For many students going to college, private student loans will be an inevitable fact of life. Private loans should be used to fill in the gaps that college savings, grants and other scholarships don’t cover in a student’s final aid plan. As a result, many students leave college with a nagging fear of the loan repayments that await.
Rather than start on the wrong foot when it comes to loans, students can get a healthy perspective of both their responsibilities and ways to more quickly get on top of their debt with these tips that destroy the common myths about student loans:
If I need help understanding or dealing with student loans, my former college or university won’t help me. Even though a student may have graduated from a school, their financial aid office is still a great resource to help explain loan repayment options and connect students with loan servicers. Financial aid offices have a vested interest in helping students understand and stay on track with their loan repayment, as high default rates can negatively impact a school. So if a student starts to get confused by paperwork, the financial aid department is a great place to start.
I’ll never pay off my loans. Those first payments after graduation may feel a bit overwhelming, and will likely be a large part of any budget as a student gets started in their career. Salary increases, paying extra when budget allows and plain old perseverance will lead to progress. Income-based plans and automatic payments are just two options to “set and forget” loan repayment as a part of monthly budgeting.
Consolidating my student loans into one loan is a good idea. Loan consolidation may offer convenience, but often students will find themselves in situations which either are not eligible for consolidation or can actually negatively impact their repayment. Loan servicers will already use a combined billing for students with Federal loans so that the students have one payment to make and federal loans can’t be combined with private loans in a federal direct consolidation loan. In some cases, consolidating Perkins Loans can lead to students losing repayment benefits that the loan provides.
Filing for bankruptcy means not having to repay student loans. While Chapter 7 or Chapter 13 bankruptcy does help protect against some loans, most borrowers will not be able to discharge their student loans unless it can be proven that the loan repayment will cause an undue financial hardship. Rather than negatively impact a credit record with a bankruptcy, students should consider finding more flexible payment plans that best meet their needs during repayment.
Get more tips and advice to help in your college planning with Iowa College Aid’s “The Path to College.”
Financial Aid Awareness Month is dedicated to helping families and students of all ages better understand the options available to them as they look to fund their educational goals and dreams. Iowa College Aid has dedicated a page to discussing some of the common issues facing those looking for financial aid.
Our staff of financial aid experts have also helped out this month, with advice on how to overcome financial aid issues (see last week’s post). This week they address two of the common myths that students have about applying for grants and scholarships and how to debunk them.
Myth #1: We make too much/my parents make too much – I won’t get anything
Family income is definitely a factor when it comes to handing out financial aid. The best kind of financial aid is always the “free” kind – the scholarships and grants that are given freely with no expectation of being paid back later. And often it’s this “free” money that has a “financial need” component to it. Many scholarship and grant providers want to give their awards to students who show some kind of financial need, and when a student’s/family’s income is high, usually the financial need is low.
Not all scholarships and grants are need-based, however. If your student is motivated, they can seek out scholarship and grant opportunities that are based on skills, abilities and interests, grades, musical, athletic or dramatic talent, essay-writing, or a number of other merit-based achievements. The key is looking for them. You know the saying, “you can’t win if you don’t play”? That same philosophy applies to scholarship competitions. Investing some time online searching for “scholarships for high school juniors” or “scholarships for journalism majors” or, if writing essays isn’t a strength for your student, “no essay scholarships” might provide some avenues of funding.
Myth #2: My parents aren’t helping me pay for college so I can’t get financial aid.
Students who are financially independent from their parents can often access additional student loan funds, but a parent’s unwillingness to pay for college doesn’t make you financially independent from them.
The primary circumstances that cause a student to be financially independent are:
- Orphan/ward of court/foster care/emancipated minor/legal guardianship/homeless status
- Veteran of the Armed Forces of the United States
- Graduate or professional student
- Student’s marriage
- Student provides support to dependents
Detailed information about these circumstances can be found on the federal Department of Education website https://studentaid.ed.gov/sa/fafsa/filling-out/dependency
If a student has no contact with their parents, or if the student doesn’t reside with their parents because of an abusive or neglectful situation, the student can approach the financial aid office at their college for special instructions on how to complete the parent section of the FAFSA or to determine if there’s a need for a dependency override.
Financial Aid Awareness month encourages students who are getting ready to attend (or are currently attending) college to put together a game plan that helps them achieve their college dreams in the most cost effective way possible. Completing the Free Application for Federal Student Aid (FAFSA) is the first step and a vital one. But once that’s done, where do students go to figure out how to get the money they need for college.
Iowa College Aid not only awards and administers state grants and scholarships for Iowa students, but helps students stay on top of all the resources available to help them graduate college with as little debt as possible.
The financial expert team from Iowa College Aid ranked the ways for students to fill that gap between the money awarded to students in a school’s financial aid award package and the cost of attending the school of their dreams. Here are their top picks:
You filed your FAFSA, you submitted the State’s Financial Aid Application, you met the deadlines and you’ve done the math – your financial aid is just short of covering your tuition bill. You still need a few more dollars to pay for the semester and buy books, what else can you tap into?
Savings and 529 Plans: The first resource to explore is your own savings account or 529 account. If you (or your parents) have been saving money for college, now is the time to use it! Not only has the money been set aside for this purpose, but using savings or college investment accounts could reduce or eliminate the need to borrow additional loans.
Explore private scholarships: There are many scholarship search websites that allow you to create a profile and search for scholarships that fit your skills, abilities and interests and often scholarship essays can be tweaked and customized allowing you to use the same essay multiple times. Make sure to read directions carefully and pay attention to deadlines. And don’t rule out “fun” scholarships like those found on unigo.com – who knows, maybe your creative 250 word essay on what flavor of ice cream would you be could score you a $1,500 scholarship?
Payment plans and paychecks: Since colleges bill you for the entire semester at once, it can be overwhelming to get a bill in the mail for the whole semester. But what if the amount you owe could be divided into 4 or 5 monthly payments? If you’re working part-time, maybe it becomes more manageable to think about making monthly payments to your college when you know you have a paycheck coming.
Parent PLUS and other student loan options: If borrowing more money becomes an option, talk to your Financial Aid Office about which loans are available to you (and your parents) and which loans have the best repayment terms and interest. Your student loan options will differ depending on if you have a co-signer, or if you want to start repayment after you graduate (versus starting repayment while you’re still in school), or if you want a fixed or a variable interest rate. Your Financial Aid Office can help you sort through options and pick the loan that works best for you.
The State Fair, the Cyclones and Hawkeyes, Blue Bunny Ice Cream, the Bridges of Madison County and the Field of Dreams. Everyone has their list of favorite things that make Iowa a uniquely great place to live. For any Iowan saving for education after high school, though, three numbers make hearts thrill: 529.
While it only makes sense to celebrate the 529 Savings Plan on the date that shares its name, 529 plans benefit Iowans saving for education 365 days a year.
Named after the section of the IRS code that allows their use, Section 529 plans come in two flavors: savings accounts and prepaid tuition plans. 529 Savings plans allow for after-tax contributions to be made on behalf of a designated beneficiary, not just a child, which means a parent or family member going back to school can also benefit.
Contributions to 529 plans grow tax-deferred (think of it like a education-focused 401(K)) and can be withdrawn tax-free to pay for qualified educational expenses. Iowans get further tax advantages, as all earnings on a 529 account are fully exempt from Iowa state income tax. Iowa taxpayers can also deduct up to $3,163 in contributions per beneficiary account from their adjusted gross income.
A Section 529 savings plan is ideal for parents or grandparents who have some combination of the following factors:
- They would like to save more than $2,000 per year.
- They live in a state that offers a state income tax deduction for contributing to a Section 529 plan.
- They make enough money to be disqualified from using a Coverdell ESA.
- They have multiple children with the hope that all will attend college.
- They are starting their college planning late in their children’s lives.
- They are planning on saving large amounts towards college costs.
- They expect their children to attend expensive graduate programs.
- They want the freedom to reclaim the assets for any reason they choose.
- They would like to fund a loved one’s college, while significantly reducing the size of their estate.
And while a Iowa family’s 529 plan may be based in Iowa, money can be used for qualified expenses at any public or private institution, regardless of where you set up the account or where the beneficiary attends school. Out-of-state relatives can also invest in an Iowa plan regardless of where the parent or beneficiary lives. So if a grandparent lives in Florida, they can still fund their grandchild’s Iowa plan.
Iowa 529 Plans are great savings options for all families. Plans can be opened with a minimum of $25 and each additional contribution can be as little as $25 ($15 when contributing through an employer’s payroll deduction plan), deposited regularly or whenever convenient.
Iowans can set up an account, review a wide variety of investment choices and learn more about the details of a 529 Savings Plan at College Savings Iowa’s website, provided by the State Treasurer’s office.
Many parents and families plan to start saving for college education as early as a student’s birth. While those intentions would make paying for life beyond high school much easier, not everyone follows through on that goal and those who do often get their savings interrupted by emergencies or life changes.
A student may already be in high school before their family starts scrambling to find ways to save for what, by that point, seems an insurmountable challenge. The challenge might be more difficult, but saving for a student’s education can still happen even with fewer years left to plan. Here are some tips to keep in mind for those late-savers:
- Keep saving through college: Most parents think that the first day of college is the last day of savings. But thanks to options like 529 savings plans, families can still sock away money through the four years of college. By assuming the same hypothetical rate of return for the account, families can invest less per month and still come out on target when college is over. Disbursements from 529 accounts are tax-free (as long as they are used to cover qualified education expenses like tuition and books) and parents can withdraw funds at any time, not just the beginning of the semester.
- Let the student get into the savings game. While Mom, Dad and the rest of the family can fund a 529 account, getting the student a savings account can double the efforts. If a student is working through school, a Roth IRA allows either a child or parent to contribute to the child’s Roth IRA. Contributions are limited to the amount the child earned that year, or $5,500, whichever is less. Unlike a 529, there are no restrictions no use of funds disbursed from a Roth IRA. But not all disbursements from a Roth IRA are tax free. While the amount contributed skips the taxes, the earnings from interest will be subject to income tax (if the total withdrawn, plus other income, is less than the standard deduction of $6,300). Roth IRA’s also fly under the radar when it comes time for FAFSA, the Free Application for Federal Student Aid, since retirement accounts don’t count as a student asset that impacts financial aid elibigility.
- Save by shopping: As college costs increase, financial companies are offering products to make it easier for families to save money. One program that presents a less conventional approach to savings is Sallie Mae’s Upromise program, a free-to-join program that helps earn cash for college by letting members earn at least 5 percent to a college savings account when making purchases with the Upromise credit card at any of more than 850 retailers, including Best Buy and Macy’s. Members also get 8 percent back when using the card at more than 10,000 affiliated restaurants and Upromise eCoupons allow members to save when grocery shopping. The money earned can be distributed in whatever way as the member prefers, be it funding a 529 plan, a high-yield savings account or an eligible student loan payment.
April is officially Financial Literacy Awareness Month in Iowa and nationally. Too many students still enter adulthood unprepared to make large purchases and wise decisions regarding their finances. According to Charles Schwab’s 2011 Teens & Money Survey Findings, 75% of teens (ages 16-18) say that learning more about money management is one of their top priorities. To celebrate the importance of financial literacy, take a look at these options for fun, creative ways to implement money management skills in the classroom and at home.
- Get certified in financial literacy. Iowa College Aid partners with EverFi, Inc and local financial institutions to provide the Iowa Financial Literacy Program at no cost to Iowa schools. These fun, interactive online modules cover such topics as: credit scores, banking, investing and other finance-related topics. Each module meets the financial literacy essential concepts and skills of the Iowa Core.
Have your students complete the program to prepare them for budgeting and handling their future finances, such as paying for postsecondary education. Iowa College Aid also provides Vault, designed to teach financial literacy to students in grades 4-6. For more information, contact Iowa College Aid at 877-272-4456.
- Take the 30 steps to financial wellness. The experts at Money Management International have provided a list of 30 steps to achieving financial wellness. These 30 steps begin with pledging a commitment to change and cover such aspects as assessing your financial situation, cleaning up your credit report, goal-setting and more.
- Utilize free resources. There is a plethora of free financial webinars, worksheets and tools available online. Check out such sites as Nelnet, 360 Degrees of Financial Literacy, Mint.com and Credit Karma.
- Complete the 52 WEEK MONEY Challenge. This challenge has gained a lot of attention through social media and encourages everyone to save a dollar in the first week, then increase the amount by a dollar each following week. Put your own twist on the challenge for your classroom and make it a contest.