August Newsletter
29-Jul-2015 August is upon us and one more month of summer. We've enjoyed some beautiful weather here in Central Oregon, some heat waves but also some nice mild days. At HCO we had our annual company dinner in July. Mike made some delicious homemade calzones for the whole gang. You can see him in action on our Facebook page! Please enjoy the following articles on the topic of college costs and student loans.
Sincerely,
Hanson & Co Staff
Facing College Costs
How much does it cost to send a child to college now? For the 2014–2015 academic year, the College Board puts the average cost of tuition, fees and room and board at private nonprofit four-year schools at over $42,000. The College Board estimates other expenses (including books, supplies and transportation) at $4,000–$5,000. Thus, sending your child away to a private institution costs an average of around $47,000 this year; at universities considered “elite,” the total tab is generally well over $60,000. Those numbers likely will be even higher in the 2015–2016 school year, and they will certainly be higher for youngsters entering college in the future.
Parents of collegians can reduce their concerns a bit by considering the College Board’s report on “net prices.” These prices are determined by subtracting grant aid (reductions in direct college costs) and education tax benefits (savings from tax deductions and credits related to higher education). As reported by the College Board, such reductions bring down the cost at private institutions from the published price of $42,000+ to a net price of $23,000+. Including the other expenses mentioned previously, sending your child to a private university might cost “only” $28,000 a year, rather than $47,000.
Be aware, though, that the net price offsets will vary enormously from family to family. The higher your net worth and your income, the less need-based grant aid your student is likely to receive. The higher your income, the smaller your tax savings from education tax breaks, many of which have income-based phaseouts. Our office can help you determine how much relief you can expect from grants and tax benefits.
Higher and lower
The numbers mentioned previously in this article are national averages. Therefore, at some schools, the total cost will be much higher, whereas others will have much lower costs. Regional differences can be huge. According to the College Board, total costs for private institutions in New England are well over $50,000 a year, yet costs average less than $40,000 in the South, Southwest, and West.
Moreover, all of those figures are for private colleges and universities. Costs come down dramatically when you send your children to public institutions. The College Board puts the average total cost for in-state students at four-year public colleges and universities at just over $23,000: about half the cost of private schools. After grants and tax benefits, the net price at these public institutions is under $13,000 a year. At two-year public colleges, including community colleges, costs are even lower.
Charting a course
Even relatively modest costs for higher education can be daunting for many families. Therefore, parents should consider starting college funds for their children as early as possible. Creating a designated account for higher education may help you avoid “dipping in” for other purposes.
Under the federal formula, a family is more likely to qualify for need-based financial aid if savings and investment accounts are held by the parent, rather than in the student’s name. For example, a parent might be the owner of a 529 college savings plan, with the child as the beneficiary. Such plans, offered by nearly all states and some private firms, can generate tax-free investment earnings to pay college bills.
Once children are finishing their high school careers, it may make sense to apply to multiple colleges—some more expensive than others. Private and public institutions could be in the mix. If students are interested, applications to virtually no-cost military academies and Reserve Officers’ Training Corps (ROTC) program scholarships also might be included, along with other specialty schools.
Accomplished youngsters may receive more than one college acceptance, allowing the family to decide among the various opportunities. Published costs, net of any aid and tax benefits, might not be the main reason for making a decision, but they also should not be ignored. Everyone—students and parents—should have a reasonable idea of how the costs will be covered.
Keep in mind that your child’s first college might not be his or her last place for higher education. Your youngster might start at a less expensive institution and wind up graduating from or getting a postgraduate degree from a more prestigious college or university.
Regardless of a student’s path through higher education, it’s possible that family cash flow plus grant aid won’t be able to cover all the expenses that arise. Consequently, as is the case for many, your family may need to explore loans as an option to pay for the desired schooling. Take a look at the article “What You Should Know About Student Loans” in this issue for more information on college funding through student loans.
Trusted Advice
Taking Credit
- The American Opportunity Tax Credit (AOTC) is among the most valuable higher education tax benefits.
- This tax credit (a direct reduction in your tax bill) equals 100% of the first $2,000 of qualified education expenses you paid for each eligible student and 25% of the next $2,000 of such expenses you paid for that student.
- Thus, the maximum annual credit is $2,500 per student.
- If the credit reduces your tax to zero, 40% of the remaining credit amount (up to $1,000) can be refunded.
- To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 for married couples filing jointly). Partial credits are available with MAGI up to $90,000 ($180,000 on a joint return).
What You Should Know About Student Loans
Recently, concerns about student loans have been in the headlines. In 2015, the Federal Reserve Bank of New York put total student loan debt at $1.16 trillion, greater than outstanding auto loans or credit card balances. Publications such as the New York Times have published articles about “A Generation Hobbled by the Soaring Cost of College.”
The reason for the growth in student loan debt is straightforward: Many families need to borrow money in order to cover the expense of higher education. If you’re in that situation, knowing your choices can help you make practical decisions.
Today, most higher education loans come from the U.S. Department of Education. Broadly, they fall into one of two categories: student loans or parent loans.
Student loans
The most common federal loans, formerly known as Stafford loans, are now called Direct Loans. Students are the borrowers; in order to be eligible for these loans (in fact, for any federal education loans), the student must fill out the Free Application for Federal Student Aid (FAFSA). There is no credit check, but there are limits on how much students can borrow. Typically, annual loans to undergraduate students who are parents’ dependents can be as large as $5,500 for freshmen, $6,500 for sophomores, and $7,500 for others.
Besides an origination fee of approximately 1% of the amount borrowed, Direct Loans have fixed rates, set each summer, based on then-current interest rates. As of July 2015, the fixed rate for Direct Loans is 4.29%.
Direct Loans are either subsidized (for students who demonstrate financial need) or unsubsidized. If a student has an unsubsidized loan, payments are due after the funds are disbursed. Borrowers can choose not to make payments until six months after leaving school, but all unpaid interest will be added to the loan balance. With subsidized Direct Loans, the federal government pays the interest until six months after the borrower leaves school.
Students with exceptional financial need may qualify for a federal Perkins Loan. If so, no interest will be charged until nine months after leaving school. The fixed interest rate is 5%, and loans to undergraduates go up to $5,500 a year.
For federal student loans, the standard repayment period is 10 years, but there are various extension, deferral, and even loan forgiveness opportunities. For example, some loans can be forgiven if a borrower teaches full time for at least five consecutive years in a school classified as “low-income” by the Department of Education.
Parent loans
Formerly known as Parent Loans to Undergraduate Students, federal Direct PLUS Loans are offered to parents of undergraduates. (PLUS Loans also are available to graduate students.) Again, a student must fill out the FAFSA in order for a parent to get a PLUS Loan.
PLUS Loans can be as large as the total amount of college costs, minus any financial aid.
Example: Dave Evans attends a college where the posted cost of attendance is $40,000 for this academic year. Including a student Direct Loan, Dave receives financial assistance that totals $16,000. Thus, Dave’s parents can borrow up to $24,000 ($40,000 minus $16,000) with a PLUS loan for that year.
The origination fee for a PLUS Loan is 4.292% (4.272% on or after October 1, 2015), and the fixed interest rate is 6.84% for the 2015–2016 academic year. In order to receive a PLUS Loan, a parent must pass a credit check. If the parent’s application is rejected, the child may be able to receive larger student loans.
Private loans
Although most student loans come from the federal government, some banks, credit unions, and other lenders offer education loans as well. Private loans can supplement or even replace federal education loans. Interest rates on private loans can be lower than federal rates for creditworthy borrowers—some are in the 3% range now.
However, private loans often have variable rates, which can rise if prevailing interest rates move higher. Private education loans may have relatively high fees, so borrowers should read all the fine print before making any decisions. Our office can help you determine the true cost of a private student loan you’re considering.
Keep in mind that any loan can be an education loan, if the proceeds are used to help pay college bills. You might use a home equity loan or a home equity line of credit, for instance. Besides a relatively low interest rate, home equity debt may offer more opportunities to take a tax deduction for the interest you pay. Of course, you always should use home equity debt with caution because your home might be at risk if you default.
Trusted Advice
Deducting Student Loan Interest
- To deduct interest paid for education loans, you must have borrowed solely to pay qualified education expenses for yourself, your spouse, or a dependent.
- Loans from a related person or a qualified employer plan don’t qualify.
- The maximum annual student loan interest deduction is $2,500.
- To get the maximum tax deduction, your modified adjusted gross income (MAGI) must be not more than $65,000 for a single filer, or $130,000 on a joint return. Reduced deductions are allowed with MAGI up to $80,000 or $160,000.
Did You Know?
Students and parents borrowed $106.0 billion in education loans in 2013–14, down from a peak of $122.1 billion in 2010–11. Non-federal loans made up 9% of the total in 2013–14, far below the record 26% of the total in 2006–2007.
Source: collegeboard.org
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June
2017
Due June
15th
Individuals: If you are not paying your 2017 income tax through withholding (or will not pay in enough tax during the year that way), pay the second quarter installment of your 2017 estimated tax.
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