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Category Archives: Student Loans

A New Student Loan REPAYE-ment Plan

You would be forgiven if you missed the news about a new Federal Student Loan repayment plan that went into effect mid-December last year.  After all, for some that time is finals week, others it’s Christmas break, there is shopping and family gatherings and all sorts of other things begging for our attention.  Hopefully, nearly a month and a half into 2016, you are back into the normal groove and feeling receptive toward some newish and potentially helpful student loan news.

December 17th 2015 was the date that a new repayment plan went into effect for federal student loan borrowers.  The new plan is called REPAYE, and can be considered a close relative to the existing PAYE income driven payment plan.  Each plan share similarities, but also have major differences which should be taken into consideration when trying to decide between the two.
Pay as You Earn vs. Revised Pay as You Earn
Let’s begin with the similarities.  They are both income driven plans, meaning, your income and household size are used to determine how much you will have to pay each month.  Income is evaluated on a yearly basis to determine if a new payment amount should be used.

They can be used to repay Direct Subsidized & Unsubsidized, Direct PLUS loans made to students, and Direct Consolidation Loans that do not contain PLUS loans to parents.  If you’re not sure what type of loans you have, visit www.NSLDS.ed.gov, select the “Financial Aid Review”, and login to review what types of loans you have.

If the loans are not repaid in the maximum repayment periods, a borrower may be held liable for the tax consequences of unpaid debt due to loan forgiveness, but both repayment plans are eligible for use when working towards the 10 year Public Service Loan Forgiveness (PSLF) plan.

Now let’s explore the differences between the two.
Firstly, the REPAYE plan does not require a financial hardship.  Anyone can apply and take advantage of the benefits.  Borrowers also do not have to be “new borrowers”, a classification based on the date the first Direct loans were received.  It doesn’t matter when your loans were received, you are eligible for the REPAYE plan.

Undergraduate and Graduate borrowers also get different maximum repayment periods.  Undergraduate, like with the PAYE plan, can take as long as 20 years to repay the loans.  Graduate borrowers however, get an additional 5 years, bringing the maximum repayment period up to 25 years.  As mentioned before, failure to pay off the loans in the maximum repayment periods will result in loan “forgiveness”, and taxation on the forgiven amount.

In the REPAYE plan, the “amount of your payment is 10% of your discretionary income” (see below for an explanation of discretionary income).  This is different from the PAYE plan, where the “maximum amount of your payment is 10% of your discretionary income”.  You may have noticed the lack of the word “maximum” in the REPAYE plan description.  Good on you, because that’s one of the key differences between these two plans.  Under the older PAYE plan your payments are capped, and you would never have a payment larger than the amount of a payment for the 10 year Standard Repayment Plan, no matter how much your income increased.  Under the REPAYE plan, there is no such cap.  Meaning, if your income increases significantly over the life of the loan (20-25 years), your payments will continue to grow.  The upside to that is, as you approach the end of the repayment period, you will likely have less debt to be forgiven than under the PAYE plan, and therefore a smaller tax liability.

Another difference, and arguably a disadvantage for married borrowers, is that REPAYE considers spousal income regardless if taxes are filed jointly or separately.  Since spousal income is always taken into consideration, this could increase a borrowers overall discretionary income, increasing the monthly payment amount.

And there you have it, a brief breakdown of the new REPAYE Federal Student Loan Repayment Plan, and how it differs from its cousin the PAYE plan.  I would encourage you to continue reading below for a quick breakdown on how discretionary income is calculated.  For more information about Income Driven Plans, please visit:
https://studentaid.ed.gov/sa/repay-loans/understand/plans

https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf
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What is discretionary income you ask?  It’s your Adjusted Gross Income (AGI – Found on your 1040 tax form) minus, 1.5 times the Federal Poverty Level for your Household size.

Household Size Poverty Level
1 $11,880
2 $16,020
3 $20,160
4 $24,300

Source: https://aspe.hhs.gov/poverty-guidelines

So, if your AGI is $18,000, and you are a single person without dependents (household size of 1), your discretionary income formula looks like this:
18,000 – 1.5*(11,880) = 18,000 – 17,820 = $180 discretionary income
Which makes for a very small monthly payment because, 10% of $180 is $18, and your monthly payment is $18/12 = $1.50.  Yes, one dollar and fifty cents is your estimated monthly payment, under the REPAYE plan with $18,000 annual AGI and a household size of one.
Something to consider about a payment this small is that interest will continue to accumulate as you go through the life of the loan, meaning the balance owed will increase significantly over what was originally borrowed.  If the loan can’t be repaid within the maximum allotted time, the tax liability due to loan forgiveness could be substantial.

Limiting Your Student Loan Liability

by Sasha Grabenstetter

With student loan debt topping $1.08 trillion as of December 31st, 2013 according to the Federal Reserve Bank of New York’s Quarterly Report, it has significantly surpassed credit card debt and become one of the most underestimated financial burdens that a young graduated can face. As a student, here are some ways to help yourself now while you’re still in college so that you don’t have to pay back so much more later:

  1. Know Your School Costs – As a student, it’s easy to forget how expensive a college education can be. Tuition, room and board, books, and school supplies can add up quickly, not to mention food and entertainment as well. Identifying these costs upfront can help to curb extra spending you may encounter. Knowing that your first freshman semester expenses were over $10,000 might make you rethink buying that late night pizza.
  2. Check Your Balance – Looking at your student loan balance may also entice you to stop adding more debt to your future self. If you don’t know what your balance is, check out the National Student Loan Data System, a website created to make students aware of their loans. Most college seniors go into exit counseling unaware of how much debt they racked up in the last four years.
  3. Limit the Amount Borrowed – Although this seems straight forward, lots of students are unaware that they don’t have to take the full amount awarded to them each semester. For example, you receive $5,500 in awards for the school year, but your expenses are only $4,400. When the cash is in your checking account, it’s easier to spend it on extras than to pay it back.
  4. Pay Student Loan Interest While In School – There are two types of student loans regarding interest, subsidized and unsubsidized. With a subsidized loan, interest does not accrue on your loan and the government “subsidizes” or supports the interest in times of deferment. With an unsubsidized loan, the interest starts to grow once the loan is disbursed to the school and you are responsible for paying that interest. By paying the interest while you’re still in school, this strategy can help reduce the overall balance of your student loan. Upon graduation, the difference between these two will be that the unsubsidized loans from freshman year will have three years of interest added to the principle while the subsidized will have none.

According to a study by Richard Fry of Pew Research, students with a college education and no student loan debt were worth 7 times more than students who had accumulated student loan debt. For some students acquiring student loans may be the only way they can get a college education, but being aware of the school costs, knowing and limiting the amount borrowed and paying on the interest accrued while in school can be excellent steps towards achieving college education and financial independence after graduation.

Sasha Grabenstetter is a former Office for Financial Success Counselor and Mizzou Alum. Sasha currently works for the University of Illinois Extension as a Consumer Economics Educator.

Public Service Loan Forgiveness

Graham McCaulley, Extension Associate, MU Personal Financial Planning Extension

For many students this time of year marks graduation, and for some, graduation prompts thinking about student loans. Those graduating high school may be anticipating the disbursements of their first student loans in a few months to cover new tuition expenses. Alternatively, those graduating college may be expecting the end of student loan deferment and the beginning of repayment in the coming months. No matter where one is on the continuum of student loan debt, it is always important to think about the long term realities of student loans, including repayment options. This tip will outline one possible option for students who may go into careers in public service jobs.

What’s a public service job?

The definition of what is considered a public service job is fairly broad. Any employment with a federal, state, or local government agency, entity, or organization or a non-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC). The type or nature of employment with the organization does not matter for PSLF purposes. Additionally, the type of services that these public service organizations provide does not matter for PSLF purposes. Some private, non-profit employers that are not tax exempt (i.e., 501(c)(3) status) can even be considered qualifying employment for the PSLF program, provided the employer provides certain public services (e.g., public health, safety, etc).

What types of loans are eligible?

Loans are either:

  • Federal- Made and/or regulated by the government, including Direct Loans, Federal Family Education Loans (FFEL), and Federal Perkins Loans; or
  • Private- Made by a bank/private lender and generally carry higher fees and interest rates than federal loans. For more information about avoiding deceptive private loans, visit http://missourifamilies.org/features/financearticles/cfe63.htm)

Private loans are not eligible for loan forgiveness programs, and not all federal loans are either. For a list of debt cancellation/forgiveness programs and which types of federal loan types are eligible for each program, visit http://studentaid.ed.gov/repay-loans/forgiveness-cancellation. Regarding the Public Service Loan Forgiveness Program (PSLF), only direct loans are eligible (i.e., loans you received under the William D. Ford Federal Direct Loan Program). Federal Family Education loans and Perkins loans are not eligible, however, they do become eligible if you consolidate them into a direct consolidation loan (more on this at http://www.loanconsolidation.ed.gov/).

What do I have to do to get my debt forgiven?

  • Work full-time: At least an annual average of 30 hours per week. For purposes of the full-time requirement, your qualifying employment at a not-for-profit organization does not include time spent participating in religious instruction, worship services, or any form of proselytizing. If you are a teacher, or other employee of a public service organization, under contract for at least eight out of 12 months, you meet the full-time standard if you work an average of at least 30 hours per week during the contractual period and receive credit by your employer for a full year’s worth of employment. If you have multiple eligible jobs, you must work a combined average of at least 30 hours per week.
  • Make 120 on time, full, monthly loan payments: Basically, you have to put in 10 years of full, on time payments before you can be eligible for the remainder of your loans to be forgiven. On-time payments are those that are received by your Direct Loan servicer no later than 15 days after the scheduled payment due date. Full payments are payments on your Direct Loan in an amount that equals or exceeds the amount you are required to pay each month under your Direct Loan repayment schedule.
  • Be paying back your loan through a qualifying repayment plan. You cannot necessarily choose a repayment plan that will greatly lengthen your repayment period so that you are eligible for most of your loans to be forgiven. For example, 30-year extended repayment plans are not eligible for the PSLF program. However, the income-based repayment (IBR) plan (http://studentaid.ed.gov/repay-loans/understand/plans/income-based) and the income-contingent repayment (ICR) plan (http://studentaid.ed.gov/repay-loans/understand/plans/income-contingent) are eligible. The 10-year Standard Repayment Plan is also eligible, however, after meeting the PSLF requirement of 120 consecutive payments, there would be no debt left to forgive!

Deciding whether or not the PSLF program is right for you depends on many factors, mainly how much student loan debt you have and how much money you will make during the first 10 years of your public service career. The more debt you have and the less you will make, the more attractive an option the PSLF may be for you (as payments tied to your income will be less when you make less money). Alternatively, if you make a high income you may very well have paid off, or be close to paying off, your student loans by the time you get to the end of the 10 year requirement under the PSLF.

There are many repayment options for student loans. A good first step would be to visit the Federal Student Aid repayment calculator at https://studentloans.gov/myDirectLoan/repaymentEstimatorLoginRedirect.action to see what all your options may be. You can also look at past financial tips (achieved at http://mufinancialtip.blogspot.com/, especially the September and October 2011 tips) or visit the Managing Student Finances and Debt area of our website: http://pfp.missouri.edu/financial/studentfinances.html. Again, whether you are just starting to take out loans or have been paying them back for years, it is always good to consider your repayment options and realities. Even though the PSLF program may help some (and does encourage public service jobs), you will still end up paying back a substantial amount of the debt you take out, so never take out more loans than you need.

Investing In Yourself: An Economic Approach To Education Decisions

Each month the Federal Reserve Bank of St. Louis publishes a newsletter titled Page One Economics, which is a selection of useful economic information, articles, data, and websites compiled by the librarians of the Federal Reserve Bank of St. Louis Research Library. Recently there was an article titled “Investing in Yourself: An Economic Approach to Education Decisions” that caught my eye and I felt it would be a great fit for the Financial Tip. It is re-printed here with permission from The Research Library. We encourage your comments and thoughts at http://mufinancialtip.blogspot.com.

There is a classroom version of Page One Economics available for teachers for free at: http://research.stlouisfed.org/pageone-economics/pages/newsletter_summary.php?id=75&edition=classroom

To subscribe to their newsletter or for more information and resources, visit their website and archives at http://research.stlouisfed.org/pageone-economics/pages/newsletter_summary.php.

The views expressed are those of the author and do not necessarily reflect the official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, the Board of Governors, the University of Missouri, the Personal Financial Planning Department or The Office for Financial Success.

When I travel around the country, meeting with students, business people, and others interested in the economy, I am occasionally asked for investment advice…I know the answer to the question and I will share it with you today: Education is the best investment.”—Federal Reserve Chairman Ben S. Bernanke, September 24, 2007(1)

One of the most important investment decisions you will ever make is the decision to invest in yourself. You might think that investment is only about buying stocks and bonds, but let’s take a step back and consider investment a little differently. Economists use the word investment to refer to spending on capital, which can be either physical capital (tools and equipment) or human capital (education and training). Let’s briefly look at each type.

Investing in Physical Capital

A firm invests in itself by buying capital that it uses to improve what it does. In other words, it invests in physical capital to earn higher profits in the future. For example, a firm might invest in new technology to increase the productivity of its employees. The increased productivity raises future revenue (income earned by the firm) and profits (revenue minus costs of production). Seems like an easy decision, right? Well, before a firm invests in physical capital, it must consider three very important points.

First, a firm invests in technology now with the expectation that it will lead to higher revenue and expected profits in the future. But this expectation might not be realized. For example, the technology might not increase productivity as much as the firm expected. Or the demand for the good the firm produces might decrease, resulting in less revenue than expected.

Second, a firm considers other investment alternatives. A firm can invest in many ways to raise future profits. For example, maybe investment in technology A results in profits, but investment in technology B, which is more expensive, leads to much larger profits.

Third, a firm also considers the potential return on investment (ROI). The ROI is a performance measure of the effectiveness of an investment. It is calculated as the net gain (gain from investment minus cost of investment) divided by the cost of investment. A firm compares the expected gain with the investment cost to make a sound decision. Of course, the result of any investment lies in the future and must be projected. Predicting the future is always tricky; therefore, any uncertainty about the result must also be considered.

Investing in Human Capital

Investment in human capital is the effort that people expend to acquire education, training, and experience. People invest in their human capital for the same reason a firm invests in physical capital: to increase productivity and earn higher income. An added benefit is the increase in job opportunities for those with more education: The unemployment rate for those with a bachelor’s degree is 4.1 percentage points lower than for those with only a high school diploma. Of course, higher education is expensive. To increase the likelihood that the investment will pay off, let’s consider three points.

First, an investment in human capital might not pay off. Just as a firm’s investment in physical capital involves risk, there is also a risk that the expected outcome from investing in human capital will not be realized. Research consistently shows a correlation between more education and higher income (see the second graph), but there is no guarantee. One way to think about the ROI in human capital is the college wage premium, which is the percent increase in earnings of those with a bachelor’s degree compared with those with only a high school diploma. Recent research suggests that the college wage premium has been growing—from 40 percent in the late 1970s to 84 percent in 2012.2

Second, people should consider what kind of an investment to make. Getting an education will most likely lead to higher income, but there are vast differences in the projected income and job opportunities of the various courses of study available. For example, according to the Bureau of Labor Statistics (BLS), an elementary schoolteacher with a four-year degree earned $51,380 (median) in 2010,3 while a computer programmer with a four-year degree earned $71,380 (median) in 2010.4 Both earned a higher income than they would have if they had not acquired a college degree, but the difference between the median earnings is significant.

The job opportunities available in different professions also vary. The BLS forecasts job outlooks for various occupations. For mechanical engineers (2010-20), the BLS forecasts job growth of 9 percent,5 while for registered nurses job growth of 26 percent is expected.6 Again, there is a significant difference. Given these facts, does that mean that you should not become an elementary schoolteacher? Does it mean that you should consider only computer programming or nursing? No, but the median income and the expected job growth rate are two factors to consider when making decisions about future education and training. In fact, there are many opportunities to gain training and valuable job skills besides the usual college route. Vocational, technical, and trade schools teach specific, practical jobs skills that can lead to a good job within 2 to 4 years. For example, many such schools offer programs in computer-aided design and drafting (CADD); law enforcement; heating, ventilation, and air conditioning (HVAC); and information technology (IT).

Third, people should consider the cost of various kinds of educational institutions when they think about investment in education. For example, the average cost of attending a four-year public university (tuition, room, and board) from 2007 to 2011 was $58,623, while the average cost at a four-year private university for that same period was $125,604.7 Does that mean you should consider only public universities? No, but cost should be considered in making your decision. The ROI for a would-be elementary schoolteacher would be higher if he or she chose to attend a four-year public university.

Conclusion

A firm invests in physical capital in an attempt to increase its revenue (income) and potential profit, but only after considering the return on investment. People might consider using a similar strategy when deciding whether and how to invest in their own human capital.

NOTES

1 Bernanke, Ben S. “Education and Economic Competitiveness.” Speech presented at the U.S. Chamber Education and Workforce Summit, Washington, D.C., September 24; 2007; http://www.federalreserve.gov/newsevents/speech/bernanke20070924a.htm.

2 Jonathan, James. “The College Wage Premium.” Federal Reserve Bank of Cleveland Economic Commentary, 2012, No. 2012-10, August 8, 2012; http://www.clevelandfed.org/research/commentary/2012/2012-10.cfm.

3 Bureau of Labor Statistics. “Kindergarten and Elementary School Teachers.” Occupational Outlook Handbook, March 29, 2012a; http://www.bls.gov/ooh/education-training-and-library/kindergarten-and-elementary-school-teachers.htm.

4 Bureau of Labor Statistics. “Computer Programmers.” Occupational Outlook Handbook, March 29, 2012b; http://www.bls.gov/ooh/computer-and-information-technology/computer-programmers.htm.

5 Bureau of Labor Statistics. “Mechanical Engineers.” Occupational Outlook Handbook, March 29, 2012c; http://www.bls.gov/ooh/architecture-and-engineering/mechanical-engineers.htm.

6 Bureau of Labor Statistics. “Registered Nurses.” Occupational Outlook Handbook, March 29, 2012d; http://www.bls.gov/ooh/healthcare/registered-nurses.htm.

7 National Center for Education Statistics. “Fast Facts: Tuition Costs of Colleges and Universities.” See http://nces.ed.gov/fastfacts/display.asp?id=76.

GLOSSARY

Capital: Goods that have been produced and are used to produce other goods and services. They are used over and over again in the production process.

Human capital: The knowledge and skills that people obtain through education, training, and experience.

Investment: The purchase of physical capital goods (e.g., buildings, tools and equipment) that are used to produce goods and services.

Investment in human capital: The efforts people put forth to acquire human capital. These efforts include education, training, and experience.

Productivity: The ratio of output per worker per unit of time.

Profit: The amount of revenue that remains after a business pays the costs of producing a good or service.

Return on Investment (ROI): A performance measure of the effectiveness of an investment. ROI is calculated as the net gain (gain from investment minus cost of investment) divided by the cost of investment.

Ryan H. Law, M.S., CFP®, AFC
Personal Financial Planning Department
Office for Financial Success Director
University of Missouri Center on Economic Education Director
162 Stanley Hall
University of Missouri
Columbia, MO 65211
573.882.9211 (office)
573.884.8389 (fax)

College Savings Tips

While many of our readers are students, tips on how to save/pay for college are the keys to one’s financial success.  I have been known to say that the most important asset in everyone’s portfolio is one’s self, for it is one’s self who works to earn the income it takes to have a fruitful financial plan.  It is well documented that education is highly correlated with earnings and, thus, understanding how to save for the investments we make in ourselves, or our loved ones, is essential to total portfolio management.  Besides, for our younger readers, it is important to consider the costs of a child, before you decide you want to have one.

Saving for college is overwhelming for many, the realization that one’s children or loved ones cannot succeed in college due to financial constraints can be quite depressing.  Yes, the loved one can and, perhaps, should work to help pay for college.  When average costs for tuition and fees, room, board, books, supplies, personal expenses, and transportation are included, it is estimated by the Scholarship Workshop to annually cost $27,210, at a public, in-state university, and $58,640, at a private university, for academic year 2013-14.  This high price tag makes working to cover the entire cost of a higher education difficult.  As a result, many choose the expensive alternative of student loans.  Loans can help and much has been written about their use and misuse in the education marketplace, however, that is not the focus of a tip on college savings.   So, let’s build some education capital!

The most important thing you can do for your child, beginning prior to conception, is to create a healthy environment in which to rear the child.  Good nutrition and exercise is important for the mother, as it will be for her progeny.  Importantly, work with the child to develop a love of learning.  Read to the child, prior to their entering school, in an effort to put them at or above their grade-level.  Academic success is the easiest way to receive financial help for university attendance.

If you intend to help the child with their college expenses, begin shortly after they are born, in order to have the benefit of time and compounding on your savings.  Start small with what you can manage or do a finely-tuned calculation utilizing an expected future cost of four years of college and what it would take on a periodic deposit to help reach the goal, at an assumed rate of return and time period.  Do NOT sacrifice your retirement savings for your child’s college expenses.  You need to be on track for saving for your retirement.  Your child is not your retirement plan and they can always borrow the money they need, if they have no other option.

There are several ways to save for college.

  • State-sponsored 529 plans are very popular as they offer federal and, sometimes, state tax benefits.  These include tax-free withdrawals for qualified educational expenditures.  Missouri’s 529 plan is called the MOST plan and more about it can be found here: https://missourimost.s.upromise.com/ .  Besides being tax-free, other tax advantages include:
    • Investment earnings grow tax-deferred.
    • While your contributions are not tax deductible on your federal taxes, they are likely deductible at the state level.
    • If you make non-qualified withdrawals, both taxes and penalties will be charged.
    • Should a child not use their entire 529 account, a tax-free transfer of the account can be made to a sibling, cousin or another family member. If this person uses the money for qualified education expenses, the withdrawals are tax free.
    •  Gift money to the child.  Money gifted to the child is counted more heavily against their eligibility for financial aid, if one might qualify for financial aid.  These periodic gifts, under the control of the parent, are a great way to save and to visibly state that you believe in your child’s future and are willing to put your money where your mouth is – toward their future.
    • Life insurance may have a cash value which can accumulate through premium payments and can be borrowed from the policy later, in order to be used for college expenses.  These withdrawals do not need to be repaid, as they will simply reduce the death benefits to your beneficiaries, should the inevitable occur sooner than planned.  Before you choose this option, make sure you need the life insurance and, if you do, that you have enough life insurance.  It is often the case that savings-type life insurance policies are too costly for many young families to purchase and to still provide adequate life insurance coverage.  Buying term life insurance and saving the difference in premiums is still a very effective plan.
    • Accumulate equity in your home and then refinance, through a home-equity loan or a new first mortgage, to provide liquidity to meet college obligations.  Accumulating more debt, as one gets older, is not the best way for parents to get ready for retirement.  Moreover, this debt is the parents’ debt, not the debt of the child.  The investment, however, is being made in the child and the child will be the one who primarily benefits from the investment. I’d let my child borrow the money.  If I want to help, I’ll send her a check.

Regardless of your plan, make sure your asset mix is appropriate.  Take greater risks when the child is young by utilizing more equity investments and, perhaps, riskier equity investments.  As the child approaches college, reduce the risks by reallocating to relatively more cash and bonds.  If you have trouble managing your investments, invest in one or more age-based college savings plans.  Most 529 plans have this option, as well as many mutual fund companies have target date funds.  Whatever your chosen investment vehicle, keep the costs of your investments low.  Make sure you remain well-diversified across asset categories, as well as within categories and don’t panic with market fluctuations.  Fluctuations are a fact of life and, unfortunately, the biggest losers are those who take their money out, when they can’t stand the declining market anymore, and those who put it in, after the market has already appreciated.  Buying high and selling low is not the way to invest.

One last comment.  If you have a child and want to save money for his education, please begin today.  It is easier to stick to a plan than it is to start a plan.  So, get started.