529 Savings Plans: How Bad are the Non-Use Penalties, Really?
Today is 529 Day, and I am sure you are seeing a lot of articles encouraging you to open and fund 529 Savings Plans for your children, grandchildren, nieces, and nephews. At College Coach, we talk to thousands of families a year who are thinking about saving for college, and 529 Savings Plans are one of the most popular ways our clients choose to save for college.
In almost every discussion we have, people ask “What happens if my kids don’t go to college?” It’s a great question to ask, because there are taxes and penalties that apply when people withdraw money from 529 Savings Plans but cannot match the withdrawal to college costs for the plan’s beneficiary.
Part Two: What questions should I ask about financial aid on my college visits?
Last week we told you how to begin researching the financial aid practices of colleges you plan to visit. This week, we provide you with questions to ask an admissions or financial aid counselor that will help clarify your understanding of their processes. (Note: It’s usually not a good idea to ask these questions of student tour guides, as they will not be as well informed about school financial aid policy.)
Questions for the Admissions Office to Understand Financial Aid:
Does your college award merit scholarships? If yes, what is the average award? What percentage of the admitted class is offered scholarships, and what is the academic profile (test scores and G.P.A.) of recipients?
This is one of the most important financial questions you will ask on your visit. Every college’s merit scholarship awarding practices differ based on the academic profile of the students they admit and who they are trying to attract to their campus.
Part One: Do your finance homework before making college visits
The car is packed and you’re ready to hit the road for a summer tour of colleges with your soon-to-be high school senior. While your student is checking out the majors offered, the size of the dorm rooms, and the quality of the food, you’re probably wondering about the price tag. Unfortunately, you can’t learn your exact “bottom line” at a college until your child’s senior year when he or she applies for college admission, scholarships, and financial aid. However, the initial college visit is a perfect time to collect information about financial aid and pricing practices, and to establish a general idea of the aid your student might receive.
First Step: Look at each college’s online resources
The first step is preparing for your visit. Research each college’s website to learn about the types of financial aid offered, including merit scholarships.
Part Two: If parents are denied a Parent PLUS loan, what are their options?
Last week, we outlined the basics of the Federal Parent PLUS loan, a great option for many families, but an option that might not be available to all. If you’ve been denied a PLUS loan, you first have the right to appeal the decision by documenting extenuating circumstances (Tweet this Tip). For more information, see https://studentloans.gov/myDirectLoan/whatYouNeed.action?page=credit.
The student’s other parent or stepparent also can apply for the Parent PLUS Loan which will trigger another credit check for the new borrower to determine his or her eligibility. Finally, the original borrower also has the option to utilize an endorser to cosign the loan. The endorser must pass the credit check, and he or she will be responsible for repaying the loan if the borrower fails to make payments.
Part One: What is a Federal Parent PLUS Loan, and how do I get one?
Now that you’ve deposited at a college, it is time to figure out how you are going to pay the bill. One of the many ways parents can help their students pay their college costs is with a Federal Parent PLUS Loan. As the name suggests, this is a loan where the parents are the borrowers. The PLUS Loan is a federal loan that provides borrowers with protections not often found in the private loan market, including several attractive repayment options, fixed interest rates with predictable payments, and deferment and forbearance options during short term hardships.
In recent years, the Parent PLUS loan has offered a fixed interest rate. It is currently based on the Ten-year Treasury Note plus 4.6 percent with a cap of 10.5 percent. The current interest rate is 6.41 percent and will be reset on July 1st for the 2014-2015 school year. Borrowers should borrow for the entire academic year, keeping in mind that they will need to reapply each year. A credit review is done each year because borrowers are not automatically approved for the entire cost of the education.
Yesterday brought breaking news for student loan borrowers: we now know what Federal Direct Loan interest rates will be for the 2014/15 school year! Though rates are officially set for the upcoming academic year based upon the 10-year Treasury Note rate in effect on June 1st, the U.S. Treasury Department just held its last scheduled Treasury Note auction prior to that June 1st deadline, giving us a sneak preview of next year’s rates. For loans disbursed between July 1, 2014 and June 30, 2015, interest rates will be as follows:
Unfortunately for borrowers, these rates represent a 0.8% increase over last year’s rates. See last summer’s blog post regarding how federal education loan interest rates are set, and note that these new rates only apply to loans disbursed during the 2014/15 academic year.
The financial aid office is out to get you!
At least that’s what the media would sometimes have us believe. The FAFSA is frequently portrayed as an impossibly frightening form, student loan debt a ticking time bomb, and the financial aid process (at best) arbitrary and (at worst) nefarious. With such portrayals in the news, it’s no wonder that future college students and their parents often feel discouraged. I fear that families reading a recent article on the website Vox, entitled “Six things colleges don’t want you to know about financial aid,” may have felt similarly dismayed.
Rather than put families off of the college admissions and financial aid processes, we at College Coach want to encourage families to take control of their application process and use the insider information we provide to their advantage. With that in mind, let’s take a look at those “Six things colleges don’t want you to know about financial aid,” and see how you can best use this information.
In many countries students take a gap year, or a year off, after completing high school before heading to college. The United States remains the exception to this trend, with the gap year viewed as an opportunity available only to the wealthiest students.
Currently, there are a handful of colleges who have established programs designed to fund a limited number of students and remove the financial barriers typically associated with a gap year. Princeton and the University of North Carolina-Chapel Hill were two early adopters of this type of program. In mid-March of this year, Tufts University announced a new one plus four program, which offers national and international service opportunities for participating students. The Tufts program will be sponsored by the university and is open to all students regardless of financial need.
Congratulations on your college acceptances and success in receiving scholarships and need-based financial aid! If you don’t mind, I’d like to give you a little assignment.
Those financial aid statements and award offers are full of information, and it’s not always easy to compare offers. Some colleges may include student and parent loans on the actual financial aid statement, while others mention them in a cover letter accompanying the statement. The school’s financial aid and merit scholarship offers may arrive in different letters, or you may still be waiting to hear about one of the two.
So your assignment is this: create a spreadsheet, and move the information on each of these non-standard forms into a format that allows you to compare apples to apples, instead of grants to pears! Once you have your spreadsheet set up, follow the next two steps.