Before and During College: Students Should Avoid Extra Borrowing Costs by Graduating Before the 150% Rule Affects Them

Here’s a tale of two brothers. Their father died years ago, and while their mother wanted to help them pay for college, her annual income has always been too low for her to do so. Because they’re financially needy, Dick and Mark are among the postsecondary students who borrow over $20 billion in subsidized debt from the Federal Direct Loan Program (FDLP) every year.

Dick began borrowing these loans when his freshman year began in the fall of 2012. But the family’s finances were so shaky that he had to “stop out” of 3 times to college to work and earn money. And like the majority of undergraduates, Dick changed majors, causing him to stay in school for some extra semesters to complete additional classes his new major required.

Dick’s university defines the educational program for his major as a 4-year program. But it took Dick 6½ years to earn his bachelor’s degree.

Mark, who’s 7 years younger than Dick, begins college next fall. He needs all the financial aid he can get, too, including subsidized FDLP loans. He’ll find that these are the least expensive college loans available but, if he takes as long as Dick to graduate from the 4-year program for his major, his subsidized loans will be more expensive than they were for Dick.

What happened? In 2013, Congress changed a longstanding federal rule that made subsidized loans interest-free until their student borrowers completed the 6-month grace periods due to them after they leave school. The change Congress made created the “150% rule,” which limits subsidized FDLP interest-free periods to timeframes equaling 150% of the length of their educational programs.

The 150% rule affects undergraduates with no outstanding FDLP or Federal Family Education Loan debt on July 1, 2013. Dick owed on Federal Direct Loans he’d borrowed before that date, so he was unaffected. But Mark borrows his first Federal Direct Loan in a few months, so he is affected by the 150% rule.

It’s important for Mark to avoid doing what Dick did – i.e. taking more than 6 years to complete his 4-year educational program. If he doesn’t, he’ll be charged interest on his subsidized loans while still in school and/or during his grace period. At current interest rates, this could add no less than $620 to what Mark, and borrowers like him, end up repaying on their Federal Direct Loans.

The 150% rule makes college less, not more affordable. Today’s student borrowers, almost all of whom are subject to the 150% rule, need to complete their studies, graduate, and get into the workforce so they can afford to begin repaying interest as soon as possible.

Contact College Affordability Solutions if you ever want help figuring out how to keep your student loan borrowing costs as low as possible.


Before College: Games Colleges Play With Financial Aid Award Letters

Last spring, we published three articles about games colleges play in making financial aid offers and informing students of their tuition and other costs. Washington plays games, too, with TEACH Grants, which ultimately become expensive loans for most recipients.

Last week, National Public Radio ran a story about “award letters” colleges send students. It focused on a recent report, Decoding the Cost of College: The Case for Transparent Financial Aid Award Letters.

Based on an analysis of 515 award letters that different colleges sent high-need to undergraduates, the report listed seven frequent problems with those letters:

(1) Confusing Terminology: 455 that offered unsubsidized student loans used 134 different phrases and terms to describe them, including 24 that didn’t include the word loan.

(2) Omitted Student Costs: One-third contained no information on the costs students would pay at their colleges, making it impossible to determine whether the colleges were affordable.

(3) No Distinction Between Types of Financial Aid: 70% grouped all aid offers together and provided no guidance about the differences between grants, loans, scholarships, and work-study.

(4) Misleading Parent Loan Information: Almost 15% listed Federal Direct Parent PLUS Loans as awards just like they listed grants and scholarships, thereby making their aid offers appear more generous than they really were.

(5) Not Explaining Work-Study: Work-study offers part-time employment to financially needy students, but 70% of the letters that came from schools offering work-study neither defined nor explained the program.

(6) Inconsistent Bottom Line: Only 40% showed unmet need — how much cost would remain after financial aid offers was applied — and they calculated unmet need in 23 different ways.

(7) Missing and Misleading “Next Step” Information: Only about half told students how to accept or decline the financial aid they offered, and their policies about this were inconsistent.

Not every college sends award letters containing such deficiencies. However, colleges that do are, at the very least, close to being deceptive trade practices.

How should students react to such award letters? If possible, enroll elsewhere. Schools using such letters are either incompetent or underhanded. Either way, they can’t be trusted.

Or, if students must attend an institution supplying such letters, they or their parents should contact its financial aid office and demand to be clearly and fully informed about whatever is confusing or missing.

Students victimized by such award letters may also consider submitting complaints to the Federal Trade Commission. Sometimes it’s investigations result in complainants getting money back.

Financial aid award letters should never trick students into selecting schools they can’t afford without taking on giant debts. So check out these letters from top to bottom. And always beware!

Need help decoding financial aid award letters sent to you or a loved one? Contact College Affordability Solutions for a free consultation!

During College: Caught Up in a Financial Dilemma? Don’t Drop Out Without First Looking Into Micro-Grants!

Last week, Lynne and Michelle almost dropped out. Their roommate had just moved in with her boyfriend, so their basic expenses — groceries, rent, and utilities for the last two months of school — had to be split two ways instead of three. Each of them now needed almost $900 to cover her portion of those expenses.

The only way to get that kind of money appeared to be replacing their part-time jobs with full-time work. Tuition had sucked up all their grants and scholarships. They were maxed out on their annual eligibility for federal student loans. Lynne’s parents were deceased, Michelle was estranged from her family, so neither could call home for help.

But dropping out meant walking away from spring semester having made no progress toward their degrees. Both would need to retake, at full price, courses they were close to completing. And it was too late to get spring tuition refunds.

“There must be another way,” said Lynne, but neither knew how.

Then Michelle visited her academic advisor. She learned that several alumni had funded a “micro-grant” program designed to help students just like she and Lynne.

Not every postsecondary institution has micro-grants. But the numbers that do is growing. Colleges, and even some high schools with graduates in college, are using them to help resolve financial problems that would otherwise push students into abandoning school.

Small wonder. Years ago, research showed that financial difficulties are the top two reasons for dropping out. Now these problems are even more widespread. As many as 93% of postsecondary students average over $4,900 in unmet need — a particular problem for the growing numbers of low-income college students because they typically lack the financial backing of family “safety nets.”

Here’s what students facing even seemingly small financial difficulties should do if those predicaments are undermining their ability to persist and graduate:

• Begin at the financial aid office. It may not administer micro-grants (which sometimes go by other names on different campuses), but it’s staff should be able to point students toward those who do.

• Learn micro-grant limits. How big can they be? How often can students get them?

• Find out how to apply. Many programs require minimal documentation and paperwork so they can deliver needed funds fast.

• Learn what else is required. Some programs oblige grant recipients to undergo financial counseling in order to reduce future financial difficulties.

• No micro-grant program? At least check another possibility — low-interest, institutional emergency loans.

Micro-grants help thousands of students who suddenly can’t afford to get across the finish line. If they’re available and needed, they can stop financial crises from denying students their degrees.

Do financial difficulties stand between you or your loved ones and that postsecondary degree? Let College Affordability Solutions help you with free consultations. Contact us Monday through Friday from 9:00 am to 5:00 pm central time.

Before College: Can We Negotiate For Better Aid Offers to Make College More Affordable?

Sally and Steve Smith are a hardworking couple in their mid-50s supporting a household of four on $62,000/year. Their son Scott received financial aid offers from all three colleges that admitted him. But each leaves him with over $10,000 in unmet need, making them all unaffordable.

Borrowing large Federal Direct Parent PLUS Loans frightens the Smiths. “We’re not poor, but we do struggle to make ends meet,” says Steve. Sally adds, “We’ve saved up to help Scotty with college, but not enough. His sister will begin college in two years, and we’re not far from retirement.” Mike then poses a frequent question, “Can we negotiate better aid offers so we can afford at least one of these schools?”

The answer is, yes . . . sort of. But the Smiths need to remember six important things:

(1) Call it an appeal, not a negotiation. Colleges officials hate the word negotiation. And no offense to Scott, but his schools probably admitted several equally qualified students, so the Smiths don’t have much leverage.

(2). Act now! Appeals take time, and most admits must pay non-refundable enrollment deposits and accept their aid offers by May 1 or their schools cancel both their admission and aid.

(3) Submit the same appeal to all offices with aid for which Scott could qualify. The financial aid office administers need-based aid. Merit-based aid — which sometimes also requires financial need — may come from admissions or the college or academic department that admitted Scott. Check websites or call to find out.

(4) Appeal via letter or, if an office to which they’re appealing has one, its financial aid appeal form. Describe why Scott:

(a) Needs more need-based aid — i.e. why Sally and Steve can’t cover Scott’s Expected Family Contribution (EFC) and unmet need. This may be due to significant income reductions since tax year 2017, from which family 1040 data helped set Scott’s EFC. It may also be based on extraordinary but necessary expenses such as caring for elderly parents, unreimbursed catastrophic losses and uninsured medical expenses. Document all these with bills, third-party letters, pay stubs, receipts, 1040 forms, etc.

(b) Deserves more merit-based — submit proof of significant GPA or test improvements plus accomplishments Scott’s achieved since filing his admissions and institutional scholarship applications. The Smiths may also decide to submit aid offers from other schools, but they should be better offers from equally or higher-ranked schools.

(5) Calmly, honestly, rationally state their case. Administrators can’t act on sob stories, but they usually want to help students who match aid program rules.

(6) Don’t expect the moon. Successful appeals usually generate $5,000 or less in additional aid, largely because most schools’ freshman grant and scholarship dollars are already committed.

Need help building an appeal for more or better financial aid? Contact College Affordability Solutions for free consultations.

Before, During and After College: White House Proposals Would Slash and Burn Federal Student Aid

The Trump administration recently sent Congress it’s proposed 2019-20 federal budget and put forth a related proposal to reduce what graduate students and parents may borrow from the Federal Direct Loan Program (FDLP) to an undisclosed amount.

Education Secretary Betsy DeVos announced the budget plan would provide “freedom for America’s students to pursue their lifelong learning journeys in the ways and places that work best for them. . . .” And Ivanka Trump, who helped craft the loan reduction plan, said “we need to modernize our higher-education system to make it more affordable. . . .”

Unfortunately, these schemes would make postsecondary learning less, not more affordable. Specifics:

Federal Direct Loan Program (FDLP): Besides reducing graduate student and parent loans, under the president’s budget plan Americans borrowing their first FDLP loans after June 2020 would face:

Increased Borrowing Costs: The administration would end FDLP Subsidized loans on which no interest is charged until six months after their financially needy undergraduate borrowers leave school. At current interest rates, this would cause a typical undergraduate to repay at least 8% more than he now does.

Limited Repayment Options: All borrowers would be forced into a new Income-Driven Repayment (IDR) plan with payments equalling 12.5% of discretionary income (generally defined as AGI minus 150% of poverty level).

Loss of Loan Forgiveness: Public Service Loan Forgiveness would be eliminated, and IDR would forgive any undergraduate debts that might remain after 15 years of payment, while graduate students could get forgiven on on what they still owe after paying for 30 years. This means borrowers would pay more and have less forgiven.

Tuition and Fee Increases: The budget proposal would force postsecondary schools to pay the government for FDLP loans whose borrowers default. The exact amount of such payments is not yet set, but this would no doubt force many schools to raise their prices so they can set money aside for this purpose.

Federal Pell Grant: This year the maximum Pell Grant is $6,095. Next year it’ll be $6,195. The Trump team wants to cut this maximum by 17%, to $5,135, in 2020-21, with smaller Pell awards suffering proportionally similar cuts.

Nowadays, Pell Grants are for community college, university, and trade and technical school undergraduates whose families can cover just 22% or less of their postsecondary costs. While cutting Pell appropriations by 1%, the Trump budget would extend Pell eligibility to enrollees in short-term credentialing and licensing programs — diverting Pell funds that could otherwise go to high-need associate’s and bachelor’s degree students.

Federal Supplemental Educational Opportunity Grant (SEOG): The proposed budget would eliminate all $840 million in funding for the SEOG program, which targets extra grant funds to the poorest Pell recipient. These students typically receive the maximum Pell Grant. But the average public 4-year college costs covered by those grants have declined from 43% to 24% in 20 years, making SEOG more important than ever.

Federal Work-Study (FWS): Right now FWS matches what on and off-campus employers pay students for part-time jobs. This helps students borrow less, learn marketable skills and make professional contacts to use when applying to graduate schools or jobs after college. The budget proposal would slash FWS appropriations by 56%, from $1.13 billion this year to $500 million for 2019-20.

These changes have little chance of making their way into the federal budget, but Congress could weave them into the Higher Education Act, which it’s now working to rewrite. So students and parents may wants to contact their U.S. House members and Senators to share their thoughts on these proposals!

If you need more information, feel free to contact College Affordability Solutions.

Before College: Beware of Unmet Need

Michelle plans to begin college this fall. She’ll need help paying for it, so she’s now analyzing the financial aid offers that have arrived from the colleges and universities to which she’s been admitted. In doing so, there are three questions to answer about each school — what’s my net price, will I have unmet need, and how much will my unmet need be?

Unmet need has two components:

  • Costs — tuition, fees, books, supplies, room, board, travel between campus and home, and a reasonable personal expenses; and
  • Non-repayable financial resources available to the student — grants, scholarships, and Expected Family Contribution.

So at each school, Michelle’s unmet need is the gap between her costs and her non-repayable financial resources.

Unfortunately, for all but the wealthiest students, unmet need must play a significant role in college selection. The Center for Law and Social Policy recently found that among students at:

  • Public 2-year colleges, 71% had unmet need averaging $4,920;
  • Public 4-year colleges, 75% had unmet need averaging $9,134;
  • Private nonprofit colleges, 78% had unmet need averaging $13,844;
  • Private for-profit colleges, 93% had unmet need averaging $14,815.

Unfortunately, financial aid offers may arrive on “award letters” that don’t explicitly list unmet need. So Michelle needs to do some math to determine her unmet need at each college she’s considering.

If she’s facing significant unmet need at an institution she’d like to attend, Michelle has two options — increase her non-repayable financial resources and reduce her college-related expenses.

But these probably won’t not be enough, so hopefully the student loans and work-study opportunities Michelle’s been offered will fully substitute for her unmet need. If so, she should remember to borrow only what’s absolutely necessary to cover that need.

If loans and work-study won’t cover Michelle’s unmet need, or if Michelle doesn’t want to take on debt, she faces a potentially difficult decision — to attend another college where her unmet need is lower.

Michelle’s parents may also borrow a Federal Direct Parent PLUS Loan to eliminate what remains of her unmet need after her loans and work-study awards are factored in. Institutions seldom include PLUS Loans in their initial financial aid offers, so Michelle will likely need to contact the financial aid office to request such a loan.

The the top two reasons for undergraduates dropping out — having to work to earn money and the inability to pay tuition and fees — are proxies for unmet need. And students trying to stay in school despite large unmet needs are generating many of today’s largest college debts. So beware of any institution that would leave you with significant unmet need.

College Affordability Solutions offers free consultations to students and families trying to analyze the affordability of different colleges. Contact us if we can help you.

Before College: Comparatively Shop Before Finalizing College Selection

In November, Greg was accepted to two of his state’s leading public universities — Summit Tech, where his brother Rick is a senior; and Woods State, three hours from his hometown.

In early December, Greg’s parents drove to Summit City for some holiday shopping. Upon returning, they laughingly told Greg about surprising Rick and his girlfriend when, unannounced, they dropped by his apartment near campus. That’s when Greg decided to go to Woods State. “My parents,” he silently thought, “will never drive three hours to ‘drop in’ on me unannounced.”

Early this week, both institutions’ financial aid offers arrived. They’re very similar. In addition to grants and loans, each includes a four-year scholarship worth $5,000 a year.

But Greg’s already selected Woods State (“I want to go somewhere new,” he diplomatically told his parents). So Greg and his mom and dad only glanced at Summit State’s offer.

That’s too bad because, at this pivotal point in college selection, Greg and his parents skipped a crucial step — comparative shopping. By failing to carefully contrast schools and their aid offers, they overlooked some important information. For example:

• Summit Tech’s 2019-20 cost of attendance (COA) will be $25,000 — 10% less than Woods State’s COA. Should costs continue to grow at both schools by 7% per year (the average annual increase at American public universities since 1998), four years at Woods State will cost $12,000 more than at Summit Tech

• His “four-year” scholarships are renewed for upcoming academic years only if Greg meets certain standards listed in the fine print of his financial aid offers. These standards at Woods State include at least a 3.75 GPA, while Summit Tech requires a 3.25 GPA for renewal. Greg’s a good student, but he’s more likely to lose the Woods State scholarship after as little as one year, especially if, like most freshmen, he struggles with emotional, intellectual, and social adjustments that affect his first-year grades.

To comparatively shop for colleges:

• Use financial aid offers to determine the student’s net price at each school;

• Comprehensively review every financial aid offer to avoid the games colleges play when disclosing tuition and fees and other costs, when offering financial aid and when awarding Federal TEACH grants; and

• Take college and student fit into account to reduce the chances of transferring to another institution, which generates extra costs.

Most Americans compare price and other factors before purchasing automobiles. But because higher education is far more costly and important, never finalize college decisions without first comparatively shopping. It can save you a lot. And even if your choice of schools remains unchanged, you’ll have made a fully informed decision.

Contact College Affordability Solutions if you need help comparatively shopping for colleges. Students and parents are never charged for consultations with College Affordability Solutions.