Who Should Apply for Financial Aid?

“If we aren't likely to qualify for need-based aid, should we file a FAFSA?”  “Is it true that everyone should complete financial aid forms, regardless of need?” “Do I need to complete the FAFSA to receive merit aid?” These are questions I often get from parents who are trying to determine whether there is any benefit to filling out this "black box" form.  The Free Application for Federal Student Aid, more commonly known as the FAFSA, is the federal form that all colleges require students to complete in order to qualify for certain types of financial assistance and any federal student aid.  (Nearly 400 colleges also require submission of the CSS/Profile form, found on the College Board website, for the allocation of their own institutional aid). You will need to fill out the FAFSA to receive need-based aid, but that is not the only reason to spend the time and effort.

Who should complete the FAFSA?  Anyone who believes he or she may qualify for need-based aid should invest the time; filling out the form is the only way to know for sure.  There is no maximum income or set amount which precludes one from qualifying.  Rather, many factors in addition to income influence eligibility including the age of parents, assets owned, family members living in the household and number of children in college.  Yet the FAFSA is not only required to calculate demonstrated need.  Any student or parent who wishes to borrow under the federal Stafford loan program, regardless of financial situation, must file a FAFSA.  This even applies if a parent chooses to take out a PLUS loan.  A handful of colleges require that students complete the FAFSA in order to receive merit aid awards.  The single best way to find out a college’s documentation requirements is to visit the financial aid pages on its website.  

  

Completing the FAFSA is relatively straight forward for those who have already filed a tax return and meet the eligibility requirements to take advantage of the IRS Data Retrieval Tool.  This enables filers to fill in much of the financial information on the FAFSA automatically by transferring data from their tax return.  But here’s the Catch-22:  You must wait approximately 2 weeks if you process your return electronically, or 6-8 weeks if you file by mail before you can access this feature.  By then the college financial aid deadline might well have passed (check individual college websites) so you may still be faced with the challenge of estimating your prior year tax information (a word of advice: better to under than over-estimate earnings).  For those who estimate, you will ultimately have to amend your FAFSA with the actual numbers, and can take advantage of the data retrieval tool at that point.  If you are certain you will not qualify for need-based aid yet will complete the FAFSA in order to borrow either a Stafford student loan or PLUS loan, you are not constrained by college financial aid deadlines so file your tax returns first to simplify the process. 

For a helpful guide on filling out the FAFSA form, you may want to view the 7 Easy Steps to the FAFSA tutorial before you get started.

Keep in mind that qualifying for financial aid is not a guarantee that you will receive lots of free money so go into the process with realistic expectations.   As I have emphasized in many of my blog postings, your personally estimated need, your FAFSA determined “demonstrated need,” and the amount of assistance you might actually receive can and will likely be three different numbers.  Financial aid formulas may yield a higher Expected Family Contribution (EFC) and lower demonstrated need than what you believe you can afford. The FAFSA is not frequently updated and consequently underestimates today's cost of living, especially for those who reside in expensive regions of the country. Furthermore, most colleges won’t fully plug the gap between the Cost of Attendance and what you are expected to pay. Like many of us managing our personal finances, colleges struggle to judiciously allocate a finite pool of resources.  So embark on this process with tempered hope and expectations. 

Does That Price for This College Make Sense?

The cost of college today has put affordability truly out of reach for most Americans, including many who are comfortably middle class.  I am not stating anything that anyone who is currently putting children through college hasn’t realized.  While higher education has always come at a cost, it has reached a price point that now exceeds the pain threshold for most Americans.  As President Obama, Congress and colleges wrangle over how to fix the problem of runaway tuition increases, I sadly am of the opinion that the situation has no satisfactory solution that doesn’t involve drastically changing the delivery of higher education in this country. But that is a subject for another day.  Right now I am consumed by the decisions families make with respect to cost and choosing a college.  

The question that has been weighing on my mind is how much is too much to pay for college, specifically for schools that heavily discount tuition.  Anyone who follows the news about rising college costs probably is familiar with the difference between the “sticker price” (what a college publishes as its total cost) and “net price” (what its students actually pay, on average).  In recent year, most colleges have made a practice of offering merit aid to students they wish to lure away from more selective schools.  Colleges do that by “discounting” the sticker price so that students feel like they are getting a real deal…but are they?  The discounting of tuition, in fact, is one of the main drivers of higher prices.  Colleges are able to offer select students sizable discounts by charging everybody else more.  So should you pay full price for a college that uses your tuition dollars to subsidize other students?  

The question has no simple answer.  What makes sense for one student and family may be impractical for another.  My goal here is to provide a framework for families wrestling with this question as they help their children make the all-important decision about where to attend college.  

Have the family discussion and a joint understanding about affordability before the applications go out and the acceptances come in.  It is okay to apply to the dream college, but be clear with your son or daughter about what kind of financial aid package, either need or merit-based, will make it feasible to attend.  Setting expectations early may mean avoiding future heartache.

Recognize that loans may make it possible to attend the college of choice today, but that excessive borrowing will feel like an albatross around the neck once graduation has passed and the loan payments come due. Borrowing a reasonable amount to pay for college makes sense, but knowing what is affordable requires planning and forward thinking.  How much will the student and/or parents probably have to borrow over four years?  What will be the approximate size of the future graduate's monthly payments and how long will it take to pay off the loans?  Given a student’s career plans, what will he or she likely earn, and will that be sufficient to comfortably meet debt payments while still covering other living expenses?  A good rule of thumb is to keep debt payments at or below 8% of gross income.  Calculators such as those available on the website http://www.mappingyourfuture.org/ enable one to project future debt payments, based on expected borrowing and interest rates. The calculators will also help you determine what a person should earn in order to comfortably pay back a given balance in student loans. If you are looking for a way to estimate average salaries in a specific field by region, you might want to check out the Bureau of Labor Statistics site: http://www.bls.gov/.

Think it through before you pay the sticker price at a college that heavily discounts tuition. It is important to find out what percentage of students receives some type of merit aid and the amount of the average award.  If a school discounts tuition for a significant number of students and you are not one of them, you are probably overpaying and subsidizing someone else’s child who has better grades and test scores.  When is it okay to do this?  1) If it’s the dream school and you can afford it without borrowing, 2) if the student wants to pursue a unique major or program for which the college is renowned, 3) when the college offers some merit aid, but most students pay full fare (e.g., the “subsidizing of other students is not significant) and 4) in cases where other less expensive options truly do not meet the academic needs of the student.

Have your child include schools on the college list that that will likely offer tuition discounts based on his or her test scores and GPA.  For the most part, you can figure out which colleges these are.  Are the test scores and GPA at the high end of the school’s range?  In all likelihood, the college will offer some discount as an incentive to entice your student to attend.

 

Weigh the emotional against the practical.  Does it make sense for the middle income family that receives no need-based aid to choose the Ivy League or highly selective university over the state school option?  Given the emotions wrapped up in these types of choices, I find it difficult to advise others on the right and logical decision.   Choosing the highly selective, name brand college may indeed change the student’s life, but at a high cost if excessive borrowing is involved.  This is especially true if a student has plans to go on to graduate school.  I know.  It’s hard to turn down Harvard or Yale, nor am I saying that you should.  However, graduating debt-free or with limited loans is anything but over-rated.  Do well as an undergraduate anywhere and you can spend the bigger bucks on graduate school.  

Deciding what a college education is worth is a complex analysis, yet unlike an integral calculus problem, there is no single right answer.  My hope is that having a framework to evaluate this decision and a list of questions to ponder will help each family come to the answer that is appropriate for them.

Making College Affordable - Time to Speak Up

I’ve been reading a lot about the cost of college lately. The talk these days is often about how to improve transparency. Thanks to a recent government mandate, families can now go to the website of any federally funded college and try out the school’s Net Price Calculator. This new online tool will ostensibly help families and students estimate their out-of-pocket costs for a college education. That’s the good news. Yet, net cost naturally leads to a conversation about how middle and lower income families will come up with this elusive figure which is still far beyond many family budgets. In fact, Education Secretary Arne Duncan asserts that three-quarters of all Americans believe college is too expensive for most people to afford. The fact that none of this has dampened the year-over-year rise in applications is indeed mind-boggling. Even Penn State’s applications are up this year, but that’s a topic for a different post.

College has become so far out of reach for so many families that last week Mr. Duncan implored higher education officials to make college costs an urgent priority and asked that they think creatively about ways to address this profound issue for our college-going population. Meanwhile, students and families still reach for the golden ring to attend expensive and elite four year colleges, often putting themselves in debt beyond their probable ability to repay. The most recent statistics on student debt show that seniors are graduating with average loan balances in excess of $25,000. Some of this is eligible for Obama’s income-based repayment plan for federal student loans, but more and more students are forced to borrow private loans to close the gap. Interest and principal on these loans will have students repaying their student obligations for much of their adult lives, perhaps forcing them to forego or postpone putting a down payment on a home or making contributions to retirement funds. Forget about funding their own children's education.

Today the Chronicle of Higher Education published a special report, What Private College Presidents Make, which shows compensation for the leaders of our nation’s colleges and universities, and also compares the president's salary to each institution’s pay scale for its faculty. At some, not all, the gap is staggering, not unlike the discrepancies we find on Wall Street. The report is quite timely given Mr. Duncan’s remarks last week. While cutting college chief executive pay won’t in and of itself make college affordable, focusing on leadership compensation seems like a great place to start. Suffice it to say that not nearly enough has been done to stop this runaway train so that we, as parents, are not further mortgaging our own futures and watching our children do the same.

We read about the steady rise in student loan balances and defaults each year, but nothing concrete has really been done to stem the rise of what will, without a doubt, be our next sub-prime crisis. I think about this everyday as I advise families on paying for college. For many it is not really a question of whether the funds are accessible; lenders are still eager to make student loans, and there is an even more tenuous link to affordability than there was in sub-prime mortgage lending where presumably some collateral existed. It is all too easy to hide our heads in the sand and hope that miraculously our children will be able to repay the loans when the time comes and still be able to live the American Dream.

I am not suggesting that everyone go to the nearest computer and sign the Occupy Student Debt Campaign online petition which calls for student debt forgiveness, free public education and greater transparency at private colleges. However, this product of the Occupy Wall Street movement has prompted me to think about my own responsibility to my children and to the families I advise. For the first time, I am encouraged to write to my representatives in Washington and ask that they make college affordability for all students a priority. I am hoping that I can persuade others to do the same. I look down the road and wonder what will happen when college is only accessible to the truly privileged in this country while the majority is saddled with student loans they will never be able to repay. The image is painfully clear and I'm not liking what I see.

Balancing Education Dreams with Smart Debt Decisions

I have transgressed from topics related to financial aid during the past few weeks, but want to return to the issue of affordability, college choice, and financial responsibility. This is now a perennial subject for the press, which is not surprising given the high and unabating cost of college, mounting student debt averages, and the state of the world economy which shows no signs of returning to good health any time soon.

The New York Times published an article by staff writer Ron Lieber on May 28, 2010, “Placing the Blame as Students Are Buried in Debt.” In this article, Mr. Lieber addresses the borrowing-to-pay-for-college dilemma by following the travails of a 26-year old woman who graduated from NYU with nearly $100,000 in college loans. When she chose NYU eight years earlier, she and her mother were determined that she should attend the “best” college, never factoring in the debt repayment burden upon graduation. I put “best” in quotes to emphasize the frequent mistake people make by equating quality and selectivity. This confusion often leads families to pick colleges based primarily on name recognition, without considering numerous other critical factors such as cost, fit and yes, academics.

Having amassed a hefty sum of private and federal loans, the young woman chronicled in Lieber’s article now finds herself in a situation where she does not earn nearly enough to meet her monthly loan payments. She, like many others, went heavily into debt to pay for college, never considering whether the nearly 6 figure investment in her education would yield a return that would make it worthwhile.

Who is to blame? The banks made loans available with little or no credit checks, the student borrowed without projecting her ability to repay the loans, and neither the university nor the banks counseled her on affordability before she amassed so much debt. Sounds vaguely like the sub-prime mortgage crisis, but with one major difference: the way the law reads today, student loans cannot be discharged in a bankruptcy. In other words, the borrower remains on the hook, even if he or she files for bankruptcy.

Curiously, NYU was one of the few universities in the country last year which actually took the initiative to contact families about debt before students enrolled. The university called 1,800 families who qualified for financial aid to ensure that they were aware of the debt they would likely have to incur. To the school’s surprise, this outreach effort had no impact on the enrollment rate. As a result, NYU ceased with such calls this year, though the university still struggles with how to best advise families on borrowing and paying for college, as well as where its counseling responsibility ends with respect to affordability.

In my view, every party here ought to be held accountable. However, the student and family will be the ones left paying back the loans, so the bulk of the responsibility lies with them. Am I implying that borrowing for college is a bad thing? Absolutely not! Financing a college education is a worthwhile investment, provided the ultimate return on that investment is positive. How does one assess that, especially before one has even decided where to enroll? One of my favorite college financial aid resources is the website http://www.mappingyourfuture.org/. This website offers a myriad of useful information, but one of its best features is the calculators which enable you to project forward and estimate future debt payments, based on expected borrowing and interest rates. One of the calculators even suggests what someone would need to earn monthly to comfortably pay back his or her student loans. Other resources such as the Bureau of Labor Statistics site (http://www.bls.gov/) provide average salaries by region based on occupation. Students who have an inkling about what they want to do when they graduate can get a sense for how much they can expect to earn. Both these resources are good starting points for understanding affordability with respect to borrowing for college.

Before you choose a college based on name recognition alone, especially if you will need to borrow, understand the potential financial responsibility after graduation. As I have recommended in prior postings, financial "safeties" or college options that are likely and affordable, are as important to put on the college list as schools deemed to be an academically secure admit.

Student Loan Reform - What Does it Mean for Me?

The recently passed healthcare reform bill will not only bring historic changes to how healthcare is provided; it will also change the way students borrow to pay for college. That’s right. The Obama proposed student loan reform was a late addition to the reconciliation bill passed last Sunday by the House. So the passage of healthcare reform this week also brought sweeping changes to federal loan programs for higher education as well as steady increases in financial aid for families with the most significant needs. The major changes to student financial aid fall into 3 categories: increases to Pell grants, elimination of the bank-based student loan program, otherwise known as the Federal Family Education Loan program or FFELP, and a modification to the loan repayment plan that will make it easier for graduates with modest income to repay their education loans (there are additional changes, though these are the three that most directly impact financial assistance for students).

Increases in the maximum Pell grants which are available to students whose families demonstrate the most significant financial need (typically income less than $45,000) will now be tied to the Consumer Price Index (though the original proposal was higher at CPI + 1%). The maximum award for 2010-2011 is $5,550 and will stay constant through the following two years. The grant size is expected to reach $5,900 by 2019-2020, nearly $1,000 a year less than that projected under President Obama’s original proposal. While the final version has been applauded, it is not expected to keep up with increases in college tuition, room and board, if history is any guide. Assuming the rise in cost of attendance continues to outpace the rate of inflation, the changes to the Pell program will do little to make college more affordable for students in the Pell eligible income bracket.

The big change in the federal loan program is the discontinuation of the bank loan option for federal student loans. The bank-based option has been available to colleges and universities since 1965 and accounted for as much as 80% of the federal student loan market. The federal government pays fees to lenders, though assumes the risk if the loans default. The Obama administration has made elimination of the FFEL program a primary goal for student aid reform, projecting a 10 year savings of $61 billion that will be used largely to support the increase in Pell grants. After July 1st all colleges and universities that participate in the federal Stafford loan program will join the Direct Loan program, shifting the administrative management from lenders to the colleges themselves.

How does this change impact students and their families? There are really two ways that borrowers will be impacted. No longer will students at colleges that participate in the FFELP program need to find a bank lender. Instead, those who apply for federally guaranteed Stafford loans will deal directly with the colleges’ financial aid offices. Secondly, the interest rate on the PLUS loans, which parents can access to pay their children’s college costs, is 7.9% with the Direct Loan program, versus 8.5% for the erstwhile bank program. With interest accruing while the student is in school, the difference can become significant over four years.

Changes to the income-based repayment plan, which became effective last July, will further ease the burden on students once they begin to repay their school loans. The purpose of the plan is to make it easier for graduates with low incomes to stay current and potentially limit their loan obligations through debt forgiveness. The bill just approved will make the repayment option available to more borrowers by lowering the debt to income threshold from 15% to 10% of discretionary income. Additionally, loans still outstanding after 20 years (versus the current 25) will be forgiven. The one catch is that this provision will not go into effect until July 1, 2014 and will only benefit those who borrow after that date.

So who are the winners and losers with the student loan reform bill? Low income students are winners, as they are now assured federal grant money that will grow with inflation. Whether it is enough to keep them from losing ground against rising college costs is in question, though doubtful. Student borrowers under the federal loan program should probably be indifferent to whether they borrow from a bank or through their college. The modified income based repayment plan is without a doubt the best deal for college graduates, though high school seniors who will start college in the fall lose out since the changes don’t become effective until July 1, 2014, the year they graduate.

Are "No Loan" Aid Policies a Thing of the Past?

First it was Williams earlier this month; now Dartmouth has announced that it is pulling back from its “no loan” policy for students who qualify for financial aid. Anyone who has been reading about college investment losses should not be surprised by this development. A couple of weeks ago a study on college endowments reported that these investment portfolios in the aggregate lost about $95 billion in value in the 2009 fiscal year (June 2008 to June 2009), contracting 23% on average. Since colleges such as Williams and Dartmouth rely on endowment earnings to fund a major portion of their operating budgets, these investment losses have significant ramifications.

Back in late 2007 and early 2008 about 40 highly selective and well endowed colleges instituted no loan or limited loan policies for their student aid programs. This trend took hold after Senator Charles Grassley, Republican from Iowa, suggested that colleges and universities be held to the same standards as foundations that must spend 5% of the value of their investments annually in order to maintain tax exempt status. Yet as colleges grapple with structural deficits, even after a series of budget cuts, the practicality of these policies is now being revisited.

With Williams and Dartmouth taking the first steps, it is just a matter of time before others follow suit, as none of these colleges has been spared the economic pain. Both schools have stated that the reinstitution of loans in financial aid packages is a necessary move in order to preserve educational programs. Each has emphasized, however, that the return to loans will not affect students who demonstrate the most significant need. Dartmouth, for example, has stated that it expects this to impact those students whose families earn above $75,000, for whom loans will comprise $2,500 to $5,500 of the financial aid package per academic year. With income under $100,000, loans will not exceed $2,500.

So what does this mean for financial aid, in general, at colleges across the country? Without a crystal ball, I can only make some educated guesses. Neither Williams nor Dartmouth has backed away from fully meeting demonstrated need, and I expect that maintaining this policy will be a priority. We will just begin to see a higher percentage of loans in the packaging. The selective schools that currently have no loan policies generally offer need-based aid only (no merit). That of course, will not change. But what about other colleges that use merit aid to attract students and shape a class? Many of these colleges do not have the hefty endowments that prompted the no loan policies in the first place. They rely heavily on tuition to meet their budgets and fund aid.

Given the importance of filling seats, I predict that merit aid as an enrollment management tool will continue for many colleges. In fact, schools that survive by maintaining enrollment numbers may find merit aid even more important. Offering some tuition discount, past experience has shown, attracts students who still bring in tuition dollars. These are the ones that also raise GPA and standardized test score averages.

But back to need-based aid...will we continue to see less generous financial aid packages? Pure economics would suggest so. Don't be surprised to see other highly selective colleges dial back their no loan policies, especially now that two of their prestigious peers have already taken the plunge.

Obama's Plan for Financing Higher Education

Last summer the Obama administration introduced the Student Aid and Fiscal Responsibility Act, or SAFRA, which would end bank origination of federally guaranteed student loans. If passed by the Senate (it has already been approved by the House of Representatives), all federally guaranteed student loans will be funded directly through the federal government. The administration claims that eliminating the bank based program will save the government $87 billion over ten years, primarily by ending the subsidies that banks receive through the Federal Family Education Loan Program (FFEL). President Obama has pledged to use the expected savings towards other education initiatives.

So who will benefit from this savings windfall? The primary beneficiaries are likely to be borrowers repaying their federal guaranteed student loans and Pell Grant recipients. At the State of the Union address a little more than a week ago, Obama announced his commitment to expand the recently created Income-Based Repayment Program which I discussed in a blog posting last June. The existing repayment program went into effect July 1, 2009 and currently caps monthly loan payments for federal student loan borrowers at 15% of discretionary income (the difference between adjusted gross income and 150% of the federal poverty level). After 25 years, any outstanding loan balance would be fully extinguished. Those employed in public service would be relieved of their debt obligations after 10 years.

Now President Obama proposes to reduce the maximum federal loan payment amount to 10% of income, with a 20 year debt forgiveness term. Roughly 36% of student loan borrowers have loan payments that exceed 10% of their income, versus 16% at the current 15% of discretionary income cap. There is a real benefit here to our sons and daughters who borrow under the federal Stafford student loan program. For recent graduates starting out with modest incomes, a cap on debt service can provide some tangible cash outflow relief and may mean the difference between affordability and potential default.

The other major beneficiary of education finance reform is likely to be the Pell Grant program, which comes as no surprise. The Obama Administration has been upfront about its desire to improve funding to this higher education aid program which benefits those students with the greatest financial need. Key features of Obama’s budget plan for Pell Grants are an increase in the maximum annual amount to $5,710 from the current $5,350 maximum with increases pegged to the CPI, and a proposal to convert this to an entitlement program. Such a move would guarantee available funding for Pell Grants and would remove the program from the uncertainties of the Congressional budget annual appropriation process.

The last, but not necessarily least of the Obama administration proposals is the extension of the American Opportunity Tax Credit which, as a modification to the Hope Tax Credit, was initially approved for 2009 and 2010 only. The maximum $2,500 per tax year can be used during the first four years of post secondary education (100% of the first $2,000 and 25% of the next $2,000 for qualified tuition and expenses, including textbooks). The tax credit is available to middle income families, though begins to phase out between $80,000 to $90,000 for single taxpayers and $160,000 to $180,000 for married couples.

All in all, it appears that higher education fared better in the president’s 2011 fiscal budget than many other programs that have experienced cutbacks in funding. In fact, the proposals, if approved, will provide some relief to a wider range of income groups. By increasing Pell Grants, extending the American Opportunity Tax Credit and lowering the income caps for federal loan repayments, the Obama education plan casts a fairly wide net. It should help, even if modestly, not only those most in need, but will also begin to address the economic challenges faced by middle income families and recent college graduates who must make student loan payments at the same time that they try to get established in the workforce.

A New Credit Program to Help Repay Student Debt

The challenge of financing a college education has spawned many proposals on how to help students finance and achieve their college dreams. One of the newer and more innovative ideas received some press in this past Saturday's New York Times (Aid for Students Facing Mountain of Debt). The featured start-up company, SafeStart, has developed the concept of providing interest-free credit lines to student loan borrowers. The company's objective is to offer students a way to protect their credit and ease their cash flow should they experience financial hardships within the first few years after graduation. SafeStart also offers financial literacy training and debt counseling services to assist its student clients.

Here’s how the program works: Undergraduate students with guaranteed Stafford loans who face financial hardship after graduation or who go back to school during the repayment period can draw down on an interest-free line of credit. Advances under the line of credit are available to cover loan payments for up to 36 months over five years. After the five year borrowing period, the student must repay the SafeStart loans in 60 monthly payments.

The cost of the program ranges from $40 to $70 per each thousand dollars of principal borrowed, payable up-front. So a student who borrows $20,000 and is charged $70 per thousand will end up paying $1,400 for access to the line of credit. This is roughly equivalent to one year of interest on $20,000 in unsubsidized Stafford loans at 6.8%. The variation in fee charged is a function of whether the student opts for the financial literacy and debt management offerings, but the charge will also vary by college, presumably reflecting a specific school's student loan default history. To qualify to drawdown under the line of credit a borrower's monthly loan payment must exceed 10% of his or her income. One's credit score has no bearing on the ability to take advantage of this service, but a student’s college must participate in the program. While the company claims to have more than 600 schools signed up, I went to the website and typed in my alma mater, Wesleyan, only to discover that it presently does not participant.

The principals of SafeStart assert that they do not compete with the federal government’s income-based repayment plan that began July 1 of this year. Under that program, which was discussed in my June 5, 2009 blog posting, borrowers can cap their Stafford loan payments at a maximum of 15% of the amount by which family gross income exceeds the poverty level (currently $16,245 for an individual), and any amounts borrowed which remain outstanding after 25 years will be forgiven. With the income-based repayment plan, debt payments that are deferred due to the payment cap will continue to accrue interest, unlike borrowings under the interest-free SafeStart line.

So I decided to do a little calculation to test how eligibility to borrow under the SafeStart line compares to the payment cap on the federal government program. What I determined is that a student making $30,000 a year with a $230 monthy loan payment ($20,000 loan at 6.8%) would only have to pay $172 and could defer $57 a month, or $685 annually under the income-based repayment (with interest of course). Under the SafeStart program, the monthly loan payment would have to be $250 (higher than the actual $230 payment) in order to render the line eligible for borrowing. In other words, SafeStart only really has value for students who have a lot of debt!

Still, the SafeStart program may be a good option for some students, especially if they anticipate choosing a career where income is likely to be low in the early years, though the government's income-based repayment plan addresses the same issue. However, here are some caveats that should be considered before signing up for a SafeStart credit line. This works essentially like an insurance policy. One may end up paying a premium or fee for a policy that he or she will never access. In that case, the company says it will refund 30% of the fee paid. The programs is currently only available to cover undergraduate Stafford loans, though SafeStart’s website claims that it will roll out similar programs for graduate student Stafford loans, graduate PLUS and Perkins loans either this fall or by winter 2010. Also as mentioned, many schools do not currently participate, though that may change over time if the program catches on.

However, one of my prime concerns, as a former bond insurance executive, relates to SafeStart's future financial health. A company that extends credit must have ongoing access to liquidity (cash) and financial resources. SafeStart collects an up-front fee with a promise to extend credit for future drawdowns. What does that mean for someone who has paid the $1,400 in advance? The company may not have available funds to lend at the time the student needs it. I would just want to know more about the long-term financial viability of this company before I signed up for its loan repayment plan.

New Option for Federal Student Loan Repayment

Borrowers graduating from college with student loans are about to get some relief from the federal government starting on July 1. Those in good standing on their student loan payments will be able to take advantage of a new program that will allow them to tie their monthly loan payments on federal loans to what they make, rather than to what they owe. Monthly loan payments will be capped at 15% of the amount by which gross income exceeds the federal poverty level (now $16,245 annually). Furthermore, if the loans are not fully paid off after 25 years, the unpaid balance will be forgiven. While this is generally great news for graduates starting out with modest post college incomes, there is some fine print of which borrowers should be aware.

As income rises, so will your monthly debt payments. That’s not a reason to turn down a raise, but don’t be surprised when the required loan payment suddenly increases.
Income used in the calculation is household income, not just the borrower’s; if a person is married, the spouse’s income will factor into the formula to determine the maximum payment amount, provided the couple files jointly. Filing separately will get around this issue. However, the taxpayers will forfeit other tax benefits such as student interest deductions which are only available to married couples who file jointly.
Payment reductions will slow down debt amortization. The not-so-desirable result is higher interest charges over the life of the loan.
Any debt that is forgiven after year 25 will be treated as income and therefore subject to taxes.
And as noted, borrowers must be in good standing to take advantage of the payment option.
This program applies to federal loans only. In other words, payments on high interest private student loans cannot be tied to income.

In an earlier post I discussed the advantages of the federal, or Stafford loan program, over other types of borrowing to finance one's education. The new income-based repayment program will provide another reason to exhaust this borrowing source before resorting to other types of loans.