Before College: Students Needn’t Borrow Loan Dollars Just Because They’re Offered

Soon it’ll be March, the month during which America’s colleges and universities begin making financial aid offers to prospective freshmen and transfer students. For many such students, how they respond to these offers is the first step toward helping themselves graduate with less debt.

Last month we discussed net price — the costs a student must pay to attend a postsecondary institution minus the student’s grants, scholarships and tuition waivers.

Most undergraduates rely on a number of financial resources to cover their net prices. These include private scholarship funds, contributions from parents and other family members, their own savings, and money they earn through part-time jobs, etc. Amounts students and, sometimes, their parents borrow in various federal loans are also included.

The financial aid packages postsecondary schools offer students generally include loans from the Federal Direct Loan Program (FDLP). A few schools also offer the FDLP’s Parent PLUS Loans to parents of their dependent undergraduates.

Schools generally put the maximum loan amounts for which students are eligible in their aid offers. But understand this, because it’s critical — students are never required to accept a single penny of the loans they’re offered. Electronic and paper documents bearing financial aid offers usually include instructions about how to downsize or totally reject the loans in those offers.

. . . students are never required to accept a single penny of the loans they’re offered.

If students subsequently discover they need some or all of the loan amounts they once nixed, they can contact their financial aid offices and almost always get those funds reinstated.

All students, but especially those who pass up loans, should try to keep their actual expenditures below the average enrollment-related costs their institutions publish. So they need to establish and update spending plans to control what they shell out for tuition, personal, recreational, textbook, transportation and other expenses.

Those forgoing loan funds may also need to maximize funding from their other financial resources (described above).

If a student can borrow less, the first loan she should downsize or cancel is any FDLP Unsubsidized Loan she’s been offered. Why? Because, unlike FDLP Subsidized Loans, interest on Unsubsidized debt begins accumulating the day the money is released for the borrower. It then gets added to principal when repayment begins. The result is that every $100 in Unsubsidized Loans the typical freshman borrows at this year’s interest rate will cost her as much as an extra $168 by the time she finishes paying off her FDLP debt.

Students need think very carefully before accepting any of the loans they’re offered. If borrow they must, they should borrow only what’s absolutely necessary. These steps are sure ways to keep postsecondary learning as affordable as possible!

Need help analyzing your financial aid offers? Contact College Affordability Solutions for a free consultation.

After College: Use the Tools Available to You to Avoid and Resolve Student Loan Delinquency

The Federal Reserve reports that 9.08% of America’s student loan dollars are “seriously delinquent” — meaning their borrowers are 90 or more days behind on repaying them. You want to stay far away from any delinquency, especially serious delinquency. Fortunately, there tools to help do this.

Why should you care? The serious delinquency rate on student loans — which make up 45% of the federal government’s assets — is almost twice as high as on credit cards (4.49%).

So not surprisingly, you’ll face increasingly serious consequences at every stage of delinquency. In the federal programs, for example, you become delinquent after failing to make all or part of a required monthly payment within 30 days of its due date. You then immediately become liable for a 6% late fee on your delinquent debt.

Ninety days into delinquency, your tardiness is reported to all 3 major national credit bureaus, dropping your credit score and making it difficult to get consumer credit — auto loans, credit cards, mortgages, etc. If you do obtain such credit, your interest rate will be higher than that charged to your friends with better credit scores.

You default when you’re 270 days delinquent on your federal student loans. Now you’re obligated to repay your whole debt immediately. Washington hires high-pressure collection agencies to collect that debt. It also confiscates anything it owes you (tax returns, social security payments, etc.) and it may require your employer to divert up to 15% of your paycheck — all to repay your default. Finally, you lose driving, fishing, hunting, and/or occupational licenses in up to 20 states.

Ironically, almost every student loan borrower can avoid delinquency. Hiding from your loan servicer when you can’t pay seems natural but, to be blunt, it’s really stupid. Always contact your servicer and ask how to avoid or fix your delinquency.

Federal student loans, for instance, offer you several anti-delinquency tools:

Set up automatic monthly payments so forgetting your payment due date will never be a problem; and

Make a prepayment, if possible, for upcoming months in which you won’t be able to pay.

And if you’ve not yet defaulted:

Switch your payment due date if the current one doesn’t work — and if your servicer permits;

Change your repayment plan, reducing your monthly payment amount by taking more months to repay;

Borrow a consolidation loan to qualify for a longer repayment period, decreasing what you pay per month; and

Get a deferment or forbearance to temporarily postpone or reduce your monthly payments.

Aggressively managing your student debt to avoid (or end) every delinquency will prevent hurtful penalties and, remember, that’s always a good thing for you!

We’re here to help you. Feel free to contact College Affordability Solutions for advice, at no-charge, on how to manage your student loan debt.

After College: A New Way to Ease Retirement Savings While Repaying Student Loans

Last week we reported that 44 million Americans are struggling to repay $1.5 trillion in student loan debt, that Millennials have the most college debt, and that 66% of that age group have nothing put away for retirement, while only 5% of them are are on track with their retirement savings.

If these numbers prove nothing else, it’s that saving for retirement and repaying student loans at the same time is difficult, if not impossible.

But a recent Internal Revenue Service (IRS) private letter ruling (PLR) can help fix this. The PLR offers links an employer’s 401(k) contributions for an employee to that employee’s student loan payments. For any pay period in which the employee spends at least 2% of her eligible compensation (usually her salary) repaying her postsecondary loans, her employer may contribute an amount equal to 5% of such compensation to her 401(k) plan

Here’s an example — a bachelor’s degree recipient owes $28,650 (the national average) on her student loans and earns an annual salary of $36,000. She pays $294 toward her student loans in each of her 12 monthly pay periods That’s way above 2% of her eligible compensation for each of those pay periods. So with IRS permission, her employer may contribute $150 a month (an amount equalling 5% of her eligible compensation) to her 401(k).

The PLR covers only the company that requested it, but it’s expected to motivate other employers — which offer 401(k) plans to 67% of workers — to seek IRS approval for similar arrangements.

Interested employees should consult their Human Resources offices, because the PLR can be helpful to both employees and employers.

The employee wins because:

• Her employer’s 5% contribution grows her 401(k) even her relatively high student loan payments severely limit her contributions to it;

• Those student loan payments reduce her college debt faster, helping her avoid close to $1,700 in interest expenses; and

• Her federal taxes are lowered because the IRS doesn’t tax employers’ 401(k) contributions, but it does tax some other fringe benefits, including student loan repayment assistance.

Her employer wins because it:

• Gains a tool for recruiting well-educated employees — 65% of today’s college graduates have student debt, 80% of them want student loan repayment options in their benefit packages, and 81% of all workers say retirement benefits are a major factor in choice of jobs;

• Creates an employee retention incentive, as oday’s workers say they’d switch employers for better retirement benefits; and

• Earns a tax deduction on its 401(k) contributions.

Employers that adopt/adapt the PLR can help curtail their employees’ struggles to both repay student loans and save for retirement. That’s a win-win for everyone!

Contact College Affordability Solutions for a free consultation if you’re looking for alternative strategies for managing your college debt.

Before and During College: Massive Student Debt Is Undercutting Millennials’ Financial Goals, But That Can Change!

By month’s end millions of college borrowers who graduated last spring will have made their first payments on their postsecondary debts. So College Affordability Solutions is designating this “Student Loans Month.”

Every Wednesday in February we’ll post an article about how to keep our national student loan crisis from becoming your personal student loan crisis. Today’s focus is on strategies to minimize borrowing.

First, some facts . . .

Student loans are the second largest form of U.S. consumer debt. They’ve more than doubled since 2010; 44.2 million Americans now owe a record $1.6 trillion on them.

Millennials (ages 30 – 39) owe the most on student loans, and their debts undercut their efforts to meet important financial goals. For example, while 89% of millennial renters hope to buy homes, 48% have nothing saved for down payments. Likewise, two-thirds of working millennials have no retirement savings.

Good news? The improving economy helped Americans borrow 15% less for college in 2017-18 than in 2010-11.

But the economy is undependable, so other strategies are needed. They fall into three categories:

Personal Strategies

Saving and investing as much as possible for college as early as possible helps families significantly reduce student borrowing.

Aggressively seeking scholarships before and during college also helps, as does part-time employment while in high school and college. When selecting schools, comparing financial aid offers and net prices is critical. Starting at community colleges can reduce student costs and indebtedness.

There are various ways to cut tuition, housing, textbook, transportation and other postsecondary costs. And those who graduate early or on-time not only enter the workforce and start making money faster, they also lower their educational costs and borrowing needs. Toward this end, students should earn college credits in high school and avoid dropping postsecondary courses they’ll need to take (and pay for) again.

Finally, everyone interested in curbing college debt should should push institutions and elected officials to implement strategies under their control.

Institutional Strategies

One academic year now costs an average of $17,930 at community colleges and $25,890 at public 4-year colleges. These institutions need to redouble their efforts to contain their charges for tuition, fees, books, class supplies, room, and board.

Governmental Strategies

State higher education appropriations remain $1,000 per student lower than before the Great Recession, so legislators should help limit tuition increases by boosting appropriations to their institutions.

From 2008 through 2018, public 4-year college tuition and fees rose 55%, causing net college prices to rise. Therefore, Congress and the legislatures need to significantly increase grant and scholarship appropriations to reverse this trend.

Today’s students borrow too much, but they don’t have to. Pursuing the personal and other strategies listed above can help downsize college costs and borrowing.

Want more information on strategies to limit reliance on debt to pay for higher learning? Contact College Affordability Solutions at (512) 366-5354 or to arrange face-to-face or telephone consultations, which we provide at no charge to students and families.