The crippling cost of college

One of the themes we keep emphasizing has to do with the crippling costs of a college education today in America. Sure, college campuses are much nicer with all the new buildings and new technologies, but they are failing in their basic mission if students leave there with massive student debt that will hang over them for the rest of their lives.

More publications are doing good work discussing these problems. In Newsweek, Megan McArdle asks whether college is a lousy investment.

Why are we spending so much money on college?

And why are we so unhappy about it? We all seem to agree that a college education is wonderful, and yet strangely we worry when we see families investing so much in this supposedly essential good. Maybe it’s time to ask a question that seems almost sacrilegious: is all this investment in college education really worth it?

The answer, I fear, is that it’s not. For an increasing number of kids, the extra time and money spent pursuing a college diploma will leave them worse off than they were before they set foot on campus.

Given the costs, it’s hard to argue with her on this point. She discusses how college was critical for many families in building a better life for the next generation. But sitting on an English degree with $150,000 of debt seems like a pretty bad deal.

That said, we can’t overreact to the current economic conditions. When the economy improves, more of these kids will get jobs with their degrees.

Yet something has to give, and it was very encouraging to hear President Obama challenge colleges to slow down tuition inflation.

Also, the future of free college courses looms on the horizon. Universities would be wise to start figuring out how to lower costs, or they might really have a problem in the future.

Some regulations on for-profit-colleges struck down

It was a pretty technical decision, but a court has struck down some of the regulations put in place by the Obama administration to regulation the for-profit-college industry. This is problematic as many of these colleges are loading up students with a ton of debt, while their degrees don’t get them a job. We’ve also seen some pretty shady practices in recruiting students to these schools. Unfortunately, there are far too many for-profit college scams out there.

This unfortunately tarnishes those colleges that provide good training for students. Hopefully the media attention will make students more selective, but the problem is that these schools are playing with our money, as the taxpayers help fund these student loans. We need more accountability and the court just made it more difficult.

Fixing college tuition

We have some serious problems in the country surrounding college education. We have some of the best universities in the world, so the issue is not quality. The issue is price. The cost of college is soaring, and aggregate student debt will exceed $1 trillion!

President Obama is trying to address the student loan crisis with some sensible reforms, but the bigger long-term issue has to do with the cost of a college education.

Steven Goodman addresses the problem and proposes a solution.

Since loans now comprise 70% of financial aid packages, the growing tuition burden falls squarely on student-borrowers who may have saved for college but who still can’t meet the high cost of attendance. Two-thirds of American undergraduates are in debt. This year, student loan debt will grow to more than a trillion dollars, outpacing credit card debt for the first time. As hundreds of thousands of high school seniors prepare their college applications, and their parents compile documents required for financial aid, Congress needs to seriously consider legislation that will rein in future tuition increases.

There are many reasons for the dramatic rise in tuition, including demand for better student residences, cutting-edge laboratories, IT improvements, cuts in state subsidies and administrative growth. Regardless of which factors are most significant, the fact remains that there has simply not been enough external pressure to force universities to contain costs. Ironically, the accessibility of student loans, while admirable at first glance, has contributed to tuition growth. And while President Obama’s recent proposal to cap student loan repayments depending on income is a step in the right direction, it doesn’t address the bigger problem of runaway tuition in the first place.

This is where government needs to firmly step in. The federal government contributes billions of dollars to research and development on campus and allows universities to function as tax-exempt institutions. Self-policing of college costs has not worked; government needs to tie its support of higher education to college costs.

Read the entire article as it presents a sensible argument.

Debt after College: Credit Counseling for Students

Credit counseling, also called “debt counseling,” is a service provided by organizations that offer professional counseling for consumers in need of assistance in the areas of debt repayment, debt management, and money management. Credit counseling is also a requirement that must be met prior to filing chapter 7 or chapter 13. The types of debt that credit counseling agencies may assist you with include credit cards, personal loans, home loans, car loans and student loans. Credit counseling agencies also assist with utility bill repayment and tax debt.

Getting Started with a Credit Counseling Agency

Credit counseling agencies will require certain documentation to begin the process, so it is important to organize your records before visiting an agency. The credit counseling agency will ask for credit card statements, copies of utility bills, mortgage payment statements or your rental amount/lease. The agency will also expect you to bring a record of spending or a budget that should  include household expenses and any miscellaneous expenses. This documentation is needed in order for the credit counselor to create a realistic budget and debt repayment plan.

Benefits of Credit Counseling

A major benefit to credit counseling is that the credit counselor will handle all lenders, collection agencies, and credit card companies for you. This helps to eliminate the stress associated with collection agency and creditor phone calls. Your credit counselor will negotiate a repayment plan that may significantly lower your monthly payments and interest rates.

You may opt to send monthly payments to the credit counseling agency (by check) or you may authorize a monthly electronic funds transfer from your bank account. Depending on the credit counseling agency, they may offer an option called “debt management system.” If you opt for a debt management system, you will pay the credit counseling agency a lump sum. Out of that lump sum, payments will be made on your behalf. This system can be used as a safeguard against skipped or late payments, which can save money on interest, fees, and any penalties associated with the debt.

An additional benefit to credit counseling is, it can educate you on how to better manage your finances and it will eventually help to minimize or prevent future debt.

Disadvantages of Credit Counseling and Protecting Yourself

While there are advantages to credit counseling, there are also disadvantages. Credit counseling could have a negative effect on your credit, initially. In some cases lenders, specifically mortgage lenders, may not want to extend credit to an individual that may be in the process of completing a credit counseling program. Fortunately, credit-counseling notations will be dropped from your credit report, roughly one month after the credit counseling program is complete.

Another disadvantage to credit counseling is the potential for fraud. This means that in some cases a credit counseling agency could turn out to be a scam. Look out for the following red flags:

  • -Unrealistic promises (“settle for pennies,” or “this won’t affect your credit report”)
  • -Big upfront fees (fees are typically $10-$15 U.S.)
  • -Delayed or missing payments
  • -No accreditation

To protect yourself against fraudulent credit counseling agencies, it’s best to make sure that the agency is approved by the approved by the U.S. Trustee Program of the United States Department of Justice. Locating an approved agency is simple. Just log onto www.usdoj.gov and follow these steps:

  • -Under “Resources” click “DOJ Agencies”
  • -Scroll down to “U.S. Trustees Program”
  • -Under “Bankruptcy Reform” click “Credit Counseling & Debtor Education”
  • -Under “Credit Counseling for Consumers” click “Approved Credit Counseling Agencies”

The search function allows the user to browse through approved agencies by state. Please follow the link below, which should take you directly to the search page http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm.

New Government Rules Give Students Break on Loan Payments

Millions of college students around the world graduated this year and they have more on their minds than finding a job. Most college students graduated with a mountain of debt and no means to pay it. Even if these graduates find a job right out of college, depending on the amount of debt, payments can range anywhere from $100 a month to more than $1,000 a month.

According to a recent news article, one student loan servicing center suggested that a recent graduate, working in an entry-level position for a Web company, pay $900 a month towards his $82,000 federal student loan balance. Of course, this is nearly impossible to manage on an entry-level salary – or even a mid-level salary for that matter, so what can borrowers do to delay or minimize payments? According to author and personal finance columnist Gail MarksJarvis, if you have federal loans, you can make use of new government rules that give people a break on student loan payments they cannot afford.

If you owe more on your loans than you earn annually, you are likely a candidate for some relief. Under the relatively new “income-based repayment plan,” you get relief if the regular payments you would have to make over 10 years will exceed about 15 percent of your discretionary income. That’s calculated based on a formula related to the U.S. poverty line. Besides income, the calculation involves the size of your family. Simply put, most borrowers will pay less than 10 percent of their adjusted gross income.

To find out if you qualify for the income-based repayment plan and to calculate your payment, visit the official Federal Student Aid website at: http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp.

Debt Ceiling Deal Still Not Enough?

A recent CNBC report casts a negative shadow over the deal that, at the 11th hour, prevented the U.S. from defaulting on its debt. The report mentions that the U.S. debt crisis appears to have been resolved temporarily, but politicians and economists are still warning that the deal won’t resolve all of the country’s economic ills. The report, based on statements made by Anthony Doyle, director of investment specialists at M&G Investments, even suggests that the country is headed for another recession.

Doyle points out that “when US GDP growth falls below 2 percent, it usually means that a recession is not far away, and combined with yesterday’s much weaker than expected ISM report and an unemployment rate at 9.2 percent, it suggests that the U.S. Federal Reserve won’t be in any rush to hike interest rates this year.”

The U.S. economy grew by just 1.6 percent in the second quarter of 2011, according to official figures released last week. Investors have also been spooked this week by Institute of Supply Management (ISM) data showing that its manufacturing index read 50.9 in July, barely above the 50 mark that separates expansion from contraction, and new orders contracted for the first time in two years.

The last U.S. recession lasted 18 months, the longest since World War II, according to the National Bureau of Economic Research. The respected research body said the last recession began in 2007, and the recovery did not start until June 2009.

President Obama signed the new debt bill, which limits student loan cuts (among others), a day after it cleared the House of Representatives by a 269-161 margin, and shortly after it passed the Senate by 74-26 votes overnight. The emergency bill increases the nation’s $14.3 trillion cap on borrowing.

New Rules are out for for-profit colleges

We’ve been highlighting some of the troubling news stories about for-profit college scams, and we’ve welcomed the notion of new rules governing the industry.

The new rules from the Obama administration are out, but they’ve been scaled back a bit from the initial proposed rules.

The Obama administration on Thursday issued a series of highly anticipated regulations aimed at cracking down on for-profit colleges and other career training programs that leave students saddled with unmanageable debts and contribute to an unequal share of federal student loan defaults.

The final rules issued by the Department of Education, however, are significantly less stringent than a draft version released last year, giving college programs an additional three years to come in line before possibly losing access to lucrative federal student aid dollars. The changes come after an unprecedented lobbying and campaign finance offensive over the past year by the for-profit college industry, which derives a vast majority of revenues from federal student loan and grant programs and has sought to protect that income by gaining influence in Washington.

Education Secretary Arne Duncan said the changes came after discussion with “lots and lots of different folks,” not just the industry, and he pointed out that the colleges were not unanimous in their suggestions for changes.

“What we really wanted to do was give people a chance to reform … this was not about ‘gotcha,’” Duncan said. “We tried to be very thoughtful, very reasonable and give people every opportunity to succeed, but be very clear where we wouldn’t permit ongoing failure.”

The intense lobbying campaign helped the industry, as the rules are weaker. You can check the article for the details. Lobbyist hacks like Lanny Davis did their job.

That said, this is a decent first step. It’s appropriate that the schools have a time frame to remedy problems, and this should help weed out the worst abuses.

Meanwhile, 10 states have opened a joint probe to look into the marketing practices of for-profit colleges, so we might yet see some interesting developments in this area.

The key here is you have to do your research before enrolling in one of these schools and taking on a mound of student debt.

Understanding Direct Loans

DIRECT LOANS

For the 2007-2008 academic year, 65.6 percent of al undergraduates received some form of financial aid. Of the 65.6 percent, nearly 40 percent received student loans. Although students may receive grants, which do not have to be paid back, they might not be enough to cover tuition costs, books, housing, and day-to-day living expenses. Student loan programs, such as the William D. Ford Federal Direct Loan Program, can help fill the gap.

Direct Loans are low-interest loans for students and parents. Direct Subsidized Loans for undergraduates with a first disbursement date between July 1, 2010 and June 30, 2011 have an interest rate of 4.5 percent. For graduate students Direct Subsidized Loans (no interest payments until after the grace period ends) have an interest rate of 6.8 percent and Direct Unsubsidized Loans (interest must be paid while enrolled) for all students have an interest rate of 6.8 percent. Direct Plus Loans have an interest rate of 7.9 percent.

Although the U.S. Department of Education is the Direct Loan Lender, the loan servicer is usually a private entity that is responsible for collecting, monitoring, and reporting loan payments. One such entity is American Education Services (AES) which was established by the Pennsylvania Higher Education Assistance Agency (PHEAA) to guarantee and service student loans for millions of borrowers across the U.S.

Direct Loans have loan limits and the limit depends on the year of study and whether the student is a graduate, undergraduate, dependent or independent. Direct Loan limits are as follows:

Dependent Student
1st-year undergraduate: $5,500 (maximum $3,500 subsidized)
2nd-year undergraduate: $6,500 (maximum $4,500 subsidized)
3rd- and 4th-year undergraduate: $7,500 (maximum $5,500 subsidized)

Independent Student
1st-year undergraduate: $9,500 (maximum $3,500 subsidized)
2nd-year undergraduate: $10,500 (maximum $4,500 subsidized)
3rd- and 4th-year undergraduate: $12,500 (maximum $5,500 subsidized)

Graduate Student
$20,500 (maximum $8,500 subsidized)
*All graduate and professional students are considered independent

To apply for a Direct Loan, you must fill out the Free Application for Federal Student Aid (FAFSA). To complete your application, use FAFSA on the Web. Once your application has been processed, you will receive an award package that contains information about which grants and loans you will receive and the amounts. Direct Loans are awarded as part of this package. Direct Loans are not based on credit or employment history, so unless you are independently wealthy, you are almost guaranteed approval.

For more information about the Direct Loan Program, please visit the official Department of Education Federal Student Aid website at www.direct.ed.gov.

A Guide to Student Loan Consolidation

Graduate

The federal government offers many options for financing your education from Federal Pell Grants and the Monetary Award Program (MAP) to PLUS Loans, Stafford Loans, and Federal Perkins Loans. Pell Grants and MAP awards do not have to be repaid, but student loans do.

Stafford Loans are low-interest student loans guaranteed by the government. Perkins Loans are campus-based loans with a fixed 5% interest rate, and a nine month grace period. Perkins loans are also guaranteed by the federal government. PLUS Loans (Parent Loans for Undergraduate Student) are granted to students based on the parents creditworthiness.

To cover the costs of tuition and education related expenses, most students will have to take out a number of loans from multiple lenders. The amounts, repayment terms, and repayment schedules will vary. Students may find that repaying several different lenders is not only taxing, but the payments may be too high after graduation and beyond. Fortunately, relief is possible through student loan consolidation.

Student loan consolidation is the refinancing of multiple student loans guaranteed by the federal government. The Higher Education Act (HEA) provides for a loan consolidation program under the Direct Loan Program and the Federal Family Education Loan (FFEL) Program. Under these programs, the student’s loans are paid off and a new consolidated loan is created. The loan consolidation program is a good option because:

-It simplifies the loan repayment process by combining all of the student’s Federal student loans into one loan, meaning there’s only one place to pay each month
-The interest rate will be lower than one or all of the original loans
-The monthly payments are typically lower, possibly 50% lower than the original monthly payments
-The amount of time to repay the loan will be extended beyond the original time period
-Consolidation may act as a safeguard against default

Applying for student loan consolidation is easy. Before applying, use an online calculator to estimate what your new monthly payments would be under one of four repayment plans including:

-Standard Repayment Plan
-Graduated Repayment Plan
-Extended Repayment Plan
-Income Contingent Repayment Plan (ICR)

Under the Standard Repayment Plan, you will pay a fixed amount each month and your payments will be no less than $50 a month for 10-30 years, based on total debt. Under the Graduated Repayment Plan, your minimum payment amount will equal the amount of interest accrued monthly. Payments will start out on the low end, then gradually increase every two years for 10-30 years.

The Extended Repayment Plan is for students with student loan debt that exceeds $30,000. Under this plan, you will have a maximum of 25 years to repay the loan and you can choose a fixed rate payment option (same amount each month) or a graduated monthly payment option, as discussed above. Under the Income Contingent Repayment Plan (ICR), monthly payments are based on several factors including yearly income, Direct Loan Balance, and family size. Payments will be spread out over a time period not to exceed 25 years.

To apply for student loan consolidation, gather the following documents:

-Your monthly billing statement
-Your annual statement or quarterly interest statement
-Your coupon book
-Website of your lender or servicer
-Your school’s financial aid office information (if you are currently in school)

Once you have all of the information listed here, visit the Federal Student Aid Programs Student Loan Consolidation Website to apply.

Both parties shill for the for-profit college industry

Some Democrats and Republicans are trying to scuttle attempts by the Obama administration to impose new rules on for-profit colleges to prevent abuses against students to rack up huge debt for dubious degrees.

The Department of Education is tired of federally subsidized student loans going to shady for-profit colleges that have poor track records of getting the students who do graduates good work — often leaving them stuck with mountains of debt. To curb this phenomenon, the agency has been moving along with a new regulation they call the “Gainful Employment” rule.

Under “Gainful Employment” rules, for profit schools would have to show that their students can find work without getting stuck with unreasonable debt in order to qualify for federal loans.

But behind the scenes, a bipartisan bloc of House members see things differently. They say the rule would reach too far and clamp down on institutions that do a decent job of educating and preparing students. But they want to tie the Department of Education’s hands completely, and block the funds they’d need to implement the rules at all.

Fortunately, many members of Congress are with the administration on this, and Obama could veto any bill with this language.

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