Student Loan Dodgers

The new student loan legislation passed by Congress in August was just signed today by President Bush. Since the College Cost Reduction Act of 2007 is now authorized, it will provide student loan debt relief to students who choose to enter certain professions and remain employed in those professions for ten years.

During the ten year period, students who are employed as police officers, social workers, school librarians, government workers, members of the military, public defenders and prosecutors. Professionals in these occupations are in high demand, but the annual salary is typically low, the work is highly demanding, and the burnout rate is high.

During the ten years following school, these professionals must make regular student loan payments and the student loans must have been made through the Federal Direct Student Loan Program. Student Loans that were not made through the FLDP but are consolidated through the federal plan will be eligible for forgiveness, but payments made prior to the effective date of the law will not count toward the 10-year pay-off period.

The new student loan legislation also provides tuition relief for students who enter the teaching profession, but only for those who teach subjects in high demand, like math, science, foreign language or special education. The grants, which provide up to $4,000 per year are designated for graduates who are willing to teach for four years in areas where educators are in short supply. Graduates have eight years following graduation to fulfill their four-year commitment. If the commitment is not fulfilled, the grants convert to unsubsidized student loans and the borrower must pay back the student loan and all accrued interest.

These opportunities for tuition grants and debt relief will make it easier for students who are already interested in working in these fields to accept lower-paying jobs in the public sector, and teaching assignments in areas that they may not otherwise consider. Students who are simply looking for debt and tuition relief may not find these career choices attractive enough, even with the added incentives, to pursue these benefits.

Getting your first credit card is a significant event in the lives of most students. Unfortunately, most students don’t have much experience in the way of managing finances, so what seems like a great deal to start out with can quickly turn into a financial nightmare.

A credit card is really an unsecured loan by the card issuer to the credit card holder, or borrower. The issuer usually grants the borrower some grace period of anywhere between about three to four weeks to repay the balance due after the lender’s statement has been issued. If the borrower repays the loan immediately, the loan is interest-free.

The credit card statement contains a list of all of the charges the borrower has made since the last statement. It also contains the date on which payment is due, and the minimum payment the lender expects to receive. If payment in full is not received, a finance charge is tacked onto the purchases the borrower made during the statement period.

If the borrower accumulates unpaid charges over several months, the interest accumulates on previous purchases. Eventually, if insufficient payments are received or enough charges are accumulated, the borrower will reach his or her credit limit and the lender will not extend further credit to the borrower. The only way the borrower can get more credit is to pay back the amount owed.

When you have a credit card, it’s very tempting to use it to pay for things you don’t have the money for right now. This is a great way to get yourself into some long-term trouble, and jeopardize your credit history for several years to come. Credit card information (good and bad) stays on your credit history for seven years. Really bad information (a bankruptcy) stays on your credit history for ten years. Your credit history determines whether you’ll get additional credit cards, personal loans, a new car loan, a mortgage, good insurance rates, and in some cases, a job.

Take good care of your credit cards and use them to establish a good credit history. Don’t use your credit card to purchase things you don’t have the money for now. It’s a set-up that could negatively affect you for years to come.

There are several college savings programs parents and others can use to help fund a child’s college education. Most programs rely on the gift of time to make contributions grow, so if you’re short on time, these options won’t be of much help. On the other hand, if you have several years to save before a child starts college, 529 accounts can be of great value.

The so-called “529 plans” are state-sponsored after-tax college savings programs. Most states have given the gains on these plans special tax treatment, so most or all of the money earned in these vehicles can be used to defray the high cost of a college education. The “529″ refers to the section of the tax code that describes the program and its limitations.

Most states have taken advantage of the Federal tax code and have created savings plans for their residents. There’s no requirement that you participate in the 529 plan associated with your state, but you may receive additional favorable tax benefits if you choose your state’s plan. Favorable treatment could come in the form of additional tax deductions, or tax-free gains on the principal.

A 529 plan can be opened by anyone for the benefit of anyone else, regardless of relationship. The money that’s invested can be withdrawn at any time by the giver with no tax liabilities because the principal investments are all “after-tax” dollars.

The tax code imposes limits on the maximum investment that can be placed in the account, and limits how the untaxed proceeds can be spent. Gains cannot be withdrawn for non-qualified expenses without incurring a penalty. Generally, if the proceeds are used for qualified higher education expenses, there is no penalty on the withdrawal of fund proceeds.

Once you begin to spend the proceeds of a 529 account, you’ll need to keep careful records of your expenses. This includes not only your tuition, but also your room and board costs, books, fees, equipment and other qualified college expenses. You’ll need to account for these expenditures at tax time.

If you leave college with student loans, you’re not alone. Approximately two-thirds of all college financial aid packages include student loans in one form or another. The sharp increases in the cost of college education mean that many students need to take student loans or borrow more than they planned in order to finish college.

The double-digit increases in the year-to-year costs of college tuition means that as students borrow more to cover their educational expenses, the risk of student loan defaults increase. The default rate among FFELP lenders is relatively low – less than six percent. The rate of default among borrowers in the FDLP is higher, at points exceeding 20 percent.

Typically, lenders receive money from collections on defaulted student loans. Lenders want to help students avoid default, but they needed a mechanism to shift their revenues from defaulted loans to default avoidance in order to make that happen. Several years ago, Congress allowed the US Department of Education to experiment with Voluntary Flexible Agreements (VFA), which allow the D.O.E. and a few test lenders to modify their existing loan agreements and provide revenue for lenders that implement successful default avoidance strategies.

One of the strategies being employed by the lenders is a change in the communication between the lender and borrower during the six-month deferment period. Typically, lenders don’t communicate with borrowers in this period, waiting instead until the student loan has become delinquent to contact the borrower. By working with borrowers in the deferment period before any payments are due, the VFA lenders have been able to reduce delinquency and default rates on their student loans by nearly 50 percent, and the lenders have been able to shift some of their revenue from collections to default avoidance.

Most federally backed lenders don’t have VFAs. The best strategy to avoid defaulting on your student loans is to understand your loan terms and talk with your lender if you think you will not be able to begin loan payments as agreed. Your lender may have some flexibility in extending your deferment or may be able to help formulate a plan to avoid default on your student loan obligations.