanding your skillset, you might want to try taking free online courses from your traditional universities. Many universities like MIT, Carnegie Mellon, Tufts, and Stanford offer self-paced online courses that are absolutely free. Here are a few to get you started:

• MIT OpenCourseWare
• Open University (UK’s largest academic institution)
• Carnegie Mellon University
• Stanford (iTunes)
• UC Berkeley
• Utah State University
• Kutztown University
• University of Southern Queensland (Australia)
• UC Irvine

What are your thoughts on online education?

(Photo: kenlund)

Basics of Online Education from personal finance blog Bargaineering.com.

You are 22 years old. You have just spent the past four years paying tuition, room and board, books, food, utilities, transportation, etc. The worst part is that it is all getting more and more expensive beyond peoples’ expectations. Where does that leave you? In a mountain of debt upon graduation. For some of us that means letting our debt dictate a less than optimal career.

However, what are some ways that we could better prepare for our college education? And if it is too late for you, how can we better plan for our children’s education?

I will outline three ways: Savings Vehicles, Financial Aid, and Reducing Costs. Each section contains a sub-list of “to-do’s” that I advise you to look into!

1. Post #1: Savings Vehicles, Bargaineering
2. Post #2: Financial Aid, Green Panda Treehouse
3. Post #3: Reducing Costs, Poorer Than You
4. Post #4: Wrap up, My Life ROI

So you are thinking about ways to prepare for your child’s college education. College may be five years away for your child. Or perhaps it’s next year. Or if you are really on top of your game, your child may just be a thought in your mind. What savings vehicles are available to make paying for college easier? And in doing so, which way is least detrimental to your child as well?

Custodial Accounts

Custodial accounts, to put it simply, are accounts managed by an adult that are created for a minor who is under the age of 18 or 21. They are usually opened at either a bank, a brokerage firm or a mutual fund company. Custodial accounts don’t have as many advantages as the following two savings vehicles I will mention, so I won’t spend as much time on them. In other words, they have some big downfalls.

Generally, anything you do with a custodial account is permanent. If you transfer money into a custodial account it is stuck there. Why? You would need the consent of the account owner to take money from the account and legally the account is owned by the minor that you created the account for. If they are a minor they probably cannot give consent, legally. Thus, your change is permanent. Once your child turns 18 or 21 the assets are legally theirs. How mature were you at 21? Will you be upset if your child opts to take that money and spend it on a new car rather than a college education? If so, tough luck… it is their money and they have free reign on what to do with it.

If the child chooses to go to college, custodial accounts can be detrimental! The financial aid formula assumes the students themselves will contribute about 35% of their assets towards costs and the parents need to put up 6% of their savings. Custodial accounts count under the students assets, thus heavily weighting the formula and increasing the burden on the student. By inflating the child’s assets they will lose money on financial aid.

Also, one thing you will find with the following two vehicles is the ability to transfer money around between beneficiaries. You cannot do that with a custodial account. Why would you want to do that?

Let’s assume that you have contributed $30,000 for child A. Recently the stock market has taken a large dive and you also lost your job. You can only afford to put in $10,000 for child B. Would you feel OK leaving one child $30,000 and the other child $10,000 just because of how the market worked out? It would be nice to leave each of them $20,000, in my opinion.

Alternates? For college reasons, read on to learn about the Section 529 Plans and Coverdell Education Savings Accounts. For other reasons, a traditional IRA, roth IRA, or even a trust could be a better idea! To determine if you fall into this situation, consult a financial or estate planner.

Section 529 Plans

Section 529 plans are advantageous in plenty of ways. They are open to people of all income levels. Not only that, but you do not have to be a child’s parent to contribute to the plan. You can be a grandparent, a sibling, an aunt, or just a random philanthropic person if you would like. You can even contribute to your own 529 plan as long as you are planning to attend law school or medical school!

A lot of people shy away from investments because of the minimum contributions, effects on tax planning, and the possibility of other detrimental consequences as seen with a custodial account. However, with Section 529 Plans, you can often times contribute just $25/month. Compared to some of the minimum investments for IRAs and index funds… that is pennies! In regards to taxes, the 529 plan grows tax-free! In order to take advantage of this tax-free growth even more, maximum contributions have been created that do not have any gift tax consequences. The limit on contributions without gift tax consequences is $65,000/person or $130,000/couple over a 5 year span. This comes out to $13,000 per year.

When it comes time to apply for college, these plans can be used at any accredited school in the country. When applying for financial aid, Section 529 plans do NOT count under the students’ assets for the formula!

If the child decides to forgo college education, it is simple for the parent to transfer the plan assets to another beneficiary such as a younger sibling. And the child that skips college cannot force withdrawals unless they are for college expenses.

Coverdell Education Savings Accounts (Formerly Education IRAs)

Coverdell Education Savings Accounts (which will be referred to as CESAs) also have their advantages and disadvantages.

In regards to contributions, there are many more limits in place than in a Section 529 Plan. Only $2,000 a year can be contributed for each minor. There are income limits to make contributions, as well. If you are single or head of household the adjusted gross income (AGI) phase-out is between $95,000 and $110,000. Those AGI phase-outs rise to $190,000 and 210,000 for married filing jointly.

CESAs allow you more flexibility in terms of investment strategy. They allow you to invest in mutual funds, stocks, or bonds. 529 plans bind you to the portfolios that the state-sponsored plan offers.

Despite the income limits, any contributions made are after-tax just like a Roth IRA or Section 529 plan and they grow tax-free. Typically little to no account maintenance fees are charged and contribution minimums are also little to none. As long as the money is used for elementary, secondary, or higher education expenses the money is not taxed again when it is distributed. The important distinction here is that unlike the 529, CESAs can be used for elementary and secondary education. But, just like the 529, for higher education the money can be used for any accredited school (with more flexibility to private and nonprofit institutions for CESAs). If the child decides to forgo college the money can be rolled over into another family member’s CESA as long as they are under 30.

One large drawback from a Coverdell is that once the child reaches college age they take control of the account and manage the distributions. Whether you think they are responsible enough or not, they have the final say. If any money remains after the beneficiary turns 30, the money that is left is subject to taxes.
Conclusion?

For many people, the 529 plans are the most robust. They offer the most control for the custodian/parent even once the child has reached the age of majority. The fact that there are no income limits and anyone can contribute to the plan makes it much more flexible. The gift-tax free contributions are a great perk. The ability to roll the plan over to another beneficiary is a great benefit, too. If your child gets scholarships wouldn’t it be great to just roll that money into the younger siblings rather than lose some of the money to taxes? And finally, by using Upromise you can get extra money added to your 529 from partner companies.

Consult a professional to figure out what your exact situation requires but go into his consultation knowing your options. Do not start a custodial account because a friend says its the best option and find out you have hurt your child eighteen years later. And do not start a CESA because you want to pick your own portfolio when a state-sponsored portfolio in a 529 may work for you. Talk to a professional and go over your exact situation!

I hope this brief outline of 3 of the major savings vehicles people use for their child’s college education has been educational!

Understanding Your College Savings Options from personal finance blog Bargaineering.com.

2. Request a Federal Student Aid PIN
The Federal Student Aid PIN will allow you to fill out your FAFSA on the web, which is always better than filing out a paper application and mailing it in. It will serve as a unique identification number and signature for your application. To request a pin, visit the Federal Student Aid PIN website. If you recently applied but haven’t received your PIN, you can check your PIN status here.

3. Submit the FAFSA
The Free Application for Federal Student Aid can be filled out anytime between January 1st and June 30th of the following year. However, the earlier you apply the better. Many state and college financial aid rewards have earlier deadlines and the funds are only available on a first come first serve basis. Though the FAFSA can be filled out in paper format, the fastest and easiest way to fill it out is on the web. The FAFSA website provides a worksheet for you to fill out before submitting the actual FAFSA. This worksheet will allow you to determine the answers to the questions the FAFSA will ask you beforehand. Then, you can use those answers when you fill out the actual FAFSA form online. Make sure to indicate on the form where you want the FAFSA to be sent. For more information about the FAFSA, watch this brief 5-minute video about FAFSA.

4. Receive Your SAR
After you have submitted the FAFSA, you will be sent a Student Aid Report. This report will tell you your eligibility status for federal student aid and will tell you your Expected Family Contribution (EFC). Your EFC is not the amount of money your parents are expected to spend on your education. Instead, it is an index of how much you are in need of financial aid. To estimate how much your EFC will be before submitting the FAFSA, use an online EFC calculator such as this one.

5. Complete Supplemental Forms if Necessary
Some schools require supplemental financial aid forms such as the CSS Profile. Check with your school’s financial aid office to determine if this is necessary.

6. Complete Your School’s Financial Aid Application
In addition to the FAFSA, you will need to complete the financial aid application for your college. During this process, it may be beneficial to meet with a financial aid counselor at your school. He will be able to answer any questions you may have and he may be able to help you receive the most financial aid your school can offer.

7. Verify If Necessary
In some instances, you may be asked to send in tax documents to verify the information you put in your financial aid application. Although this step can be tedious, it is necessary for receiving financial aid.

8. Receive Your Award Package
After receiving your application, your school will determine how much financial aid your are eligible for and will send you an award package. Your package could include several different forms of financial aid. Grants and scholarships are forms of financial aid that do not need to be repaid. Loans on the other hand will need to be repaid, often with interest. Finally, work study awards provide you with part-time employment to fund a portion of your college education. For more details on the types of financial aid, see this site and use the Federal Student Aid Programs link on the left side of the page. Here’s what a sample award package looks like.

By following these steps, you can navigate your way through the financial aid system. If you have trouble along the way you can call the Federal Student Aid Information Center at 1-800-4-FED-AID. You can also contact your school’s financial aid office. Good luck applying!

This is a guest post by Olivia, who blogs at Independent Beginnings, where you can learn all about personal finance and independent living for young adults. Make sure to check it out!

(Photo: sgw)

How to Navigate the College Financial Aid System from personal finance blog Bargaineering.com.

What’s the catch?

No catch, I’ve been a member for years, having joined when I took advantage of some UPromise promotion codes for free money. It does seem a little too good to be true right? I linked up my Giant (a local grocery store) card and now I earn money without having to change anything about my routine. There is no catch, you can even withdraw the funds from your account by sending them this withdrawal form, though I haven’t done this yet (I don’t anticipate I will).

Linking family and friends: You can invite your friends to join and contribute to your educational cause. When they join, they can link their cards to your account so that you earn rewards based on their spending, as if it were your own.

How do they earn money? Through the UPromise website, you can earn higher percentages when you purchase products on the UPromise site. They have partnerships with various stores that offer higher percentage contributions if you purchase through the site. For example, if you visit the UPromise website, you’ll see that you can get TurboTax Deluxe for $49.99 and earn 2% towards college. When you make that purchase, Intuit probably pays UPromise a commission, part of which they turn around and give to you as a reward. Speaking of the website, they run occasional promotions where you can get bonus percentages on certain months. If you look at the website right now, there’s a 2% bonus on top of the regular bonus if you buy something at Lancome, ProFlowers, or Sears. They may pay you a percentage, but they collect a greater one from the stores. Since you would otherwise get nothing from the store, this is a win-win for everyone involved.

In the end, it’s free money for me and little risk involved, which is why I do it. Since I’m not swayed by the site (I haven’t visited it in several months) or the marketing, I really give up nothing by being a member.

Do you have any UPromise success or horror stories you’d like to share? I’ve only had a good experience with UPromise so I don’t know what could be bad about it.

UPromise Review: Free & Automatic College Savings from personal finance blog Bargaineering.com.

Best part about grants? It’s money you don’t have to repay!

If you’re not taking a shot at these grants, you’re leaving BIG money on the table. If you’re a college student or a high school student and your parents aren’t jumping on top of this, you need to seize this thing by the horns and go after it. So many students, myself included, are saddled with student loan debt out of college and despite what the “experts” say – student loan debt is not better than credit card debt. It all sucks. If you can get even a $500 grant, you can save thousands of dollars down the road in interest payments. You can buy a car earlier, you can buy a house earlier, you can get on the wealth accumulation track and off the debt repaying track that much sooner.

Sallie Mae sent me a list of the deadlines for states that offer grants and whose FAFSA filing deadlines hit before the national deadline of June 30th. If you don’t see your state listed, double check with the local financial aid office to see if the deadline is before June 30th because you do not want to miss out on the free money. With state grants, it is typically the state where the student resides in that determines eligibility (but always double check!).

• Alaska – April 15
• Arizona – March 1
• California – March 2 *
• Delaware – April 15
• Florida – May 15
• Idaho – March 1 *
• Indiana – March 10
• Kansas – April 1 *
• Kentucky – March 15 *
• Maine – May 1
• Maryland – March 1
• Massachusetts – May 1
• Michigan – March 1
• Mississippi – March 31 *
• Missouri – April 1
• Montana – March 1
• New Hampshire – May 1
• New York – May 1 *
• North Dakota – March 15
• Oklahoma – April 15
• Pennsylvania – May 1
• Rhode Island – March 1
• Tennessee – March 1
• West Virginia – March 1 *

* Sallie Mae recommends you contact that state’s financial aid office for additional forms.

Go!

FAFSA State Grant Deadlines from personal finance blog Bargaineering.com.

The answer …?

Not enough available data. (sorry)

Too Many Factors

The reality is that there are far too many private colleges and universities in too many fields, it’s impossible to say “the average starting salary of a private college or university graduate is…$X,” so no one does. Since we don’t have public data to work with (I have no idea where my friend’s friend got his numbers), let’s play with the numbers we do have, or can make up, and see what happens. Assuming all other factors are equal, the question comes down to servicing the loan. The privately educated graduate’s salary has to be greater than the publicly educated graduate’s salary by the amount of the loan payments.

$6,440/Year Breakeven

If the privately educated graduate has to service a $75,000 student loan at 5.00%, then his minimum monthly payments are $402.50 a month assuming a 30 year payback period (standard payback period after you consolidate your loan). That works out to be $4830 a year. If you assume the student is in the 25% tax bracket, his salary has to exceed the publicly educated graduate by $6440 a year. If the graduated has $100,000 in loans, he or she would need a pre-tax salary difference of $8592 a year. If the debt were only $50,000, then the pre-tax salary difference falls to $4296 a year.

I am greatly simplifying this problem, in reality the difference is going to be less than $6,440 because the graduate with a higher salary is going to see their salary grow faster assuming the same percentage raises. If public student gets paid $40,000, then five years of 4% raises puts him at 48,666 a year. If private student gets paid $46,440, five years of 4% raises puts him at $56,501. The original $6440 difference has grown to a difference of $7835, or almost $1,400! However, given that this isn’t a mathematical proof and absolute correctness doesn’t really add much, I opted to skip that analysis.

According to FinAid.org, a graduate of a 4-year private non-profit institution has about $21,957 in debt versus a 4-year public student graduating with $17,277; a difference that is much less than the $75,000 and $0 I assumed above. Assuming a debt burden difference of $4680, the salary difference is only $402.08 a year (pre-tax). Four hundred bucks a year is not a big difference.

College Important, Public/Private Irrelevant

At the end of the day, whether your school is public or private has no impact on your salary. It’s far more important to take the set of possible majors your interested in and compare it with the best paying jobs to determine what you want to study, then work from there to figure out where you want to go to achieve that.

College is still important though, according to the Census Bureau, bachelor’s degree holders earn an average of $2.1 million lifetime while high school graduates earn on average about $1.2 million lifetime. So stay in school, you’ll end up a millionaire!

Before you go, here’s a eye popping stat – The average amount of debt held by someone graduating with a degree in Medicine is a staggering $113,661 ($125,819 when you add in their undergraduate debt), no wonder it takes twenty years to break even!

(Photo: hmocopymonkey)

Salary Breakeven for Private vs. Public College Graduates from personal finance blog Bargaineering.com.

New temporary college credit: The bill introduces the American Opportunity Tax Credit, which would be in effect for 2009 and 2010. It expands the existing Hope Scholarship tax credit and would be worth as much as $2,500 for higher education expenses, up from $1,800 currently.

The full credit would be available to those making less than $80,000 ($160,000 for joint filers). Those making between those amounts and $90,000 ($180,000 for joint filers) would get a partial credit. And the break would also be partially refundable, meaning lower income families with little or no tax liability could now claim some of the credit. Estimated cost: $13.9 billion.

The stimulus package also has another education related tax break, the Pell Grant has been increased to $5,350 for 2009 and $5,550 for 2010; an increase of $500 in both cases.

American Opportunity Tax Credit Details from personal finance blog Bargaineering.com.

I graduated undergrad with about $25,000 in student loans, a paltry sum when compared to some of my friends who had upwards of $50,000 and $80,000 in student loans. Also, the majority of my loans were low-interest deferred Stafford loans. I was only able to get those loans, and other grants, because I filled out a FAFSA form… something 25% of families fail to do.

I was amazed when I read a press release from Sallie Mae that stated 25% of families didn’t even complete the FAFSA application! Sallie Mae is another one of those former government sponsored entities that privatized a few years ago (like Freddie Mac and Fannie Mae) and they deal strictly with student loans and college savings plans. The FAFSA is the Free Application for Federal Student Aid.

How do I apply?
You can either fill out a paper form or you can apply online. Applications can be submitted starting January 1st (so you can do it now) and the deadline is June 30th.

Why is the FAFSA so important?
It’s used to determine everything in federal aid. Need- and non-need-based grants, scholarships, work-study and low-cost student loans – they all use the FAFSA to determine who gets what. Last year, $163 billion dollars in student aid was awarded and 40% of them were grants that do not have to be repaid. That is free money. If you don’t complete a FAFSA, you are not eligible for any federal financial aid. No Stafford loans, no Perkins loans, no PLUS loans, and not even unsubsidized Federal loans. Zero. Zip.

I heard student loans are really hard to get this year.
That may be true, but if you don’t spend the hour or two to fill out the FAFSA, they will be nearly impossible for you to get because you won’t be eligible for any of the federal loans.

What are the interest rates on subsidized loans?
The Stafford loan is probably the most popular subsidized loan as it has the most favorable interest rates, it’s a need-based loan and the rates are schedule to be (all loan rates are listed on Sallie Mae):

• July 1, 2008–June 30, 2009 the interest rate is 6%.
• July 1, 2009–June 30, 2010 the interest rate is 5.6%.
• July 1, 2010–June 30, 2011 the interest rate is 4.5%.
• July 1, 2011–June 30, 2012 the interest rate is 3.4%.
• Beginning July 1, 2012 the rate is 6.8%.

Those rates may not look incredibly favorable now but remember that interest is tax deductible if you earn under a certain amount and the interest is deferred until after graduation.

I recognize that some part of that 25% of families may not be eligible for federal financial aid on a need basis, but there are plenty of non-need related federal financial aid options that everyone should try to apply for.

I am extremely thankful that I was able to get federal financial aid (and some grants directly from Carnegie Mellon) and it all starts with filling out and submitting a FAFSA.

(Photo: btreenews)

Free College Money: The FAFSA from personal finance blog Bargaineering.com.

My wife and I are thinking about having kids soon and one of the biggest challenges has been projecting and planning for the cost of college. It’s pretty sobering to use FinAid’s projection calculator. I put in $30,000 a year (just a ballpark figure for a year of private college today), 20 years until matriculation, and left the college cost inflation rate at 7%. The total four year cost? $515,435.35

Half a million bucks for a private college. It’s insane.

Fortunately there’s help available and it comes in multiple forms:

• Saving for college before college starts: This is the topic of this article, learning more about the ways you can save money by taking advantage tax-advantaged education savings accounts like 529 Plans and Coverdell ESA’s.
• Tax deductions and credits for when your child is attending college: I won’t be going into detail about these deductions and credits in this article but you can get some assistance through the Hope and Lifetime Learning Credits. They may not exist in 20 years but they’re available today.
• Financial aid: Also not covered in this article, but financial aid, whether it’s need or merit-based, plays a huge role in helping families pay for college and should always be considered.

Here’s a brief overview of your options (for saving for college) to give you a sense of what your options are. This is by no means exhaustive but should give you a good idea of the landscape so you can do your own investigating.

529 Plans

Named after the section number in the IRS code, the 529 Plan is simply a savings plan for college education and has two options:

1. Prepay tuition at a qualified institution at today’s tuition rates, or,
2. Save money in a account where the earnings are tax-deferred to pay tuition at future rates.

All earnings in the account are exempt from federal taxes if withdrawn and used for qualified educational expenses. Your contributions, however, are taxed before you put them in but some states let you deduct a portion of them from your state taxes. The Pension Protection Act of 2006 made the tax exemption permanent.

Coverdell Education Savings Accounts (ESA)

The Coverdell ESA was once known as the Education IRA and was revamped in 2002 with some major changes. Again, the account is like a Roth IRA in that you make non-deductible contributions into an account that can grow tax free if used for education. Like the Roth IRA, your contribution limit is affected by your adjusted gross income. For single filers, the range is $95k – $110k, and for married filing joint, it’s $190k – $220k; the contribution limit for 2008 is $2,000 per beneficiary.

Unless Congress makes changes to the existing law, some ESA benefits will expire in 2010. The key ones are that K – 12 expenses won’t qualify, the contribution limit will lower to $500, and withdrawals won’t be tax free if you claim Hope or Lifetime Learning credits. I don’t know if they acted yet on this and I couldn’t find anymore information about this.

Treasury Bonds

Earlier this year I bought some Series I bonds because of the favorable interest rates. One of the benefits of Series I bonds, and Series EE bonds, is that earnings are tax free if used for education. The rules are that “qualified higher education expenses must be incurred during the same tax year in which the bonds are redeemed.” There are several other requirements but they are all spelled out in the education planning section of Treasury Direct.

The benefit here is that you can get a lower guaranteed return, unlike the stock market investment returns for Coverdell and 529s, on education savings but the rules are slightly stricter. Also, you are limited in how much you are allowed to purchase.

Difference Between 529s & ESAs

There are some major differences, and lots of minor differences, between these plans.

The first has to do with control of the account. With a 529, the owner always retains control and can change beneficiaries at will. With ESAs, the money gets transferred to the benficiary (your child) if it’s not used for education when they reach a certain date. With 529s, the money is returned.

Another difference has to do with contributions, the limit for Coverdell is $2,000 a year subject to the contributors’ modified income. With 529’s, the limit is usually several hundred thousand and depends on the state program you join.

The last major difference is that a Coverdell has to be used up or transferred by the time the beneficiary turns 30, or the funds have to be withdrawn and tax and penalties must be paid. With the 529, there is no age limit. This is significant because that means you can open a 529 for your child before they are born. You simply open one for yourself, contribution, then change the beneficiary when the child is born. You can’t do this with a Coverdell.

As for similarities that may affect your choice, the Coverdell and the 529 are the same for financial aid purposes. They are considered assets of the custodian, which would be you, and the withdrawals are not income when they are tax free. Both plans are transferable, meaning you can change the beneficiary fairly easily.

Have you taken a deeper look at these types of plans? If so, what made you choose one or the other? Are there major differences, advantages, or disadvantages that I overlooked?

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Saving for College – 529 Plans & Coverdell ESAs from personal finance blog Bargaineering.com.

My friend just had their first child and began researching 529 plans. A 529 plan is an education savings plan run by a state or an educational institution, it’s named after Section 529 of the Internal Revenue Code. The plan offers tax benefits to individuals saving for future education. In his case, he was looking at a savings plan, rather than a prepaid plan*.

And now he had a choice: an in-state plan with a tax deduction or an out-of-state plan with potentially cheaper funds. Specifically, he wondered if he should open a Maryland 529, which offers a tax deduction to Maryland residents, or a state plan offering Vanguard funds, which is known for lower mutual fund fees. The state plan he found was Nevada’s, which is run by Upromise but offers Vanguard funds. (Plan data provided by Saving For College, run by Bankrate)

College Investment Plan (Maryland)

• Program Manager: T. Rowe Price Associates, Inc.
• Residency Requirement: No.
• Maximum Contributions: No annual limit until account balance for beneficiary reaches $320,000.
• Account Maintenance Fee: $25 / yr, waived with automatic investments or balance greater than $25,000.
• Management Fees: 0.28% manager fee, 0.25% once program assets reach $2 billion.
• Tax Deductions: $2,500 per beneficiary per year by account owner is deductible with a 10 year carryforward on excess contributions.

The Vanguard 529 Savings Plan (Nevada)

• Program Manager: Upromise Investments, Inc. and Vanguard Group, Inc.
• Residency Requirement: No.
• Maximum Contributions: No annual limit until account balance for beneficiary reaches $310,000.
• Account Maintenance Fee: $20 / yr, waived if account owner or beneficiary is a Nevada resident or assets in account exceed $3,000.
• Management Fees: 0.65% manager fee, include underlying fund expenses.
• Tax Deductions: None.

Comparing just the Nevada plan against the Maryland plan, it appears that the Maryland plan is superior. What you’re trading off is the tax deduction versus the mutual fund fees, but the tax deduction is only available the year you contribute. In Maryland, the $2,500 deduction is worth $125 (5% state income tax) making it nearly a wash between the slightly higher account fees in Nevada.

It’s really a choice between T. Rowe funds vs. Vanguard funds. If you’re an index fund type of investor, the T. Rowe Price Equity Index 500 (PREIX) has an expense ratio of 0.35%. Vanguard’s 500 Index (VFINX) expense ratio is 0.15%, meaning T. Rowe’s ratio is more expensive by 0.20%. On a balance of $10,000, that’s a difference of $20 being whisked out of the account each year for nothing. While $20 doesn’t seem like much, that’s a fee taken out each year and one that will erode your investment’s growing potential.

If it were me, I think the Nevada plan is superior of the two because it offers access to cheaper Vanguard funds.

Five Best 529 Plans

Liz Pulliam Weston of MSN money recently looked at the 5 best college savings plans and listed Nevada as one of the top five. The other states included were Alaska, Nebraska, Rhode Island and Virginia. The Virginia plan offers access to some Vanguard funds too.

* A prepaid plan is an option where you “lock in” the price of an in-state public college education right now. You can always convert it to a private or out of state school later on based on some conversion tables.

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529 Plans: Fees More Important than Deductions from personal finance blog Bargaineering.com.

Student loan consolidation isn’t really a magical trick, you essentially take all of your student loans, figure out your effective aggregate interest rate, and consolidate it into one loan with one monthly payment. Before July 1st, 2006, Stafford Loans had variable interest rates so it would benefit you to consolidate (lock) your loans when the rates are low. I consolidated my Stafford Loans a few years ago at 3.25%, minus some direct debit and timely payment interest rate discounts. So, if you had all Stafford Loans and consolidated them, your rate would be 4.25% (rates are always rounded up to the next eighth of a percent) if you consolidated within your grace period. If you consolidate after that six month grace period, there’s an automatic 0.6% increase tacked on to make it 4.85%.

Finally, this is really just a PSA for folks who are getting new loans. The rate, starting today, falls from a fixed 6.8% to 6% on new Stafford Loans. Loans originated after July 1st, 2009 will be 5.6%, those after July 1st, 2010 will be 4.5% and those after July 1st, 2011 will be only 3.4%.

Sixty Second Guide to Stafford Loan Consolidation from personal finance blog Bargaineering.com.

2. Graduate school is no longer a ticket to play. “It used to be that you couldn’t go into business without an MBA. But recently, the only reason you need an MBA is to climb a corporate ladder.” I have two graduate degrees – a technical one in software engineering and a vaunted MBA. In the case of the software engineering degree, I pursued it because job prospects for software developers following the dot-com burst were bleak and because it never hurts to get another technical degree. The MBA? I pursued it strictly because my employer paid for it and because it was seen as another item on your resume, a “requirement” to climb that corporate ladder.

I didn’t pursue an MBA because it would teach me the skills required to fulfill a job function, because it wouldn’t, I pursued it because I knew that at some level it would be required to even be considered for some management position (even if that management position would require none of the skills taught in an MBA course… how does marketing or analyzing internal rate of return help in management?).

What’s my point about MBAs? While some companies may require them for management, you don’t actually need one to succeed at your job. Results matter and companies should promote based on results, not degrees on a wall. If you are at a place that refuses to recognize results, go somewhere that does.

4. Graduate degrees shut doors rather than open them. Penelope focuses on the financial aspects of this – the loans you are saddled with preclude you from working at certain places because you can’t afford it. I believe graduate degrees have a pigeonholing effect. When I applied to become a software developer at my last company, I had been doing embedded software development for about six months. In the interviews, the interviewers focused on the fact that I had been working in the embedded development world for “so long” and how I might not want to or even be able to do application development. Luckily they called me in so I could resolve their concerns because, based on six months of work (it appeared longer than six months because I used the same language, C, for various applications, the last of which was truly embedded development), they had pigeonholed me as an embedded software developer who was disinterested in, or incapable of, application development.

Imagine if you spent a year or two pursuing a degree in a very specific area within your field? Employers would naturally assume you have a singular focus and would only consider you for positions directly related to that field. You might have only gone after that degree because you thought it could broaden your horizons, not make it more narrow.

Lastly, I submit another reason, the eighth reason, graduate school can be outdated.
8. In many graduate programs, the bulk of the teaching is done by textbook. While in some fields this is acceptable, I found that the textbooks used in our business classes were woefully inadequate. We had marketing textbooks that appeared to have last been refreshed in the early nineties, discussing case studies of companies that no longer existing, and really teaching us little that could be applied in the real world anymore. You can learn more reading the nuggets from Seth Godin’s blog, for free, than you can get out of most marketing textbooks.

Finally, and this is unrelated to graduate degrees being outdated, is the fact that there are two things of value when it comes to graduate school and neither involves the knowledge. First, you will, hopefully, increase your network and, second, you’ll get a piece of paper. If graduate school was about the knowledge, you wouldn’t be able to take classes for free from resources like MIT OpenCourseWare and BusinessWeek Small Biz.

I hope you don’t leave here thinking I’m cynical about graduate school or an MBA, I’m not (that cynical), but it’s like what Brian Flanagan (Tom Cruise) said in Cocktail to his professor after a bad grade: “Those that can, do. Those that can’t, teach.”

Graduate Degrees Are Outdated from personal finance blog Bargaineering.com.

My opinion is that you can and should bribe or reward them for performance because that’s how the world works. You get a good SAT score, you are rewarded with admittance into a good college or university. If you get good grades in college, you’re rewarded with a good job. If you perform well at your job, you’re rewarded with more money (maybe!). Giving children incentives for strong academic performance isn’t going to ruin them for the world because the world rewards strong performance with money as well.

What prompted this Your Take post was an article from the New York Times where students were being paid to perform well academically.

What’s your take on this?

Your Take: Pay for Academic Performance for Children from personal finance blog Bargaineering.com.