Tips on How To Save for College

I came across a press release today that contained some great tips on how to save money for a college education (thanks to Andrew D. Schwartz and the good folks @ www.MDTaxes.com). Here's a snippet from today's release:

"...One positive outcome of the Deficit Reduction Act of 2005 is that the maximum Stafford Loan increases from $2,625 to $3,500 for first-year students and from $3,500 to $4,500 for second-year students, effective July 1, 2007.

Saving For A Child's Education
Do you have a child who will attend college in the future? Rising student loan interest rates provide an extra incentive for you to save more money towards your child's education.

What is the best way to save for a child's education these days? With all the options available to you today, it's important to understand the basics:

529 Plans. With these state sponsored education savings plan, you purchase into a managed investment portfolio based on when your child will attend college. Amounts contributed grow tax-deferred, but since the post-2010 rules have not yet been determined, withdrawals from a 529 Plan to pay for college tuition and fees might end up being taxed at your child’s rate starting in 2011. For 2006, you can contribute up to $12,000 per child into a 529 plan. Or, you can make five years worth of contributions, up to $60,000, all in one year. Just make sure to file a Gift Tax return (Form 709) electing to spread your 529 contributions over five years.

Pre-paid Tuition Programs. If you’re concerned that the cost of college will rise quicker than your investment portfolio, take a look at pre-paid tuition programs. Many states offer these college savings programs on behalf of colleges and universities within their state. Or you can check out the Independent 529 Plan (www.independent529plan.com), which is a national pre-paid tuition program representing approximately 250 schools throughout the country.

Coverdell Education Savings Accounts. Formerly known as Education IRAs, you can contribute up to $2,000 per beneficiary per year into an ESA. You’re not allowed to contribute to an ESA if your adjusted gross income exceeds $220,000 ($110,000 if single). Amounts contributed grow tax-free, as long as the money is used for your child's K-12 or college tuition or other allowable education expenses. Unlike 529 Plans, the tax rules for ESAs won’t change in 2010 when the 2001 Tax Act sunsets.

Two Tax Credits. If you're paying for a child's tuition out of your current earnings, don't overlook the Hope Scholarship Credit, which saves you up to $1,500 per year in taxes each of the first two years of college. Another option is the Lifetime Learning Credit, which saves you up to $2,000 in taxes per year. Both of these credits phase out this year once your income exceeds $107,000 if married or $53,000 if single.

U.S. Government Bonds. Another way to save for a child's education is with EE Bonds or I Bonds. Both of these bonds can be purchased at a bank or from TreasuryDirect.gov. I-Bonds are currently yielding 6.73%. As long as your child's name isn't on the bond, the interest isn't taxable to you as long as the total bond proceeds don't exceed the amount spent for tuition and fees. This tax break has a pretty low phase out - $121,850 for married couples and $76,200 for single individuals in 2005.

Employ Your Child. If you have an unincorporated business, you can pay your child up to $5,150 (in 2006), deduct his or her wages, and your child won't pay any income taxes (provided the wages are the only income earned during the year) or social security taxes. You can also contribute up to $4,000 from those wages into a Roth IRA each year, which would be available to pay for your child's college expenses, fund first time homebuyer costs, or grow tax-free over the next fifty years or more.

Higher Rates Are Here To Stay
'It looks like the days of low interest rates on your student loans end on July 1st,' says Schwartz. 'Consolidating your loans by June 30th, and taking advantage of the strategies described above to save for your child's education can help cushion the blow...'"

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Bush Signs $12 Billion Worth of Cuts to Federal Student Loan Aid Programs Into Law

On February 1, 2006, The U.S. House of Representatives passed S.1932--The Deficit Reduction Act of 2005--by a very tight vote of 216-214; basically, a Republican bill passed by a Republican majority in Congress (S.1932 only made it through The U.S. Senate by a deciding vote that was cast by Senate President Dick Cheney.) S.1932 includes $12 billion of cuts to federal student loan aid programs. Yesterday--February 8, 2006--Bush signed S.1932 into law.

What are the real world implications of S.1932? On July 1, 2006, the interest rate on Federal Stafford Loans will go from 4.7% to 6.8%. The interest on Parent PLUS loans will go from 7.9% to 8.5%.

OK, now let's get as real as we possibly can here: if, for example, you are a parent, and you borrowed $30,000 via a Parent PLUS federal student loan to pay for your child's education, then, after July 1, 2006, you will pay over $10,000 more in interest payments by the time you pay the balance down to zero (you can avoid the interest rate increases by taking advantage of no cost student loan consolidation before July 1, 2006.)

Here's what Mr. Bush had to say about the changes to federal student loan programs when he signed the bill into law:

"The Deficit Reduction Act makes important improvements to federal student loan programs. The bill cuts excess government subsidies to lenders and makes other reforms that will help us reduce overall student loan costs by about $22 billion. With that money, we will save taxpayers $12 billion -- because we intend to increase student aid by 10 additional billion dollars. What I'm telling you is, the students are getting the money, and we're making the program a lot more efficient for the taxpayers."

For a different point of view, I've posted below a snippet from a recent NextStudent.com press release:

"Congress voted on and passed Feb. 1 the Deficit Reduction Act of 2005 that included massive cuts to federal student loan programs. The $12.7 billion in student loan cuts and changes in laws regarding student loan consolidation will negatively impact those students seeking a college education and others seeking to consolidate their higher interest loans. The industry expects a rush of students seeking to consolidate at the current low rates before the imminent July 1 increase.

Prior to the bill’s passing students and concerned citizens throughout the country made last-minute phone calls and sent e-mails urging their representatives to vote no on budget reconciliation, but to no avail. Previously the bill passed the House by a narrow margin of 212-206.

Students and graduates now are in jeopardy. With college costs increasing every year and the forthcoming higher interest rates on student loans and student loan consolidation, the dream of a college education for many could become just that: an unattainable dream for students and families who fear they cannot afford college let alone the cost of student loans.

Student Loans Take the Hardest Hit

Throughout this past fall and early winter students, parents and other concerned citizens had been gearing up for the vote. While the government looked to cut major spending in the wake of disasters such as Hurricane Katrina, students spoke up through the Stop the Raid on Student Aid Campaign. Unfortunately, the campaign in the end did not stop the passing of the five-year $39.7 billion legislative package that includes the $12.7 billion in cuts to student loans, by far the worst of the cuts to federal programs that also include Medicaid and food stamps.

The final vote came on the heels of President Bush’s Jan. 31 State of the Union address, which was expected to garner support for budget reconciliation. The House reconvened on the same day for the Second Session of the 109th Congress.

A majority of the legislation’s provisions to student loans will take effect on July 1 and others will be implemented over time. Some provisions include an increase to 6.8 percent for federal Stafford Loans, from rates as low as 4.7 percent. PLUS fixed interest rates will jump to 8.5 percent, from 7.9 percent.

Consolidate Student Loans Before July 1 Rate Increase

With student loan consolidation rates set to skyrocket on July 1, now is the time for students and graduates to consolidate, according to NextStudent, the Phoenix-based education funding company. Students and graduates now are urged to consolidate as current consolidation rates can be as low as 2.75 percent with benefits applied. Other incentives to consolidate include a longer payment term, one monthly payment and no prepayment penalties.

The following are other provisions affecting student loan consolidation that take effect July 1, 2006. Students and graduates should be aware of the new regulations so that they now can take action:

Consolidation Loans

• Retains the single holder rule
  
  
• Eliminates spousal consolidation
  
  
• Eliminates in-school consolidation
  
  
• Eliminates reconsolidation in both FFELP and DL, except that a FFELP borrower whose delinquent loan has been submitted to a guaranty agency for default aversion is eligible for a DL Consolidation loan for the purpose of obtaining an income contingent repayment plan
  
  
• Provides that a FFELP borrower may consolidate in the Direct Loan Program only if a FFELP lender denies the borrower’s application for a consolidation loan or denies the borrower’s application for a consolidation loan with income sensitive repayment terms. Additionally, directs the Secretary to consolidate loans of defaulted borrowers
  
  
• Provides that, unless otherwise specifically provided, the terms of DL consolidation loans must be the same as FFELP consolidation loans..."

My personal take on this? During the recent State of The Union speech, Mr. Bush said that we, as a nation, should boost investment in math, science, research and education, yet with S.1932--the bill that Mr. Bush just signed into law--the average, young, middle class American, with the will and the brains to make it through 4 years of college, will have a tougher time finding the money it takes to make it.

What are your feeling about the changes to federal student loan programs? Your comments are welcome and appreciated.

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