Graduating without student loans is tough

Education savingsA few months ago I gave a verbal spanking to a woman who equated college loans with handouts. She wondered why people didn’t just delay college for a year and earn enough money to pay for their entire education, as she did back in the day.

I pointed out that there weren’t many jobs available to newly-minted high school graduates that paid $60,000, which is about the minimum you’d need to pay for a four-year degree today.

Apparently my reader isn’t the only one having trouble keeping up with the times. A recent New York Times story quoted Virginia Foxx, a Congresswoman from North Carolina who heads a House subcommittee on higher education and work force training, saying she was bewildered why people went into debt instead of working their way through school the way she did.

Here’s what Times writer Ron Lieber pointed out:

But students nowadays who try to work their way through college without parental support or loans face a financial challenge of a different order than the one that Ms. Foxx, 69, confronted as a University of North Carolina undergraduate more than 40 years ago. Today, a bachelor’s degree from Appalachian State, the largest university in her district, can easily cost $80,000 for a state resident, including tuition, room, board and other costs. Back in her day, the total was about $550 a year. Even with inflation, that would translate to just over $4,000 for each year it takes to earn a degree.

A plucky, lucky few manage to get through college with no loans or parental support. But many of those who try wind up dropping out, unable to balance the work hours required with the demands of school.

If you’re one of those who may be stuck trying to pay your own way, Zac Bissonnette’s book “Debt Free U” can provide helpful guidance. If you’re a parent or a policymaker, however, you should check your views about the viability of kids’ working their way through college with today’s realities.

Kids, ignore your elders: college is worth it

CollegeOld folks can offer wisdom about many things, but you might not want to trust them when it comes to 21st century economics.

I’m hearing too many older people espouse the view that college degrees aren’t as valuable these days because more people have them. They need an Econ 101 review. It’s true that the price or value of something may drop if the supply increases—but only if the demand for that thing does not increase as well.

In the case of college degrees, demand has risen dramatically. Part of that is because so many jobs that didn’t require degrees have been made obsolete by technology or been outsourced overseas. (When Grandpa says he knows lots of people who made good livings without post-high-school training, ask him what they did—and if those factories and union jobs still exist.)

But employers are pickier as well, using college degrees as a screening device for jobs that in the past didn’t require them.

It’s true that incomes for college graduates dropped during recent economic hard times and unemployment rose. But the situation was a lot worse for folks without a college degree, according to a Pew Charitable Trust report released yesterday.

Back to supply and demand: The demand for post-secondary educations helped push up the net cost of college during the 2000s. The College Board says the net price of college tuition (the sticker price minus financial aid) rose 75% between 2002 and 2011.

But now demand seems to be softening, according to a Moody’s Investor Service report, thanks to a tough economy and a smaller pool of high school students. As a result, more schools are freezing tuition costs or at least holding down the increases and offering more financial aid. That’s good news for those heading off to college in coming years.

None of this means a college degree is worth any price. Too many families are overdosing on debt to get educations they really can’t afford. Getting a good value also requires college students to pick their majors carefully, since some degrees are worth a lot more than others.

But college degrees are and will remain all but essential in the 21st century if you want to get ahead financial, or even just remain in the middle class. That wasn’t true in Grandpa’s day, but it’s true now.

“Compassionate review” may lead to student loan discharge

Dear Liz: We have a family member who recently was approved by Social Security for a complete disability claim. This person will never work again but has an outstanding student loan. The lender has a formal mechanism to apply for loan forgiveness, but is refusing to accept medical documentation of the disability. What appeal process is there and how can we force them to act? Do we need to retain legal counsel and incur additional expense to enforce a legal process and achieve loan forgiveness?

Answer: Federal student loans offer a “total and permanent disability discharge” that forgives outstanding education debt. You can find the rules and an application at DisabilityDischarge.com.

The rules for private student loans, however, vary by lender. Four lenders — Sallie Mae, New York Higher Education Services Corp., Discover and Wells Fargo — offer a discharge for total and permanent disability that is similar to the federal one, said Mark Kantrowitz, publisher of the FinAid.org and FastWeb.com financial aid sites. The Sallie Mae discharge is also provided on loans made through lenders that market the Sallie Mae loans, such as Commerce Bank, Fifth Third Bank and Regions Bank, Kantrowitz said.

Other lenders do not offer such a discharge, but all have a compassionate review process for their private student loans, he said.

“Borrowers in a difficult financial situation, or their family or other representatives, should contact the lender that holds the loan directly,” Kantrowitz said. “The call center staff are not always familiar with the compassionate review process.”

Lenders are generally more likely to cancel some or all of the debt, or at least reduce the interest rate, in a situation that permanently affects the borrower’s ability to repay, Kantrowitz said. They are less likely to make an adjustment when the loan was cosigned and the cosigner is capable of repaying the debt.

“But it varies,” Kantrowitz said. “I’ve seen some cases in which the borrower was military and killed in action where the lender forgave the loans even though the cosigners were capable of repaying the debt. Another example involved a mother whose daughter dropped dead on an athletic field and the mother’s anguish was palpable in the letter to the lender.”

Debt cancellation comes with another issue: taxes. Forgiven debt is typically treated as taxable income by the IRS. Your family member may be able to avoid the taxes if he or she is insolvent, but a tax professional should be consulted.

Why college is more expensive now

Dear Liz: Thank you for your response to the reader who complained that college students who received student loans were getting a handout. You did a great job of highlighting the challenges today’s students face, but you didn’t talk about the main underlying cause. This is the defunding of state universities by state governments. In Oregon, for example, the state has gone from funding over 50% of the costs to current funding of 6%. The difference has been made up by tuition hikes and increasing the proportion of out-of-state (and foreign) students who pay much higher tuition. This is part of the reason that students are crowded out of classes. In Oregon, the medical school found it was better off giving up all state aid and going it alone. Other universities in Oregon are considering taking the same action. Schools founded with state money and supported for years with tax money will no longer be operated for Oregon students. They will be more like private schools, perhaps moving out of the reach of middle-class students. So the answer to the reader is that she did get government help to get through school, help that is now curtailed so students have to finance it themselves.

Answer: The reader didn’t specify what type of college she attended. But the withdrawal of state government funding in recent years has definitely made public college educations more expensive for many students. Meanwhile, many private schools have expanded their financial and merit aid budgets so that some students can attend a private college at a lower net cost than what they would pay for a public school.

Don’t tap retirement funds to pay kids’ student loans

Dear Liz: I’m in my 50s. My kids have college loan debts that might total more than $200,000. I allowed them to take out loans because I expected to inherit $300,000 to help them pay off the debt. Now that inheritance will not happen.

I have $250,000 saved for retirement. When I’m 58 1/2 years old, I would like to pull that money out and pay some or all of these debts. Or use home equity. I’ve recently been downsized in employment, but I am looking to increase my income so I can help with their debt. Advice?

Answer: If your goal is to impoverish yourself so your kids will have to take care of you in your old age, by all means proceed with your plan. Otherwise, you need to rethink this.

You’ve been laid off in the middle of what should be your peak earning years. Older workers often have a tougher time than younger ones finding replacement jobs, even in a better economy than this one. You may not be able to replace your former income, which means you may not be able to add much to the amount you’ve already saved. You should be conserving your resources, including your home equity, and not squandering it repaying debts that aren’t yours.

And “squandering” is the right word. You may be able to avoid paying federal and state tax penalties on withdrawals under certain conditions; distributions made after age 59 1/2 avoid the penalties, as do those made if you’re “separated from service” if the job termination occurred in or after the year you turn 55. But you’ll still owe income taxes on the withdrawal, and those can be considerable.

Your children are the ones who will benefit from their educations. Those educations should allow them to earn incomes to repay these loans. The amount of debt they’ve accrued might be excessive — you didn’t specify how many kids, or whether this debt is being incurred pursuing undergraduate or graduate degrees. Ultimately, though, they will be in a better position to pay the debt than you are.

If you promised them help you can’t deliver, sit down with them now to break the bad news and strategize on how they can finish their educations without incurring substantially more debt.

Your story also should serve as a cautionary tale for anyone counting on an inheritance to pay future bills. Until the money is in your bank account, it’s not yours and shouldn’t be part of your financial planning.

Tax breaks for helping grandchildren

Dear Liz: I am grandmother to two girls ages 10 and 14. I contribute to their Section 529 college funds and pay for expenses such as dental bills, dance lessons and so on. Is there a way I can deduct these contributions from my income tax?

Answer: Most states offer at least a partial tax deduction for 529 college plan contributions, said Mark Kantrowitz, publisher of the financial aid sites FinAid and FastWeb. The exceptions are California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey and Tennessee, which have state income taxes but no deduction; and Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, which don’t have state income taxes.

To get a deduction, you typically have to contribute to the plan offered by your home state rather than ones offered by other states. For more details, visit www.finaid.org/savings/state529deductions.phtml.

In general, you can’t take deductions for other expenses paid on behalf of your grandchildren. (If they’re your dependents — they live with you and you provide more than half their support — you could claim exemptions and possibly tax credits, but that doesn’t sound like the case here.) However, any medical or tuition expenses you pay directly on their behalf don’t count toward your annual gift tax exclusion, as discussed here last week.

Government recoups defaulted student loan debt

Dear Liz: I read your response to the person questioning the rationale behind taxpayer-supported federal student loans. Your response was well written, but do you have any information about how much money is owed to the government for student loans and what percentage of all the loans are actually paid back in full? You mentioned that the government can garnish wages and Social Security checks and seize tax refunds, but does the government follow through and hold these people accountable? Does the government have personnel to do this or is this just a threat?

Answer: Millions of unhappy student loan borrowers can assure you the government’s considerable powers to collect defaulted student loans are much more than a threat. In addition to its own collection activities, the U.S. Department of Education also hires a number of private collection agencies to help recoup what’s owed.

As a result, the government collects more than 100 cents on every defaulted dollar once accumulated interest and penalties are included, according to the Education Department’s most recent report. On a net present value basis — when future collections are discounted back to today’s dollars — the government recovers about 80% of the defaulted debt.

Decades ago, it was possible to skip out on federal student loan debt without serious consequences. Public outrage over that fact led to much stronger collection efforts. That has resulted in the federal government recovering about $10 billion in defaulted student loan debt every year, said Mark Kantrowitz, publisher of the FinAid.org and FastWeb financial aid sites.

Student loans aren’t handouts

Dear Liz: I am increasingly annoyed by the entitlement attitude of today’s students. Why should the taxpayers (me) pay to educate somebody else’s children? I remember when there was no such thing as a student loan. If I wanted to go to college and didn’t have the money for tuition, I delayed starting college until I had worked for a year and saved up the money. Many of my friends did this, as did I. Now these kids stand around with their hands out looking for somebody to bring them their education on a silver platter. I wish you would say something about this in your column.

Answer: Let’s start with the obvious, which is that an education costs a heck of a lot more than it did when you were in college.

The College Board reports that a student attending an in-state, four-year public university needs to budget an average of $22,261 to pay for the 2012-13 year. Which means the total cost to get an undergraduate degree would be about $90,000, assuming he or she can get all the required courses in four years (something that’s increasingly difficult because of state budget cuts in education).

Not to put too fine a point on it, but there aren’t many jobs these days that would enable someone (particularly someone without a college degree) to save the full cost of a college education in a single year. Even someone who started out with two years of community college would need to budget about $8,000 for each of those years, according to the College Board, and the total cost of a four-year degree would still be around $60,000. Some people would pay less if they got a lot of financial aid or lived at home, but any way you cut it, the tab is much, much higher than it has been in decades past.

Something else has changed since you were a student, and that’s the importance of having a college education if you want to have a decent financial life and remain in the middle class. In your day, people without college educations — even those without high school diplomas — could find well-paying jobs. Those jobs have increasingly been phased out by technology or they’ve gone overseas. The manufacturing and technical jobs that remain often require at least some post-secondary education. Having a college degree is what having a high school diploma used to be — an essential entry-level credential in many fields.

Our nation and our economy need educated workers if we’re to be competitive in a global economy. It also would help to have an expanding pool of well-paid workers to pay taxes toward things like roads, defense, police and fire protection and Social Security, from which you presumably benefit.

This is why governments promote post-secondary education with a relatively small amount of grants for the needy, and a relatively large amount of loans for everyone else. The first federal student loans were part of the National Defense Education Act of 1958; today, most students borrow at least some portion of their education costs.

You see, most kids (and their parents) aren’t standing around waiting for a handout. Most financial aid these days comes in the form of loans, which have to be paid back. These loans aren’t necessarily cheap — the rate on a Stafford student loan is 6.8%, while graduate and parent PLUS loans have 7.9% rates (plus a 4% origination fee that’s deducted from each disbursement).

If students or their parents default, the government can garnish their wages, seize their tax refunds, take a chunk of their Social Security checks and trash their credit. There is no statute of limitations on federal student loans and only rare relief in Bankruptcy Court, so borrowers can be pursued to their graves for what they owe.

Yes, many families overspend on education and overdose on student loans. The majority, however, graduate with a reasonable amount of debt (about $26,000 on average) that can be repaid from their now-higher earnings. Student loans aren’t a handout — they’re an investment in both the graduate and our economy.

Parents trapped by huge student loan debt

Dear Liz: My husband and I took out more than $200,000 in federal parent PLUS loans to pay for our two daughters’ college educations. My husband earned over $300,000 when the loans were made. Since then, he lost his job and now makes $100,000. I went back to work and earn $35,000. We finally succeeded in getting a more affordable mortgage, but we are taking about $3,000 out of our savings each month to pay the bills.

My husband handles the finances and says that even if we could lower our loan payments, it wouldn’t matter because we still have to pay forever. He can’t even think about retiring. We do have a financial advisor, but I’m very concerned and wonder whether we should be using our savings this way. What are our options?

(P.S. Our girls both graduated, although one doesn’t have a great job and the other is still looking for work.)

Answer: Parent PLUS loans can, in moderation, help families pay for their children’s college educations. The key phrase there is “in moderation.” Even at your former income level, taking on so much debt for your children’s educations was ill-advised.

You don’t have a lot of options, unfortunately. As you probably know, this debt typically can’t be erased in Bankruptcy Court. If you stop paying, the government can take your federal and state tax refunds, garnish up to 15% of any Social Security benefit payments and ruin your credit, said Mark Kantrowitz, publisher of the FinAid and Fastweb financial aid sites.

“The government can also sue defaulted borrowers to recover the debt if they believe the borrower has sufficient funds to repay,” Kantrowitz said.

Ideally, you wouldn’t have borrowed more than you could have paid off before retirement (while still being able to contribute to your retirement savings). Since that’s not the case, your best strategy may be to simply get the payments as low as you can and resign yourself to paying this bill, perhaps until you die. (PLUS loans are canceled when the borrower dies and are not charged against the borrower’s estate, Kantrowitz said.)

As you suspect, it’s not a good idea to dip into savings to pay your monthly bills, especially when you’re doing so in the vague hope that things will get better rather than in the face of concrete evidence that they will.

There are several ways of stretching out the term of the loan to reduce your payments. One is using all available deferments and forbearances to suspend repayment for a few years. Then you could use an extended repayment plan to stretch out the loan term to 30 years.

Normally you wouldn’t want to take deferments and forbearances because interest continues to accrue, digging you into a deeper hole, Kantrowitz said. “But if the goal is to reduce the burden of the monthly payments and not ever fully repay the debt, it can be a workable strategy,” he said.

Another possible option for some families is an income-contingent repayment plan. Parent PLUS loans aren’t eligible for the more favorable income-based repayment plan, but income-contingent plans could lower your payments to 20% of your discretionary income, with the balance of the loans forgiven after 25 years of repayment. Discretionary income in this case is the amount of your income over the poverty line.

To qualify, you’d need to consolidate your Parental PLUS loans into a Direct Loan consolidation loan. You can find out more at http://www.loanconsolidation.ed.gov. Given your current income, though, you may be better off with the extended repayment plan.

 

Don’t buy an education you can’t afford

Dear Liz: Please make me feel like I’m doing the right thing. My daughter happens to be very talented academically and athletically. She will graduate from one of the best prep schools in the country. She also plays ice hockey and is being recruited by some of the best schools. However, we are of middle-class means. We were given outstanding aid from her prep school, which made it very affordable. The net price calculators of the colleges recruiting her indicate we won’t get nearly the same level of support.

We have a lot of equity in our home and about $25,000 total in college funds for both of our children (we also have a son in 9th grade). We make about $185,000 as a family and pay about 12% to mandatory retirement and healthcare accounts. I’m hoping by some magical formula we can beat the “calculator” but I’m not so confident. So please tell me that paying for an elite education is worth our sacrifices. Our daughter has worked very hard to put herself in a position to gain entry into these schools, but I just need an expert to make me feel better.

Answer: An expert who makes you feel better about buying an education you can’t afford isn’t doing you any favors.

So let’s do a reality check. The amount you have saved for both your children would pay for a little more than one semester at most elite schools, which run around $60,000 a year these days. If she finishes in four years, that’s a price tag of about a quarter of a million dollars.

Of course, most college students don’t pay the sticker price for college. They get some kind of help. You, however, can’t expect much of that help, since you’re really not “of middle-class means.” At your current income, you make more money than about 95% of American households. Financial aid formulas don’t particularly care that you may live in an expensive area or that you prioritized spending over saving, only realizing too late that you can’t afford the schools your daughter wants to attend.

The exceptions may be Ivy League schools, many of which have committed to capping tuition costs even for upper-income families. If your daughter gets into one of those schools, she may have a shot at an affordable education.

Other schools may be willing to give her “merit aid” to induce her to attend, especially if she’s an outstanding hockey player and they want outstanding hockey players. But you’ll still be left with a sizable bill and only one way to pay for it: borrowing, either from your home equity or via federal student loans. Your daughter can borrow $5,500 in federal loans her first year, but as parents you can borrow up to the full cost of her education from the federal PLUS loan program.

Which leads to the question: Is taking on up to a quarter of a million dollars in debt for an undergraduate degree a sacrifice or is it insane? Before you answer, consider that some research shows that students who are accepted to elite schools, but attend elsewhere, do just as well in life as people who actually attend those elite schools. (The exceptions are kids from lower-income families, who actually do get a boost in life from attending elite schools. Obviously, that doesn’t include your child.)

Also consider how you’ll feel about making payments of $1,800 a month or so for the next 30 years to pay for this education. And how you’ll feel telling your son, “Sorry, kid, we spent all the money on your sister. You’re on your own.”

The picture may not be as grim as all that. You may get a better deal from one of these schools than you expect. But you should start managing your daughter’s expectations now and look for some colleges you can actually afford in case the dream schools don’t come through for her.