Student Loan Dodgers

How early is too early to start planning for college? Some financial advisors say that it’s never too early. For parents and parents-to-be who are savers, the only thing you’ll need to take advantage of the tax-deferred college savings plans is the baby!

Federal law requires that all beneficiaries have a birth date and a social security number. If you’re anxious to get started before the baby arrives, you’ll have to make due with plain old, taxable savings accounts. You could also buy savings bonds or treasury securities. While they’re not tax-free, they do have tax advantages of their own.

If you’re not familiar with 529 plans, their name refers to the section of the IRS code that describes them. They’re basically tax-deferred savings accounts that are set up to benefit a particular individual. An individual can be named the beneficiary of multiple accounts.

Most states have elected to set up 529 plans, but there’s no requirement that you participate in your own state’s savings plan. Participating in your state’s plan may offer you additional tax benefits that you will not get if you participate in a different state’s plan.

Pre-paid tuition plans offer another option. Thirteen states offer a pre-paid tuition contract, where parents can purchase a defined number of semesters of college tuition. The tuition contract can be paid at once or over a period of years. Once the contract is paid off, the beneficiary will have the contracted number of semesters paid for as long as s/he attends one of the schools covered by the plan.

In addition to the thirteen state plans, parents can also fund an “independent 529″ plan, that enables their children to attend one of 270 participating private universities or colleges on a pre-paid tuition contract. One caveat with the Independent 529 plan: the contributions for an independent 529 plan may not cover the full cost of attending one of the participating universities.

One thing is certain, however. Saving for college is much easier when time is on your side. The earlier parents start planning for college, the more likely they are to amass the money their children need to attend a university.

If you’re considering going to college - for the first, second or third time - it makes sense to spend a bit of time thinking and planning before you commit to going to school in a particular location.

Keep in mind that staying close to home will always be the least expensive route. Your tax dollars (and those of your parents) have funded the state universities, colleges and community colleges around you. As a state resident, your tuition rate will be less expensive, and that will make a big difference when you’ve graduated and it comes time to pay off your student loans.

Keep in mind that Federal loans can’t be used to cover living expenses, so carefully consider the colleges that are near your home. You may overlook these institutions because they’re “familiar” to you, but staying in your own back yard may be one of the best financial moves you can make. Commuting will also save you a bundle because it reduces your costs to tuition, fees, books and transportation.

Look carefully at the “scholarship” packages you’re offered. If an institution will cost $50,000 per year to attend, and you’re offered a 50% scholarship, you’ll need to determine whether or not you can really afford the remaining $25,000 bill. $25,000 is a big chunk of change, but if you don’t have it, and can’t pay back $100,000 after college, you’re better off looking at lower-cost schools.

Look carefully at your major. If you can only reasonably expect to make $30,000 right out of college, borrowing $100,000 isn’t really in your best interest. Get realistic about what you will be making after college. The Bureau of Labor Statistics can give you an idea of what people currently working in your field are making, but keep in mind that the statistics are an average of all persons in the field. Starting salaries are going to be lower, and may even be below average.

If you’re interested in science, technology, engineering or mathematics, your country needs you! According to the results of a 2005 study, more than one in five American college freshmen enrolls in a remedial mathematics course in college, and the proportion of degrees in science, math and engineering awarded to American students is dropping.

In contrast, students from other countries where math and science are emphasized in elementary and secondary schools, the proportion of students who go on to receive degrees in math and science is much higher. Additionally, the demand for skilled graduates in the sciences, engineering and mathematics fields is steady. Employers are increasingly forced to hire foreign workers to fill these positions because no fewer qualified American graduates are available.

Some colleges and universities are responding by redesigning their mathematics curriculum to appeal to American students and to improve their success in mathematics. One such campus, the University of Missouri- St. Louis, redesigned its college algebra program and has increased its student success rate without making the course less challenging.

As part of the redesign, the University’s introductory college algebra course was converted from a three-lecture-per-week format to a single lecture per week and two one-hour laboratory periods where students work on algebraic concepts, using math software designed to challenge and engage students. The software in the mathematics labs provides instant feedback so students know when they understand the concepts being presented. Over a three-year period, student success in the algebra course increased from about 55 percent to 75 percent.

Currently, middle school and secondary school mathematics teachers are in high demand. Some school districts are paying bonuses to recruit and retain qualified high school mathematics teachers, and those graduates who opt to teach in high-need areas are eligible for Federal student loan forgiveness. If you have an aptitude for mathematics, and can apply your skills in a science, engineering or mathematics field, you may find yourself in a career that provides multiple rewards.

Every year, students by the thousands look for funding opportunities for their educations. In some cases, opportunities to pay for education outright or receive reimbursements and credits go unused. When looking for college funding, don’t overlook these opportunities;

Employer programs: some employers offer tuition reimbursement plans to their employees and dependents. If you’re employed as a student, check with your employer to see if a tuition reimbursement benefit may apply to you. Likewise, some employers provide tuition reimbursement plans for dependents of their employees.

Loan forgiveness programs: generally speaking, it’s a bad idea to choose a major based on the availability of loan forgiveness programs, but if you’re considering a major that will lead to public service work, understand that there are several state and Federal loan forgiveness programs that may help reduce your student loan debt. These programs rely on you to fulfill a work commitment of a certain number of years, in some cases as much as ten years. You’ll also need to make regular student loan payments during the period of time you’re amassing your eligibility. If you’re not prepared to make the commitment to public service, you’re better off not seeking loan forgiveness under these programs. These programs generally don’t provide “partial credit” for public service work that falls short of the required time commitment.

Tuition reductions and waivers: Some state programs offer tuition reductions and waivers for certain students. For example, some states offer tuition waivers for Native American students, low-income students, and other students that meet certain guidelines. If you qualify for a waiver of some type, you should apply to take advantage of it.

Tax credits and tax deductions: College students, their parents and graduates may be eligible for certain types of tax credits and deductions related to higher education expenses. The government offers Hope and Lifelong Learning credits to qualified individuals, and tax deductions for qualified higher education expenses that are not otherwise reimbursed by an employer.

Scholarships and grants: the number of students seeking financial aid has increased substantially, and it is becoming more difficult to find scholarships that can help defray the cost of education. Visit your institution’s library to see if they maintain a section on scholarship resources for students. Research grant opportunities carefully and apply only for those you think you have the best shot at getting. Be diligent and persistent. Over time, you may find that you can lower your tuition bill substantially with several small grants each semester. You may not end up with a free ride, but anything that lowers your bottom line at no cost to you is a plus.

For some students, four years of a college education is simply too much to afford. Accelerating their college career can reduce the amount of time spent in the classroom, which reduces the overall cost of college. How do they do it?

For many students, the three-year journey through college starts in high school. High school students can accumulate college credits by taking and scoring well on Advanced Placement examinations. Generally, the cost of an AP exam is less than the cost of a college course, and for public school students, the cost of instruction is generally free.

Another way to accumulate college credits is to take courses online. Many colleges and universities are now offering online courses in both major subjects and to fulfill general education requirements. The advantage of online courses is that students can log on at convenient times to complete their work, and can take courses during the spring and summer semesters without having to be on campus.

For students who will be around, the Spring and Summer semesters present a great opportunity to grab a few extra classes at lower tuition rates. Spring-Summer classes usually take half of a semester to complete and offer the same number of credits toward graduation.

Some institutions offer compressed classes that can be completed in the space of one or two weeks. These intensive 40-hour per week classes are often offered to graduate students, but some undergrad programs also feature these high-intensity courses.

Another great opportunity to get college credits is to take classes at a local community college and transfer the credits back to your home institution. You’ll need to work with an academic advisor to make sure the credit transfers, but this can be a good way to clear out general education and foreign language requirements for a fraction of the cost of the same courses at the university.

If your child isn’t near college age, you still have time to plan for Junior’s post-secondary education. The Federal government has created savings vehicles that will help parents pay for college. The 529 and 530 accounts can be used to pay the cost of a college education and come with tax benefits not available with other savings vehicles. In addition, at least thirteen states offer pre-paid tuition contracts that enable parents to lock in the cost of tuition.

Parents worry that saving too much will mean that Junior won’t be eligible for financial aid. For need-based aid, that may be true, however the amount of need-based aid has been dropping steadily for the past decade or more.

With fewer need-based or income-based aid programs available, Junior is not likely to be eligible for need-based aid anyway, unless the family’s income meets strict low-income guidelines. Many parents make the mistake of thinking that the less they save, the more need they’ll be able to show when it comes time to fill out the Federal financial aid application. That’s not exactly true. Lack of savings doesn’t translate into “need” in most cases. The more likely outcome of reduced savings is increased student loans.

For example, Duke University reports that about 40% of its undergraduate students qualified for need-based aid in the 2004-05 school year. The median family income for qualifying students was $86,000. Adjusted for inflation, in 2007 dollars, that would be nearly $97,000. The university also reports that some students with high family incomes (in excess of $150,000 - $169,000 in 2007 dollars) received some need-based aid due to extenuating circumstances. Need-based aid is not limited to grants. It also includes certain types of loans.

The Federal student aid formula takes into account the cost of the institution, the income of the student, the income of the family, savings, awarded scholarships, the number of college-age students in the family, and family hardships such as long-term or catastrophic medical illness. Students with extremely low incomes – less than $40,000 ($45,000 in 2007 dollars) – were offered more grants and fewer loans. The point I’m making is that unless your family finances are minimally north of the poverty line, you’re much better off saving money in a college account of some type than you are hoping that you’ll receive grants.

The most important lesson here is that “need-based aid” doesn’t always mean “free money.” More often than not, it means subsidized Stafford Loans that must be repaid. In the long run, your student will leave college with fewer loans and a better opportunity to benefit sooner from his or her college education by using private funds saved in a 529 or 530 account, or by using a pre-paid tuition contract.

Summer is prime time for student financial aid concerns. Students who are attending college for the first time are scrambling to get loans and aid in place before the start of the Fall semester. Federal and state departments, banks and private lenders are working to review applications and disburse funds before September.

Little attention is being paid to the cost of university expenses, which drive the ever-increasing need for financial aid. State colleges and universities are often pressured to keep tuition raises low, but face the prospect of stagnating or decreasing state aid. Therefore, the spiraling cost of education often falls on the students in the form of increased tuition.

How can students combat the high cost of tuition? A number of approaches can be used successfully to cushion the impact of college tuition increases. If time is on your side, saving for college is one of the best ways to reduce the need for aid. By using a 529 plan, parents can make regular contributions to a special savings account that is designated for qualified post-secondary education expenses. The accounts can be opened as soon as the child has a Social Security number, and have extremely high contribution limits. Contributions are made post-tax, and the accumulations can be tax-free, provided that they’re used for qualified educational expenses.

Taking money from a 529 savings plan amounts to using “free” money. It reduces the amount of aid a student needs and can be used for tuition, room and board, books, and fees. In other words, there is a broader range of “qualified” educational expenses that qualify for favorable tax treatment under 529 plans.

Using proceeds from the sale of savings bonds can also garner favorable tax treatment, but again, special rules apply regarding how the money can be spent. Consult a tax advisor or the IRS Web site for more information on tax breaks available for savings bonds.

Resident tuition rates at public universities and colleges are lower than non-resident rates. Attending local public universities is a great way to reduce the cost of going to college. Likewise, studying at a two-year college and transferring credits to a four-year institution can substantially reduce the cost of getting a four-year degree.

Borrowing to cover the cost of educational expenses and working to cover the cost of living is also another strategy that can reduce the amount of loan debt a student needs to take on. Before school starts in the Fall, make a budget that shows expected expenses and determine how much income and aid are needed to cover those costs. Stick to the budget as much as possible and develop a plan for covering unexpected expenses before leaving home in September.

A recent study by GfK Roper Public Affairs and Media shows that 35% of Americans admit to carrying a balance on their credit cards, while studies by the Federal Reserve board and data released by credit card companies show that the actual number is nearly 50%.

A study by the Consumer Federation of America and Washington Mutual Bank showed that 66% of its 1,000 respondents carried a balance on at least one credit card. The CFA/WaMu study also showed that less than one-third of Americans understand the meaning of a credit score; fewer than 3 in 10 respondents knew that a credit score of at least 700 is needed for a low-rate mortgage; and more than one-third of respondents didn’t know that other industries, like insurance companies, use credit scores to determine coverage rates.

Lack of information can profoundly affect a consumer’s ability to get credit. More than 40% of consumers don’t understand that maxing out a credit card will lower a person’s credit score. Other additional trouble spots include not understanding that interest rates are often pegged to credit scores and that multiple applications for credit in a short period of time can lower the applicant’s chances of getting credit.

With so many people unsure of what their credit score is and how it affects them, one of the best things that new consumers (especially students) can do is spend some time learning about their credit scores and finding out what helps and what hurts. In most cases, knowledge is the key to developing sound financial habits. Unfortunately for most borrowers, although the information is widely available, few actually take the time to read what’s available and fewer still analyze the information to determine its impact.

If you’re just learning financial management, a good place to start is the student financial aid office. Since most of your heavy-duty borrowing will be related to your student loans, the financial aid office may have ready resources to help you understand what you’re borrowing and how those sums will accumulate over time. They can also provide information on how to limit your need to borrow and direct you to other sources of money for your education.

The next stop should be your bank or credit union. Often, these organizations will hold mini-seminars and financial planning workshops to help you understand how you can use their services to better manage your money. As a student, your institution may also offer a personal financial planning course that may assist you in understanding credit, debt and money management.

For some families with college –bound students, the question of room-and-board is converted to the question of whether it’s better to rent or buy. In certain college markets, renting a place to live close to campus is so expensive that buying a condo or home nearby makes more financial sense, even when real estate taxes, insurance, maintenance, upkeep and utilities are taken into account.

If you think your college town might fall into this category, do a little research to compare average rental and mortgage prices for properties in the area you wish to live in. Don’t forget to look at taxes and insurance. In some areas, property taxes are higher on rental properties. Another area of offset might be utilities. Apartments sometimes include utilities costs in the rent. The cost of transportation is also a factor, if the property isn’t close to campus.

You can offset the cost of the mortgage by renting extra rooms out to friends. This can be a tough call, since friends don’t always make the best roommates. You’ll also need to understand the real estate market in the area in which you’re buying. If real estate values are holding steady or even rising in the area, selling the property when you’re finished with it will be easier and will likely mean that you’ll recover some of your mortgage payments. On the other hand, if the market is down or stagnant, selling may not be possible, and you’ll be renting out the property from afar.

You won’t really know whether you’re coming out ahead in a rent-v-buy arrangement until after the fact, but owning an address in town could give you residential tuition rates if you’re attending an out-of-state public institution. Residential tuition rates can be substantially lower than out-of-state rates and the opportunity to take advantage of them shouldn’t be overlooked in the decision to rent-v-buy.

Another good argument for buying can be made by parents who have more than one child attending the same institution. It’s a convenient way to extend the family household and make a good investment at the same time.

Your college career can last for several years, and it’s a good bet that you’ll be taking student loans at some point. If you’re a smart borrower, you’ll want to keep tabs on your loan balances, and have some idea of what your monthly payments will be when you graduate.

CollegeInColorado.org provides a calculator to help you do just that. The calculator can help you determine what your loan balances are, the rates at which your loans accrue interest, and how much you can expect to earn (and pay) after graduation.

Knowing where you stand when it comes to borrowing, and understanding how your loan balances change as interest accrues will help you keep a good perspective on how much you owe, and how much you’ll need to make to cover your loan payments after you graduate.

As you work your way through college, try to keep your borrowing to a minimum. As always, exhaust all of your Federal borrowing options first. Be diligent about searching for scholarships and grants. Even small grants can translate to big savings when it comes to reducing the amount of borrowing you need to do. Borrow only what you need to get through school. For day-to-day expenses, use personal savings or take a part-time job.

Finally, don’t forget that credit card purchases are a form of borrowing. The purchases you make on a credit card will carry a high interest rate if you don’t pay the balance off in full at the end of each billing Avoid making purchases on credit. If you can’t do that, keep your credit purchases small and pay your balance off at the end of the month. If you’re using your credit card to cover purchases that your income doesn’t, you need to rethink your monthly budget. Remember: you can’t get ahead by running up your credit card balance!