Financing A College Education

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The cost of a college education keeps rising, making the burden of acquiring it heavier by the day. In the last few years, fees, including tuition, accommodation, medical, and other costs are rising even faster than inflation. For most students, having a plan on financing college education is just as important as selecting the appropriate course of study.

Letting Numbers Do the Talking

From 1984 to date, the cost of education for four years in private institutions has shot up by 146%. On the other hand, that of studying in a public institution for four years has risen by 17% within the last half of the decade alone.

Statistics* for the academic years between 2002 and 2013 show that the tuition fees, together with accommodation fees (room and board), increased by 27% in private institutions and 39% in public institutions.

With such enormous financial burdens, most students are forced to apply for loans and grants. However, this has a long-standing effect as most students complete their college education with the weight of debt.

Between 2011 and 2012, 38% of all students in college were awarded federal grants while 19% were awarded federal loans. Additionally, within the same period, federal grants were issued to 38% of those in public institutions and 33% of those in private institutions. 2015 graduates left college with a debt burden of about $33,000 each, on average.

There are several ways of receiving help for financing college. Some of these may lower student expenditure, while some spread the burden over a more extended period. The next few sections will delve into these.

*https://research.collegeboard.org/pdf/trends-student-aid-2012-full-report.pdf

Student Loans

If you think that you are the only one seeking for loans to be able to pay for tuition and accommodation fees, you are not alone! Actually, more students require loans for financing college education than those who do not. About 70% of graduates from public institutions or non-profit institutions after secondary school, paid for their education using student loans.

However, before choosing to use a student loan for financing, ensure that you know how they work and go through all the available options carefully first.

Student loans may be granted by one of four organizations: the school itself, private institutions which may or may not be affiliated to the school, state government, and federal government.

These options are explored further:

The School Itself

Some schools maintain their own fund for student loans. This is done to assist students in raising the fee balance when personal resources and financial aid are not sufficient. The schools have their own structure for maintaining these funds and have a simple structure for granting these loans. Therefore, a student seeking such assistance should liaise with the Financial Aid Officer to create suitable repayment options based on the set interest rate and loan limit.

Loans From Private Institutions

Private institutions, including banks, credit unions, and finance companies are the second option for borrowing. These are commonly used when financial aid, including that from federal and state governments, does not suffice to cover the required fees. Such loans are best sought as a last resort after the other lending options have been exhausted because they demand higher interest rates. Additionally, some institutions do not offer a fixed price, with fluctuations increasing the overall payback amount.

Furthermore, private institutions usually need a credit check to be performed. Most students do not have credit histories to allow them to be granted such loans. This, therefore, forces a parent or guardian with a more substantial history to step in and co-sign on the loan.

Federal Governments

The eligibility for financing college (loans) from the federal government is determined using personal and family information provided by the applicant. Federal loans are of two types: subsidized and unsubsidized. Those that are subsidized are student-friendly because they don’t accrue any interest while the student is enrolled and studying. They begin accruing interest only upon completion of college education. On the other hand, unsubsidized loans accumulate interest from the moment they are granted. Commonly used options for such loans include PLUS, Stafford and Perkins.

State Governments

Many states allow student loans, although each one sets its own criteria for this. Filling the application form for federal loans may automatically grant eligibility for state loans in some states, although others will require filling of a separate state loan form.

Repayment Plans and Options

While a readily available loan may be enticing to take up, it is essential for a student to explore different options and weigh the various repayment plans to pick the most affordable and convenient one. That single signature made presumptuously may be the beginning of a trail of debt.

While repayment plans may be somewhat similar across the four types of loans, not all repayment plans are offered for all four models.

The following is a breakdown of common federal loan repayment plans and options that are used for financing college:

Standard Repayment Plan

Each month, the student pays a fixed amount provided the loan is repaid within ten years. Additionally, the monthly payments must be $50 or more.

Graduated Repayment Plan

The loan is paid in tiers that increase every two years, beginning with low repayment amounts for the first two-year period and subsequently higher prices in the subsequent periods. The loan must be paid back within ten years.

Extended Plans

These plans have a longer duration for the repayment to be completed. The student can make a fixed payment or a gradually increasing payment for up to 25 years.

Pay As You Earn Plans

This plan is composed of repayments which are a percentage of discretionary income which must not exceed 10%. The repayments increase in proportion to the rise in revenue and the loan must be repaid within 20 years.

Income Based Payment

This plan is composed of repayments which are a percentage of discretionary income which must not exceed 15%. The repayments increase in proportion to the rise in salary and the loan must be repaid within 25 years.

Income Contingent Plans

The repayment amount is calculated annually based on factors which include the outstanding amount and the adjusted gross earning. The loan must be repaid within 25 years.

Scholarships and Financial Grants

Because of the high cost of education, students cross their fingers when they apply for grants and scholarships. These are issued without the condition of repayment and are in essence gifts. Students do not necessarily have to be valedictorians or outstanding sportsmen to receive help with financing college (scholarships or grants).

Individuals, organizations, and schools seek deserving candidates covering a wide range of traits, abilities, and interests. These include: 

 

  • In-demand areas and courses of studies that are not well represented, e.g., Mathematics, Engineering, Science, and Technology.
  • Students hailing from underrepresented communities and ethnic minorities.
  • Female students, especially in areas of study with a small representation.
  • LGBTQ students
  • Those who demonstrate a commitment to community development and service
  • Those entering professions of human care, e.g., nursing and social work.
  • Those interested in creative disciplines

Employer Programs and Benefits

When considering a job proposal, it is essential to find out whether the employer offers education subsidies to cover part of the college fees. It was recently discovered that about 8% of undergraduates and almost 22% of postgraduates make use of employer programs. Overall, about $9 Billion is spent by employers on such subsidies.

The most common program employers offer, independent of the level of education, is the annual tax-free benefit of up to $5,250. Employers have the leeway to contribute more than this amount if they can prove that school is a fringe benefit pegged to the working condition. This means that the employer must demonstrate that the skills of the student directly affect their output and that their education is a business expense that the business is taking for its own growth.

Therefore, before accepting a job offer, have a conversation with the HR department to find out if, and how much the company offers in financial aid. Find out the conditions attached to the subsidies including the required grade point averages that must be maintained.

A condition that is essential to note which is easily ignored is on reimbursement of aid offered upon quitting the job within a specified period of time. This means that you must keep the job until that period elapses, or else the aid for financing college must be repaid.  

Federal Work-Study Award

Statistics from the Department of Education show that federal work-study programs are available at over 3,400 campuses countrywide. As of 2011, the award of $1,642 was distributed using a monthly paycheck with rates calculated at a per-hour basis. Students only know their eligibility for this award when filling out the federal financial aid forms. They must also fill out these forms every year to be eligible for the same.

Students who qualify get assigned jobs that are based on campus, e.g., at the library, halls of residence, cafeteria, bookstore, among others. A few universities also partner with organizations to offer jobs involving public service off-campus.

  • The flexibility of work hours to avoid disruption of the student’s schedule, sometimes even allowing work hours between classes
  • Some jobs allow personal study by the student during working hours
  • These jobs do not require travel, cutting down on transportation costs and time
  • The money earned does not have to be paid back
  • The positions assigned may not be in line with the student’s interest and end up being tedious
  • Young students may have trouble balancing their academic demands with the requirements of the work they are offered
  • There may be better-paying student jobs in comparison to the work-study job
  • With a ceiling of work hours set at 19, the amount paid may be earned well before the end of an academic year.

Family and Individual Contributions

Many parents foresee the burden of financing college and start saving up for it. Some programs simplify the process, although they limit the way these funds can be spent by the student.

Three of these programs include:

529 Plans

These tax-free savings plans are comparable to the 401(k) plans for retirement. The savings made are invested by a Fund Manager to give interest. Take, for example, a couple that decides to save up for their 1-year old son’s college education. They foresee tuition and fees summing up to about $130,000 by the time their son is to go to college. They invest deposit of $5,000 into the college fund while saving $200 monthly. At an interest rate of 6% per annum, the fund will accumulate over $115,000 by the time their son is to go to college.

Savings Bonds

Series I and Series EE Bonds can be used to pay for college in the United States. These usually allow for reduced taxation on the interest earned and will enable the tax-free holder redemption of interest. While several criteria affect tax outcomes, the most important one is the Adjusted Gross Income of the holder.

For an individual, an income of above $76,000 enjoys less tax exclusion. Adjusted Gross Incomes above $91,000 do not benefit from tax exclusion. For joint filers, income above $113,950 has less tax exclusion while that above $143,950 does not benefit from tax exclusion.

The ceiling for individual investment in a bond is $10,000 annually, per owner for a single type of bond. The bonds become redeemable in as short as 12 months, but their maturity is in 30 years.

Consider a case where parents take out a Series EE bond in anticipation for their newborn baby’s college tuition. The interest rate of the bond is 1.27% per annum, and they invest $5,000. By the time their daughter is going to college 17 years later, the bond shall be worth $10,196.

Online Crowdfunding

For a long time, crowdfunding sites have been utilized to raise funds for nonprofits, emergency relief situations, and creative arts. More recently, however, some students have started using such platforms to offset college costs in a bid to have the burden of massive expenses shared and the dream of a college education achieved. These platforms include PigIt, CrowdfundEDU, GoFundMe, and AngelDorm, among others.

While it may take humility to request family and friends for funding, it requires, even more, to obtain monetary aid from strangers through crowdfunding for your college financing. For your supplication to be successful, you have to demonstrate integrity and convince complete strangers of your commitment to creating an impact on the lives of many more.

As evidence of the success of crowdfunding as a way of financing education, over $13 Million was raised in over 100,000 supplications to fund education.

Benefits for Public Service and Other Special Service

Occupations such as the military, teaching, public service, and other specialized services usually come with financial benefits for the student. However, this is dependent on several factors, including the selected area of study. Each occupation has its unique advantages and has specific requirements which must be fulfilled for one to be eligible for the benefits.

Before settling for an occupation, ensure that you understand what it offers and the conditions it attaches to the benefits. The following is a brief analysis of some of these occupations: 

Teaching

The number of teachers required to support the growing number of students and the ever increasing need for education is always rising. To avoid shortages of teaching, personal loan forgiveness programs are rolled out to increase the number of students who may be attracted to this area of study. Up to $4,000 per student is provided each year in TEACH Grants, although the student must plan to go to a school with a high demand for teachers to obtain help for financing college.

Other than grants, teachers who obtained Perkins loans may obtain loan forgiveness if they plan to study a subject that has a shortage of teachers, e.g., Science, foreign languages or Mathematics. Additionally, those who plan to teach in individual schools or work in low-income communities also qualify for loan forgiveness. The Stafford loan plan grants loan forgiveness up to $ 17,500 to teachers as long as they stay at a low-income school 5 years in a row.

Military Personnel

Depending on the branch of the military, under which one chooses to serve, loan forgiveness programs offer between $10,000 and $65,000. Additionally, students who have completed a 1-year deployment to active war zones or hostile territory receive loan forgiveness.

Public Servants

The Peace Corps and AmeriCorps are examples of programs that offer loan debt relief. The government also offers loan relief for those who work under community service projects. The government also offers loan forgiveness for those who work in roles including healthcare, non-profit organizations, and government agencies after ten years of loan repayment. 

Nurses

In addition to the public service programs, nurses and other healthcare professionals in the Perkins loan program get up to 100% relief after working for 5 years. The NURSE Corps grants 60% relief to those who work where there is a shortage of staff.

President Obama’s Loan Relief Program

This program was introduced by President Obama, offering total debt relief to students who make 240 monthly payments within 20 years.

The Impact of Loans on Your Future

Student loans, even upon personal bankruptcy, cannot be canceled. One has to, therefore, plan their borrowing. Upon graduation, one also has to balance between spending and repayment. Realistic payment periods reduce the stress of repayment.

Students should make use of financial counseling to create balanced budgets. The following are some tricks to enable new graduates to save:

 

  • Understand the implication of an expense, e.g., a lease includes not only the rent but also the accompanying utilities and supplies.
  • Anticipate emergencies and save for them, e.g., job termination and health crises.
  • Avoid lavish living at the onset of your career.
  • Save up for retirement. Preferably, set up an automated plan for a retirement fund.

Tax Credits and Deductions

Graduates may claim deductions on loan interest, either $2,500 or the sum paid that year, whichever is lesser. As the principal amount reduces, the deduction or credit available reduces. Therefore, this option should be used early to reduce the outstanding loan amount from financing college.

The Impact of Loans on Credit History

Along with loan repayment, keep in mind the fact that your credit history is also affected by this. The credit history reflects your tendency to honor your obligations. This history ends up being considered when one is seeking different kinds of loans, credit cards, and even housing! Because the overall account is calculated based on all forms of credit, it is essential to ensure that the student loan does not mess this rating.

In case you get into a period of difficulty, ensure that you get into contact with the company in charge of your student loan and inform them. Their input into your credit history about your handling of situations such as this will mitigate the adverse effect of requesting short breaks when making other credit repayments.

In case of serious difficulty, instead of defaulting on payments, it is better to take the option of deferring the loan repayment. This is despite the fact that even while the loan is put on hold, it will still accrue interest. The reason for this is to avoid soiling your credit history early in your life, mainly because the history is very brief.

Graduate and Professional Students

Graduate and Professional students have to find ways of securing loans that are convenient for them. Unlike undergraduate students, they tend to have fewer options. For example, they cannot access unsubsidized Stafford loans or Pell grants. While graduate students can obtain PLUS loans for financing college, they have to go through a credit check as they would have while seeking a private loan.

Some loan debt relief programs are available at this level, including those offered for public service. While private loans may have less suitable conditions than federal grants and loans, good credit scores will aid in securing lower interest rates.

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