A few weeks ago I asked newsletter subscribers to email me with the things that concerned them. Many readers told me that the cost of higher education, specifically the college and university level, and their student loans were some of the things on their mind.

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.

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I’ve been doing research on the various reward catalogs of credit card companies when I discovered my favorite reward, a student loan rebate check from the Citi ThankYou Network, had gone up in price. I would routinely cite that reward as one of the main reasons I kept using my Citi card. A few short months ago, for 10,000 points, you could get a $100 check written to your student loan servicer. That came out to each point being valued at 1¢.

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Rules of thumb are great. They teach you a little nugget of wisdom and have been vetted by generations of experience. Don’t swim thirty minutes after eating, don’t mix hard liquor and beer, and don’t date your relatives. Follow those rules of thumb and you’ll live a happy and healthy life.

The same can be said about financial rules of thumb. Don’t spend more than you earn, save 10% of your salary, and always buy a used car. You don’t have to always follow those rules of thumb, but if you want to achieve financial prosperity, it’s best to heed them.

However, over the years, some rules of thumb are in need of a refresher. Times change. A rule that made sense ten or twenty, or even a hundred, years ago may not make sense. Let’s have a look.

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Earlier this year I finished writing an article in which I tried to find the salary breakeven point for private vs. public college graduates, a task that was impossible because I couldn’t find enough publicly available information at the time. I was trying to figure out whether college was “worth it” and if so, whether public or private college was a better value. Since I didn’t have enough data, I just took some “average student loan debt” figures and calculated the breakeven point.

In a recent Business Week article, they took a 2007 College Board analysis that showed college graduates earned 61% more than high school graduates over a 40 year career. Master’s degrees earn 93% more. It’s not the private college vs. public college debate but it’s certainly a good look at whether student loan debt, in general, is worth it.

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I was amazed to learn that 25% of families don’t submit a FAFSA, which is the Free Application for Federal Student Aid, because they’re leaving free money on the table for no good reason. For those that do fill it out, be careful to submit it before your state’s deadline for state grants! The FAFSA deadline is June 30th but many states have earlier deadlines for state specific grants.

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

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I had lunch today with a few friends and the topic of private versus public college came up, a topic they recommended I put on my blog (so to appease them, I did!). As the graduates of private colleges, we were all curious what the difference in salary between graduating from a private college, paying $30,000+ a year for tuition/room/board/etc, and graduating from a public college, paying $10,000 a year for room, board, etc. The impetus of the conversation was that one friend knew someone who was graduating as a radiation oncologist and did a similar analysis between doctors and typical engineers (his analysis said it took twenty years for the doctor, a radiation oncologist, to “catch up” to an engineer, after accounting for typical raises, college loan debt, and other factors). So what’s the break-even point between private and public college graduates?

The answer …?

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Debt is a bitch and student loans have taken center stage recently as the credit crisis threatened the ability of students to get loans. However on this day, I read a story about how some people have resorted to moving overseas to avoid paying their loans, a step that seems like a lot until you realize the size of their loans.

Initially, I felt bad. Then I thought about it some more and realized that we all make choices and trade-offs in our lives and education is merely one of those choices you make. The story talks about Chris, who graduated with $160,000 in student loan debt and a master’s degree in music. Chris admits he could’ve (he didn’t say he “should’ve,” he said he could’ve) gone to a cheaper school but that he’s “most angry at the fact that for anyone who has debt that’s not student loan debt, there’s relief. You can get into $150,000 worth of credit card debt and you can declare bankruptcy and you can go on with your life. But with student loans, you’re being punished for being a better person.”

First, I’m sorry Chris, but you’re not a better person and someone with $160,000 worth of credit card debt is not a worse person; you both made your choices and are now are forced to live with them. It doesn’t matter what the money was spent on, it was spent and now you owe it. There is no woe is me, you can’t blame someone else, it’s all on you.

Second, $160,000 is a lot of schooling. Let’s say he went for six years (4 years undergraduate, 2 years master), that’s about $27,000 a year. He could’ve gone to a public school, he could’ve paid off more while in school, he could’ve done a lot of things. $160,000 for a M.S. in music seems very expensive to me (but I have no experience in that, it could be spot on).

Third, bankruptcy is not a panacea. It’s not like you walk into some courthouse one day, declare bankruptcy, and you’re free to do what you want the next day. When you declare bankruptcy (and prove it, which is not a simple task), it stays on your record for the next seven years. At a minimum, you can’t get a loan for anything. No car loan, no mortgage, no credit cards, no 0% financing… the list goes on.

Finally, and I know everyone is thinking it, but how could you expect to pay $600 a month? At 0% interest, it would take you 22.2 years to pay off a sum of $160,000. As a testament to how off his estimate was, his payments were four times as much – $2400 a month.

Running from your problems doesn’t solve them, it makes those problems harder to solve.

Long-time reader Geoff asked the following question:

My wife finished her grad school a year ago and got a job as a teacher. This summer, she’s been taking college courses in order to boost up her pay. We just received an email from Sallie Mae (her student loan provider) that they have automatically put her loans into deferment until 2012 due to her
enrollment activity. I’m assuming that the colleges she’s taking courses from somehow communicate with Sallie Mae and that’s how they found out. Although she is taking 12 credits this summer, it’s only for the summer, and I know a deferment usually applies only if you continue to be in school. Will they automatically know that she is no longer in school in September, and will end the deferment? If not, do we have to notify them? And if we don’t would we be penalized?

The only question I can answer is that the deferment rule is you must be in school at least part-time, as defined by your school. Your school may define 12 credits as part-time, so you’re safe there.

As for automatically knowing, my lender, ACS, uses a central database that is supposed to be updated by the school with my student status. When I took a semester off, that database was updated to reflect that. Now, the loan is still in deferment but I graduated a couple months ago, so my question is the same as Geoff’s – will I be on the hook for the interest? Is it my responsibility to notify the lender? Or will they know later, when the school updates the database?

I tried asking ACS but gave up after thirty minutes on hold, does anyone know how we should be handling this?

Update: I emailed ACS two days ago with this question and here was their replay:

The school is a participant of the National Student Loan Clearinghouse (NSLC) they will report your enrollment status and graduation date to the NSLC, which in turn will forward this information to ACS.

Interest will start to accumulate once the account enters repayment status.

Student loans have been on my mind ever since I read about the latest legislation dropping Stafford rates earlier this month.

Here’s a brief recap of where my student loans are now. I consolidated my Stafford loans years ago, locking in a very comfortable rate of 3.25%, and the balance currently stands at a little over $22,000. The loan had been in deferment as I completed my MBA at Johns Hopkins, which has stopped the clock the last few years, but with my graduation the interest has started to accrue again. We earn too much to be eligible for the student loan interest tax deduction (certainly not a bad thing) and thus bear the full brunt of the 3.25% rate. Once again, I’m revisiting my student loan dilemma.

$22,000 in student loans at an effective tax rate of 3.25%. We also have a mortgage of around $220k at an effective tax rate of 4.3125% (the rate is 5.75% but it’s tax deductible, in the 25% tax bracket the effective rate is 4.3125%; we could consider only the deduction above the standard deduction for couples $10,900 but that begins to get overly complicated). Math says that if we were to pay down a debt, it would be my mortgage first because it’s at the higher tax rate. So I should never make more than the minimum payment on my student loan unless we have paid off the mortgage (which I envision is something that won’t happen for quite some time).

Proponents of Dave Ramsey’s Debt Snowball approach would say that you should pay off the student loan first because it’s the smaller amount (ahh, psychology). I personally don’t subscribe to that idea, I go by the Blueprint for Financial Prosperity Common Sense Payment Strategy (okay I just made that up, it’s how most people who understand interest rates and math would pay down their debt, I just added some color). While I anticipated this result, it’s always good to revisit things as situations change.

So, the student loan is here to stay for the foreseeable future.

My sister is a public school teacher in Boston. She’s participating in a program where her student loans will be paid off after some number of years teaching difficult students in schools in low-income neighborhoods. The arrangement works for my sister because she would be teaching anyway, though as a young female teacher the rowdy students seem like they would be a greater challenge for her, and now she’s also getting sizable debts forgiven. She hasn’t complained once yet, so perhaps things are well.

I don’t know the name of the program she’s participating in but there are several public service programs that offer the same benefits. If you’re in one of these fields, you’ll want research these more as you could get some of your loans forgiven. I don’t know if the pay for these jobs is adjusted accordingly though.

Public Service Loan Forgiveness Program

The Public Service Loan Forgiveness Program is the biggest of the loan forgiveness plans. It offers total loan forgiveness on Stafford, Grad PLUS and associated consolidation loans in the Direct Loan program if you work in a “qualified public service job” for at least 10 years and continue to make payments during that span. Ten years seems like an awfully long time. The standard payment structure on Stafford Loans is equal payments over ten years! However, typical consolidation repayment lengths are often thirty years and consolidation is always a good idea.

A qualified public service job is often determined by the employer, rather than the role you play. If your employer is a nonprofit, tax-exempt 501(c)(3) organization, you’re eligible. If it’s the federal, state, local, or tribal government, you’re eligible. Finally, if you’re in a full-time Americorp position, you’re eligible. If you don’t meet any of those, you can still qualify if your employer is a non-profit type entity that is engaged in public service but is not a political organization, religious organization, or a labor union. Rules are slated to be finalized by the Department of Education in November.

TEACH Grant

The TEACH (Teacher Education Assistance for College and Higher Education) Grant is a grant worth up to $4,000 a year if the student agrees to teach at least four years in the next eight in a “high-need” field in elementary or secondary school that serves low-income students. It’s a new program and you need to apply with your school’s financial aid office. If you’ve already graduated, unfortunately you can’t apply for this particular grant.

If you are out of school, thus ineligible for the TEACH Grant, consider asking your school district’s administration to see if they are covered under The National Defense Education Act. Under that Act, if you become a full-time teacher in an elementary or secondary school that serves students from low-income families, you can get some of your Perkins loans forgiven. It’s 15% of your loan for the first and second years, 20% for the third and fourth years, and 30% for the fifth. My sister may be in this program.

Volunteer Work

Those two programs have been getting most of the press lately but there are several other programs available. Here are some of the other options:

• AmeriCorps: Receive $7400 in stipends and $4725 towards your loans for 12 months of service.
• PeaceCorp: You can get deferment of your student loans and partial cancellation of Perkins Loans, 15% per year of service up to 70%.
• Volunteers in Service to America (VISTA): $4725 for 1700 hours of service.

In addition to the programs mentioned here, there are many more specific programs.

Additional resources:

• Public Service Loan Forgiveness [IBRinfo, nonprofit, nonpartisan Project on Student Debt]
• TEACH Grant Program [Federal Student Aid, office of the US Dept. of Education]
• Loan Forgiveness [FinAid.org]