Towards the end of 2012, President Obama introduced a new student loan repayment program called: Pay as You Earn. It was activated on December 21, 2012, for all eligible borrowers.
Here is the information on the repayment plan according to the Department of Education:
To qualify for Pay As You Earn, you must have a partial financial hardship. You have a partial financial hardship if the monthly amount you would be required to pay on your eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under Pay As You Earn.
For this purpose, your eligible student loans include all of your William D. Ford Federal Direct Loan (Direct Loan) Program loans that are eligible for Pay As You Earn, as well as certain types of Federal Family Education Loan (FFEL) Program loans. Although your FFEL Program loans cannot be repaid under Pay As You Earn, the following types of FFEL Program loans are counted in determining whether you have a partial financial hardship: Subsidized and Unsubsidized Federal Stafford Loans Federal PLUS Loans made to graduate or professional students Federal Consolidation Loans that did not repay any PLUS loans for parents
You also must be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You are a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan as of Oct. 1, 2007, or had no outstanding balance on a Direct Loan or FFEL Program loan when you received a new loan on or after Oct. 1, 2007. Your payment amount may increase or decrease each year based on your income and family size. Once you’ve initially qualified for Pay As You Earn, you may continue to make payments under the plan even if you no longer have a partial financial hardship.
Under this plan your monthly payments will be capped at 10% of your discretionary income. What is discretionary income? As defined by ED: “Your income minus the poverty guidelines for your family size.”
Here is an example if you are a family of 4 and your income is $50,000 annually. You would take $50,000, subtract the poverty level for your family size, which is $23,550, and your remaining “discretionary income” is $26,450. $26,450 divided by 12 months is $2,204. So under the “Pay As You Earn” scenario your monthly loan payments would be capped at 10% of this discretionary income or $220 per month.
Another advantage of this plan is that if you make 20 years of consecutive on time monthly payments under this program, the remaining amount of your student loans will be forgiven.
20 years is a long time…
The Bottom Line
This new repayment program only scratches the surface of the real problem with student loans: high college costs and students having zero financial sense.
It does however, give some respite for families who are struggling under the burden of student loan repayment. It may not help you pay off your student loans any faster, but it may help ease your monthly budget. Especially if you have a large family size, as your discretionary income fluctuates based on the poverty guidelines for family size.
If you are wavering on whether to switch to this new repayment plan or not, you can use the handy calculator at the Department of Education’s website, and it will tell you if this new repayment plan will save you any money or not.
Do you think this is worth a try? Or this just another government bailout is disguise?
I will assume that we are all aware of the current student loan crisis. You might have heard the term “student loan bubble?” This term was created because, just like the housing bubble, student loans were given out in excess to students who had no means of paying these loans back. Now these students have graduated and are struggling to find a job in a sluggish economy. Students are behind on loan payments, and student loan lenders are buckling under a mountain of defaulted student loan debt. Just as the housing market did in 2008, the student loan bubble is on the verge of bursting.
Unfortunately, I do not think there is any way to stop this “bubble” from bursting. The damage is already done. Billions of dollars in student loans are now on the books, and unlike a mortgage, many of these student loans cannot even be discharged in bankruptcy. In fact, student loan debt just recently surpassed the total credit card debt in the United States and continues to rise to shockingly unsafe levels.
What have we gotten ourselves into?
A Way Out?
When the bubble bursts, and I don’t believe that event is too far into our future; students, legislators, lenders, and colleges and universities will all be clamoring for a solution to the problem.
The clearest solution I see to this problem is for colleges and universities to find an intersection of education and business.
In practice, I think that colleges and universities should be a hotbed for economic innovation. College students should be encouraged to develop their entrepreneurial mindsets while on campus. Corporations should be given access to students, and vice versa, so that both can learn from each other. After all, the point of a college degree is to get a job, right?
College career centers spend time and money trying to attract businesses to their doorsteps to hire college graduates, but what if these same corporations played an integral role in the fabric of the university.
I am not proposing that colleges and universities adopt a profit centered business model, but rather that students themselves adopt a business mindset.
The Business Mindset
A business, whether large or small, has to protect their bottom line. Any business owner understands that they have to meet certain profit margins to maintain a profit, and they need a certain gross income to meet their financial obligations. They cannot leverage themselves too thin, or they will not be able to pay their bills.
This same principle can be applied to students who are borrowing way more money than they need to fulfill their college goals. They are essentially leveraging themselves too thin, with no hope of being able to repay their bills.
College students with a solid understanding of business principles could easily relate their personal financial situation to that of a business. They will quickly see that they need to view their education and their student loans as an investment. If they treated themselves as a startup company, would they be able to secure funding to complete their education?
This simple shift in perspective could open up the eyes of many college students. I love NBC’s show “Shark Tank”. The “sharks” are brutally honest with the entrepreneurs who come on the show because they know what it takes to succeed in business. They understand what constitutes a good and profitable investment. College students need to have the same view of their education and their future career goals.
The question is: “How can you as a college student ensure that your education is a solid investment?”
This question should drive your education, and be the basis for the decisions you make in your career. After all, you likely have a mountain of student loan debt following you that is more than happy to bury you if you stumble.
The college rankng system of the U.S. News and World Report has been the industry standard for many years. Conventional wisdom says that if you want to know what the best colleges in the U.S. are, you should look no further than the top of their list.
However, with many students disgruntled at the methodology behind the U.S. News and World Report ranking system, a new ranking system has emerged to challenge this paradigm.
Enter The Washington Monthly College Guide and Rankings. Their mission as stated in their methodology:
Unlike U.S. News and World Report and similar guides, this one asks not what colleges can do for you, but what colleges are doing for the country. Are they educating low-income students, or just catering to the affluent? Are they improving the quality of their teaching, or ducking accountability for it? Are they trying to become more productive—and if so, why is average tuition rising faster than health care costs? Every year we lavish billions of tax dollars and other public benefits on institutions of higher learning. This guide asks: Are we getting the most for our money?
So rather than selfishly asking what a college can do for you, this guide looks at what a college does to positive impact the nation it supports.
Antithesis of US News and World Report
The US News and World Report college ranking system has become the industry standard. In recent years however, their methodology has come under fire as being to much of a “good ‘ol boy” system. For example, within the methodology of determining their ranking system, they give a full 25% to peer rankings. So for example, if you me and 3 other of our buddies were all college presidents, we could all get together and be sure to vote each other’s colleges very high. This rating would then be used as 25% of the overall score for the college. Does that seem fair to you?
Methodology aside, the US News and World Report does not address the ability of a college to get their students employed. It does not measure the effectiveness of teaching. Like Bill Gates previously said: “The control metric shouldn’t be that kids aren’t so qualified. It should be whether colleges are doing their job to teach them. I bet there are community colleges and other colleges that do a good job in that area, but US News & World Report rankings pushes you away from that.”
What is Your Criteria?
If you are currently evaluating college admissions letters what are your top criteria for choosing which college to go to?
Be sure to think about how good of a job your college does at giving back to the community.
How well will they prepare you for the work force (that is after all, the main purpose of getting a college education right?)
Do they excel at teaching?
What is the average student loan debt of graduates?
When the dreaded “Sequester” deadline was passed on March 1st, we all thought the financial world might implode. Many politicians painted a dreary picture for the future state of our economy, and government frustration was at an all time high. Then the fallout of the sequester began to take shape.
One of the worst impacts of the sequester was the elimination of the Tuition Assistant (TA) Program for the United States Military. Separate from the G.I. Bill, the TA program provided up to $4,500 per year for active duty soldiers to take classes. Over 870,000 courses were taken last year by soldiers in this very popular program.
Needless to say the outcry was quick, and powerful.
The military was in a fury over this, and the general public was also rightly outraged. How are we showing support to our military if we cut the funding necessary for them to further their education?
Where Do We Go From Here?
Not even 3 full weeks later, and Sen. Kay Hagan from North Carolina passed a continuing resolution through the Senate that reinstated the Tuition Assistant program for active duty military under the Department of Defense.
So the program is back on, and soldiers can continue taking their courses.
What can we learn from all of this?
- It’s best to have a back up plan!
- Diversification is key
- Financial Aid can be fickle
As we are all well aware, it is tax time again…
If you, your spouse, or one of your dependents attended an institute of higher education this past year, they should have received a 1098T tax from from their school. **Many schools make these available online, and do not mail them out, so please check your school’s online portal if you have not received one**
The 1098T is used to qualify for the American Opportunity Credit and the Lifetime Learning Credit: http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center
One important point to note is that the majority of colleges and universities report qualified tuition and related expenses based on when the amounts were “billed” as opposed to when they were actually paid. This may cause a headache for you when filing your taxes because you will likely want to file based on how much and when you actually paid the expenses. It is ok to do this, but you must figure out the exact amount of “qualified” expenses versus non-qualified expenses, and file accordingly.
In the end, it is often easier to simply file according to how the 1098T is reported from your school.
In the end however, the 1098T is only for informational purposes, and you can do with the form what you would like. Yes, it is submitted to the IRS, but many people do not claim their education deductions strictly according to the 1098T.
For a sample form, and an explanation of each of the boxes you will see on your form, please see below!
Instructions for Student
Box 1. Shows the total payments received in 2012 from any source for qualified tuition and related expenses less any reimbursements or refunds made during 2012 that relate to those payments received during 2012. Please note, Box 1 may be intentionally left blank. Many colleges reports tuition billed and not payments received. For information regarding total payments made to your student account, please see the supplemental information accompanying your 1098T.
Box 2. Shows the total amounts billed in 2012 for qualified tuition and related expenses less any reductions in charges made during 2012 that relate to those amounts billed during 2012.
Box 3. Shows whether your institution changed its method of reporting for 2012. It has changed its method of reporting if the method (payments received or amounts billed) used for 2012 is different than the reporting method used for 2011. You should be aware of this change in figuring your education credits. The credits are allowable only for amounts actually paid during the year and not amounts reported as billed, but not paid, during the year.
Box 4. Shows any adjustment made for a prior year for qualified tuition and related expenses that were reported on a prior year Form 1098-T. This amount may reduce any allowable education credit that you claimed for the prior year (may result in an increase in tax liability for the year of the refund). See “recapture” in the index to Pub. 970 to report a reduction in your education credit or tuition and fees deduction.
Box 5. Shows the total of all scholarships or grants administered and processed by the eligible educational institution. The amount of scholarships or grants for the calendar year (including those not reported by the institution) may reduce the amount of the education credit you claim for the year.
Box 6. Shows adjustments to scholarships or grants for a prior year. This amount may affect the amount of any allowable tuition and fees deduction or education credit that you claimed for the prior year. You may have to file an amended income tax return (Form 1040X) for the prior year.
Box 7. Shows whether the amount in box 1 or 2 includes amounts for an academic period beginning January-March 2013. See Pub. 970 for how to report these amounts.
Box 8. Shows whether you are considered to be carrying at least one-half the normal full-time workload for your course of study at the reporting institution. If you are at least a half-time student for at least one academic period that begins during the year, you meet one of the requirements for the American opportunity credit. You do not have to meet the workload requirement to qualify for the lifetime learning credit.
Box 9. Shows whether you are considered to be enrolled in a program leading to a graduate degree, graduate-level certificate, or other recognized graduate-level educational credential.
Box 10. Shows the total amount of reimbursements or refunds of qualified tuition and related expenses made by an insurer. The amount of reimbursements or refunds for the calendar year may reduce the amount of any education credit you can claim for the year (may result in an increase in tax liability for the year of the refund).