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Get smart with your money

Student Loans

New tool helps you compare financial aid offers

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You’ve gotten the college acceptance letters, and their accompanying financial aid offers. But how do you really decipher how much college will really cost you? More than 1.5 million students and their families are wrestling with these issues, and the Consumer Financial Protection Bureau wants to help. The bureau just announced a tool that can help you evaluate your options. From the CFPB press release:

The beta version of the Financial Aid Comparison Shopper has more than 7,500 schools and institutions in its database, including vocational schools and community, state, and private colleges. It draws information from publicly available data provided by government statistical agencies. With the prototype, students and their families can compare the following across multiple financial aid offers:

·         Estimated monthly student loan payment after graduation;

·         Grant and scholarship offers;

·         School-specific metrics such as graduation, retention, and federal student loan default rates; and

·         Estimated debt level at graduation in relationship to the average starting salary.

The Financial Aid Comparison Shopper also includes a “Military Benefit Calculator” that can estimate education benefits for servicemembers, veterans, and their families. The calculator includes military tuition assistance and Post-9/11 GI Bill benefits.

You’ll find a link to the cost comparison tool here. Take a look, run some numbers and give the CFPB your feedback.

How not to owe half a million in student loans

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Most college students graduate with manageable student loan debt, but there are plenty of exceptions. Marketplace Money highlighted one case last week: the medical student who expected to owe nearly half a million in loans by the time he graduated. I was in the studio with host Tess Vigeland and senior producer Paddy Hirsch to talk to this guy and discuss his options, as well as the choices he made that led him into such whopping debt. You can listen to our conversation here.

One point that Tess made, and that I’d reiterate to anyone thinking about student loans, is that taking on debt is a choice. No matter what your financial situation or education goals, you don’t “have to” borrow gobs of money to pay for school. You can go to a cheaper school, serve in the military and pay for school with the G.I. Bill, or work while you study, among other choices. You reasonably may choose to borrow some money to get through college, but if you borrow more in total than what you expect to make the first year you’re out of school, then you’re borrowing trouble.

Our caller was in a bind since he’ll need to start paying back his loans while he’s in residency. But with federal loans, at least for now, he has the option of an income-based repayment plan that will ensure he has enough money left over to eat. Once he’s in practice, he should make somewhere around $300,000 a year, which will ease the pain of paying back all that debt.

Far too many borrowers aren’t as lucky. They’re unemployed, or never got their degrees, or owe far more than they’re ever likely to earn. Nobody warned them when they were 17 or 18 and beginning to sign up for this debt that it could dog them for the rest of their lives. Private student loans in particular should come with warning labels, since they’re like paying for college with credit cards–except, unlike credit cards, the debt can almost never be erased in bankruptcy court. Read “Wipe out your student loan debt,” my column for MSN on this topic, for more details about the differences between federal and private loans, plus strategies that can help you deal with your education debt.

 

 

Saving for college: what parents need to know

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I’m giving a talk this morning to fellow parents about saving for college. I’ll be covering three important topics: why you need to save, how much you need to save and where you should put the money you’re saving.

Why you need to save

A college degree, or at least some post-high school training, is already important if you want your kids to remain in the middle class. That’s only going to become more true in coming years. Read “Should your kid skip college?” for more.

If you can save, you probably should. Financial aid formulas will expect you to have put aside at least something if you’re middle income or above. The idea that saving will hurt your kid’s chances for financial aid is the #1 myth I address is “3 college myths that will cost you.” (You also should read the second part of this series, “Costly college myths part 2.”)

To learn more about financial aid, visit FinAid.org and try out its estimated family contribution calculator. Another good site: TheCollegeSolution.com.

How much you need to save

The answer: A horrifyingly large amount if you expect to pay the whole tab. Even if you start when your child is born, you’d need to save:

  • Nearly $500 a month to pay for a public college
  • Nearly $1,000 a month to pay for a typical private college that currently costs $40,000 a year
  • Nearly $1,500 a month to pay for an elite private school such as Harvard or USC.

If you don’t start saving until your child is older, you’d need to put aside even more to cover the entire bill for tuition, books, room, board and living costs.

(A note: Harvard, like other Ivy League colleges, has committed to capping the cost for education. Families earning $65,000 pay no tuition. Families with incomes between $65,000 and $150,000 will contribute from 0 to 10 percent of income, depending on individual circumstances.  Significant financial aid also is available for families above those income ranges.)

Most families can’t save enough to pay the whole tab. But anything you can save likely will reduce your child’s need to take on debt. You can play with the numbers using SavingForCollege.com’s college savings calculator.

One thing you need to keep in mind: retirement savings must come first. Nobody will loan you the money you need to retire. But try to put aside at least $25 to $50 a month for college, and increase it as you can. Encourage grandparents and relatives to chip in as they can.

Where you should save

Three key points:

  • If your child stands any chance of getting financial aid, don’t put money in UTMAs, UGMAs or other custodial accounts, which are counted as the student’s assets and dramatically reduce financial aid.
  • Savings bonds have very poor returns and aren’t a great way for most to save for college.
  • State-run 529 plans are a good option for many families. The plans have limited impact on student aid awards. The money grows tax-free for college and the contributor retains control. There are estate-planning benefits as well. For more on which plan to use, read “The best and worst 529 plans.”

UPDATE: In my speech, I mentioned how Coverdells (Education Savings Accounts) were changing–I should have been clear that those changes haven’t happened yet. At the end of 2010, Coverdells were scheduled to revert back to their old version, where the limit on contributions was $500 (down from $2,000) and the money could be used only for college (instead of for K-12 as well). Congress actually extended the more favorable rules through 2012, so Coverdells aren’t scheduled to revert to their old form until the end of this year. Congress may extend the rules again, so anyone with a Coverdell may want to wait before they transfer the money to a different type of account.