Category Archives: College Funding

How to Pick a College Major

Are you a young person planning to go to college? Or maybe you are an adult and want to go in a totally different direction in your career. Or maybe you just want to stay in the same industry but specialize in a particular area of study. Whichever group you are in, you need to go back to school or just continue on in your studies–but if you don’t plan, you might be headed in the wrong direction. Luke 14:28-32 kind of speaks about planning before setting a course.

A recent newspaper article indicated that those that graduate from college with the highest debt are those coming out of arts schools, yet their job prospects might not be so great. That WSJ article lists 3,500 colleges and their graduation rates and median amounts borrowed. Like any college or university, they will tell you about the most successful students and how well their careers are going. Attending college orientations and visits with our children, we had these wonderful top of the class students obtaining great fulfilling jobs paraded before us. They wanted you to think that if you attend their school you would be successful too. One school in particular we visited had a great arts school, and we heard about famous grads that were working for Disney–everyone was impressed and excited, but the odds were low for most students landing a similar job.

It seems as if most schools do a very poor job at helping students pick a career that not only fits their interests, but has great job prospects as well. In addition, little guidance is given when it comes to borrowing. More schools are talking about debt now, which is good, but too often they don’t give a lot of information, because if they do, they fear admissions will drop if students know the real story.

How do you make the most of your college experience to prepare you for a future career?  First of all it is good to have goals and knowledge. The main goals of education should be to prepare you for your next phase of life in your career, and as solid well rounded people that a liberal arts education promises.

How do you choose a good career?  I believe it is a combination of knowing yourself, knowing the job market, and following God. If you set your sights on making a lot of money without considering your own natural abilities and interests, then you might end up being very unhappy. Some people believe that as long as they have a lot of money to do the fun things, they will be happy, but for some that doesn’t work out. On the other hand, if you totally pursue your heart without consideration of the practical side of things, like the ability to earn an income your new degree will provide, then you will either starve or end up living with your parents, and maybe with a ton of debt that you can hardly ever re-pay. Lastly, if you don’t do it without any consideration for the call on your life that God may have for you, you might miss out on all sorts of wonderful things that are in store for you. A case in point is majoring in social work. This career can be one of the most wonderful areas of work, and if that is someone’s calling and interest, go for it, but be mindful that the income potential is modest, so plan to minimize debt and plan for the lifestyle that career will provide. The same might be said for teaching and other careers with many openings, but it is just good to plan appropriately.

It is easy for me to have this perspective now that I am in my 50’s, but it was difficult when I was 20 and was just ‘finding my way.’ It is better to take inventory when you are just starting out in life since switching gears later is hard if you have a family and lingering college debt. Start with knowing yourself a little better. Take an inventory of the things you like to do or have enjoyed doing so far.  What are you naturally good at? What makes you happy at work?  What are the undeveloped talents and abilities that you have? You may have difficulty seeing them yourself. I know I do. What has helped me is taking various aptitude tests, often offered through high school or college counselors, or personal, career or college coaches. Secondly, ask other people. For example, co-workers and friends told me I had teaching and writing abilities and natural administration skills, that I was good with technology and other things that I never really thought of. Having other people’s perspective is so valuable because we can’t often see things about ourselves. Proverbs 15:22 comes to mind, so early on don’t be afraid to ask for counsel and seek advice. Sometimes I find this hard to do, since I have to swallow my pride–publicly admit that I don’t have many things figured out–but I am finding out as I age how valuable this is.

Some career professionals will tell students to get a 4-year major in STEM degrees: science, technology, engineering and math. The following areas seem to be hot these days (sources: Forbes, Yahoo Finance, NY Times, US News and World Report):

  • Medical: medicine, nursing, pharmacology, pharmacy, bio-medical engineering, treatment therapy
  • Science and Math: Biochemistry, computer science, applied mathematics, mathematics, physics and statistics
  • Engineering: software, bio-medical, civil, environmental, petroleum, chemical, transportation, electrical and construction
  • Information Technology: programmer, network specialist, and various others
  • Business: Finance, accounting, business services, human resources, and management consulting
  • Less than 4-year degree: some IT, medical aid workers, airplane repair and maintenance

For some people, careers are not always a straight arrow path. I am reminded of the Sheryl Crow song title, Every day is a winding road.  You might start off your career in  one direction, and through the fun adventure of life, eventually end up doing something altogether different from what you planned or expected. During the journey you meet people that will be important to you in guiding your career. You may have different jobs that teach you new skills, and you might learn about abilities you do or don’t have. I think that is why many people go back to school at all ages to get advanced degrees, study for entirely new careers, or just expand their knowledge of where they are. You are never too old to learn or try something new.

If you do go to school, try to minimize debt as much as possible. Not only will the debt burden be easier to shed, but also having less or no debt allows you to be more flexible in pursuing various careers and interests later. To learn about more ways to pay for college, read my previous article: 14 Ways to Fund College.

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14 Sources of Funding College and Calculators

College costs are going through the roof! You’ve seen the headlines. How are you going to pay for college, and what is going to cost you or your kids? A 4-year college costs on average  $21,447 for in-state public and $42,224 for private per year for tuition, room, and board. That’s a total of nearly $100,000 for public and $170,000 for private, if the students graduate in 4 years.

If it will be many years before your kids attend, then you will have to plan for much more. We know that college costs increase at an average 7% a year, at least double average inflation.  With 7% inflation the costs double every 10 years. Why you might ask? They have to. Have you been on a college campus lately? They are like country clubs, with state of the art exercise facilities and gourmet-like cafeterias if you compare them to the slop they served in the late 70’s when I began college. Large university presidents and coaches are paid many millions of dollars each year, the campuses have huge sports complexes, and many campus buildings have been updated to like-new condition. College professors are paid high salaries with great benefits, which adds to the ever increasing costs. Also, colleges have faced government funding cutbacks.  On one hand I love the opportunity the colleges provide students in a wonderful learning environment, but if people don’t plan or know their options, students will graduate with double the debt they need too.

The cost of college is still a good value, as I covered in an earlier article: The Relationship of Education to Poverty.

Some parents have planned well enough, but many kids either have to go at it on their own, or they have to share the costs with their parents. Recession, job loss, stock market decline, too much debt, and health care that doesn’t cover as much as it used to and costs much more now than ever before are all putting more financial pressure on kids, so it is extremely important to consider many alternative ways to pay for college.

I think it is insane to borrow the full college costs. At the very least parents and students should explore and use many options. Last March I wrote an article about College debt already passed $1 trillion in 2011. Avoid contributing to this statistic by employing this college funding priority list:

  1. If parents have saved for college, have not faced financial setbacks, and desire to pay for college, then stop here.  Parents often use 529’s and prepaid tuition. Some parents require certain grades and behavior for their children to stay on the parent plan. I covered the options in an earlier article: What’s an ESA, Coverdell Education IRA, and 529?
  2. Look for tax savings to help lower the net costs. I touched on many of them in College Education Tax Deductions and Credits and Tax Breaks for Students.
  3. Choose an in-state public school. This alone will reduce your cost almost 50% in some places.
  4. The next source is scholarships: for academics or sports, or through special offerings from numerous organizations. Often the latter are small, but every bit helps.
  5. Grants and non-loan financial aid based on the income or net worth of the student or parent. If you qualify for financial aid or you want to qualify, you should read How Not to Blow it Financial Aid.
  6. Students working at jobs can help some, and there is nothing wrong with their working. It looks good on their resumes, teaches maturity, and lessens the loan burden.
  7. Many people lessen the initial cost by getting the basic education requirements out of the way at lower-cost community colleges. Many people already know this, and you probably noticed how much these institutions are growing. In Columbus,Ohio, where I live, Columbus State Community College has grown by leaps and bounds.
  8. Pay as you go. While working part-time takes longer, you will end up with less debt.
  9. Commuting and living with parents for a few years will lower out-of-pocket costs, and transportation may be lower than room and board.
  10. Working for a company that pays part of the tuition for their employees. Again this takes longer, but it is a great benefit that can lower amounts needed from savings, income and borrowing.
  11. Work/study on-campus employment is in a separate category, since it requires financial qualification.
  12. Paid internships are a great way to earn income and to help graduates get great jobs.
  13. Loans are near the bottom of the list, since after doing all the above you minimize how much money you need to borrow.  I recommend against parents co-signing loans, since the Bible recommends against it and it is not usually needed if you follow the above suggestions. Some things about student loans changed as reported in the Wall Street Journal last July. Parents can get parent plus loans, but if they want to consider them they should read The Minuses of Parental Plus Loans. If students need loans, then when they start to repay them they should read my articles Federal Student Loan Repayment Options and How Does Obama’s College Loan Program Work?
  14. Lastly, the Wall Street Journal reported that there are a few non-traditional methods that some parents are now using.

Estimating the costs for your child depends on the child’s current age, the school the child wants to attend, and the annual increase rate. After you have that number, you are then armed to calculate how much money you will need to save and invest for the child. Your financial planner can run the numbers for you, or you can calculate them yourself using eFinPLAN.com online financial planning (which has a college cost estimator) for a small fee. Dinkytown has a good simple cost estimator, but it doesn’t have the costs for each college. The Dave Ramsey Financial Peace University website has a simple calculator you can use if you have enrolled in the personal finance course–Financial Peace University. College Board has some calculators.

What you don’t know is what college actually will cost after grants and financial aid are factored in, since that depends on your income, when the child will attend, the amount of money you  have saved, and the amount of money the college has to reward students. Various colleges and universities you might be considering may have calculators. However, caution may be warranted a bit, based on a recent article: Tools That Help Compute Real Price Of Schools Get Mixed Grades So Far.

College Education Tax Deductions and Credits

If you have a child that will be going to college, it is a good idea to become aware of the various tax credits and deductions that may be available to you. These have been around a while; they include the HOPE Scholarship Credit and the Lifetime Learning Credit created by The Taxpayer Relief Act of 1997, The American Opportunity Credit created by the American Recovery and Reinvestment Act (ARRA) of 2009, and other education tax deductions.

First let’s delineate the basic difference between tax credits and deductions. Credits directly reduce tax, compared to deductions, which reduce the amount of income that is subject to taxation. Usually, credits result in less taxation compared to deductions.

The Hope Scholarship Credit was extended to 2008. Basically, ARRA extended it through 2012 and modified it somewhat. The following are some of the highlights of the Hope Scholarship Credit, also now called The American Opportunity Credit and the Lifetime Learning Credit

  • The current HOPE Credit maximum is $2,500, and 40% is refundable. The Lifetime learning credit is 20% of the first $10,000 of eligible expenses, with a maximum non-refundable credit of $2,000.
  • You can’t use both the HOPE and the Lifetime Learning Credit for the same student in a year.
  • The Hope Credit used to apply for 2 years, but now applies for 4 years. The Lifetime learning credit can apply to all years of post secondary education and other course work, such as to help improve job skills.
  • “Married Filing Separately” tax files are ineligible.
  • The Hope Credit is only available to those with certain incomes, and it begins to be reduced when someone’s modified adjusted income (MAGI) exceeds 80,000 ($160,000 joint filers). Once it exceeds $90,000 ($180,000), there is no eligibility. For the Lifetime Learning Credit, the credit maximum begins to be reduced when the MAGI exceeds $51,000 ($102,000 joint); there is no eligibility when the income exceeds $61,000 ($122,000 joint).
  • The Hope Credit only applies to tuition and related expenses, including fees, required books, and supplies and equipment; it does not include room and board and personal expenses.
  • Those convicted for a felony drug offense are eligible for the Lifetime Learning Credit but not for the HOPE Credit.

Education Tax Deductions
Qualified higher education expenses can be deducted by the person paying the expenses. Double deductions are not permitted, such as deductions taken as business expenses, learning credits, distributions from Coverdale or Section 529 Plans, or those paid with tax-free interest or benefits from savings bonds or from scholarships and grants. The maximum deduction is $4,000 for individuals with Modified Adjusted Gross Incomes (MAGI) of no more than $65,000 ($130,000 joint), and then it is $2,000 with MAGI above those amounts, with no deduction if MAGI is larger than $80,000 ($160,000 joint).

This is just a summary of information to increase your awareness, and it should not be relied upon; rules and limits are subject to change and interpretation. You should seek the advice of qualified tax preparers and refer to documents at irs.gov.

The Relationship of Education to Poverty

Interesting article in the Atlantic: College costs continue to rise, outpacing inflation, yet the cost to them and society is astounding:

  • College graduates earn 80% more than high school graduates
  • If US raised education performance South Korea’s level US economy would improve by more than $2 trillion (same as Italy)
  • The impact of a good versus average teacher improves a student’s future lifetime earnings by $400,000
  • $100,000 spent on college at age 18 yields a greater return than the same invested in stocks or bonds
  • Social cost per youth is over $37,000 when considering lost earnings, public health spending, and other expenditures. Calculating that for all youth in the study (6.7 million) the cost is $4.75 trillion: 1/3 of GDP, or 1/2 of U.S. public debt

Student Loan Debt Tops $1 Trillion

The Financial Protection Bureau recently reported that total student debt topped $1 trillion last year (2011). They report that some of the reasons for the rise is a lot of Americans returning to college, instead of staying in the weak labor market. Tuition increases have continued especially considering cuts in state funding. Also many parents have been unable to help as much with college due to job loss or career stagnation, and hits to their investment portfolio.

Data from the New York Fed  indicate that almost one in four student borrowers are behind on payments. All of this debt doesn’t bode well for the housing market, as more graduates and young families struggle, they are unable to save for down payments and afford a mortgage. Another example of how debt can feel like bondage. It is no wonder the Bible warns against debt and equates it to slavery.

Maybe some college debt can be avoided as some students pursue all the options such as grants and aid, scholarships, work-study or part-time jobs, shopping around for the best college deals as well as completing some of the first couple of year’s of basic courses at a community college and then transferring.

Source: Wall Street Journal

Federal Student Loan Repayment Options

Week #4 of Dave Ramsey’s Financial Peace University: Dumping Debt was a great motivating lesson. Since that class I have received numerous questions about Federal student loans. Therefore I put together the following brief about Federal Student Loans various repayment options to foster your additional research and consulting with your advisors. Please keep in mind, this subject is complicated and further investigation about someone’s particular situation is recommended.

When you are out of school (graduate, leave school, or drop below half-time enrollment), monthly repayment installments are required. The rate of interest that is charged depends upon when the loan was disbursed, type of loan and whether graduate or undergraduate degree. There are various options for making, consolidating and stopping payments, and some of them are as follows:

Loan Payments Stopping

  • Grace period of 6 – 9 months  from the date school ends, depending upon the type of federal loan
  • Total forgiveness for death, total and permanent disability, and other severe hardship
  • Deferment of loan payments for specific situations or hardship, depending upon the type of loan you may not have to pay interest during deferment, or you might have to pay it or have it added (capitalized) to the loan
  • Military deferment for active or post-active service
  • Forbearance with interest accruing
  • Partial forgiveness after 10 years if employed by a “Qualifying Public Service Organization,” remaining balances of loans granted under the William D. Ford Federal Direct Loan (Direct Loan) Program are forgiven after making 10 years of Qualifying Repayments (Income-Based Repayment (IBRP) Plan or the Income-Contingent Repayment (ICR) Plan, or the 10-year Standard Repayment Plan or repayment plan where the monthly payment amount equals or exceeds the 10-year Standard Repayment Plan
  • Partial forgiveness after 25 years for Income Based Repayment eligible borrowers but not employed by Qualifying Public Service Organizations, this is new

Loan Repayment options (example used $100,000 at 5%)

  • Standard level for 10 years $1,060.66 for a total of $127,279
  • Standard graduated repayment plan, for 10 years, the first payment is $706.10, and total payments would be $132,496
  • Extended months for 25 years of $584.59 for a total of $175,377
  • Extended graduated repayment plan, for 25 years, the first payment is $416.67, and total payments would be $191,558

Income Based Repayment

  • Income based repayment programs, base the repayment on various factors, including family size, household income, and spouses student loans. Repayment will change as someone’s situation changes, including income. Using the online calculator for a family of four, earning $60,00 the payment is only $330 per month.

New Student Loan Consolidation

  • In October President Obama announced a new loan consolidation plan, it seems to have a few benefits: slight reduction in fees, interest rates and complexity

Lastly, someone asked me even if there are financial benefits to doing IBRP and forgiveness, are there any behavioral, ethical or financial disadvantages?  Negotiating payments or bankruptcy I think gets into the ethics and behavior issues more than federal forgiveness programs, however some may argue this point, because forgiven payments will have to be paid by tax payers ultimately. From a financial perspective it is possible that someone could end up paying more with a IBRP than a standard 10 year repayment plan, with longer term payment plans especially if their income increased quite a bit over time.  To estimate this one would have to run 20 different reports.

The Shame of College Sports

If you are a college sports fan and have wondered about how college athletics grew from its humble beginnings into a multibillion dollar institution of hype and controversy, you will want to read this article from The Atlantic: The Shame of College Sports.

After reading this article, I conclude that college athletics are in need of a major overhaul. While the powers that be are at it, I think they need to give some consideration to the amount of money being paid to college coaches, the revenue major colleges collect from sports, and the continuing escalation of the cost of college education.

Tax Breaks for Students – WSJ.com

Most articles about college education planning provide valuable information for parents who are saving and investing for their children’s education, as well as various options for financial aid and student loans. However, what options are there for students that don’t qualify for aid and want to minimize student loans? This article in the Wall Street Journal on Saturday, October 29, provides excellent information, including tax breaks for young students as well as for adults who are returning to school to further their education and might not qualify for financial aid.

Tax Breaks for Students – WSJ.com.

What’s an ESA, Coverdell Education IRA, and 529?

Following Dave Ramsey’s “From Fruition to Tuition” class, people often ask me about the education savings accounts and 529 plans.  It seems there is a little confusion.  Briefly…

The Education Savings Account (ESA) and the Coverdell Education IRA are one and the same. They are accounts that are set up specifically to fund college education. They are not tax-deductible for Federal income tax purposes, but they grow tax deferred, meaning that if they are used for college education, then the growth is not taxed when used for that purpose. A few states allow the tax deduction from state income  taxes. The contribution limit is $2,000 per year per beneficiary, but  it depends on the Adjusted Gross Income. The money can be invested in a wide range of investment accounts. This is the main reason Dave Ramsey recommends them over 529 plans.

The 529 plans are similar in many ways to the ESA. The biggest exception is much higher contribution limits. This is a little too complex to explain here, but per the IRS.gov website: “Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary.” The 529 plans available vary by state. In Ohio, where I live, the investment choices are limited to five investment or bank firms. Individuals may purchase a plan offered in another state, if they prefer; however, some states offer advantages to purchase in your home state. There is a second type of 529 plan: purchasing pre-paid tuition credit. Your investment return is essentially tied to the rate of increase of qualifying school’s tuition and room and board. One investment professional I spoke to recently told me that since people can contribute more money to 529 plans versus ESAs, states are expanding their investment choices or are buying one out-of-state 529, and 529 plans are more flexible long-term (if the original student doesn’t use the funds) that fewer people are using ESAs today.

Investors should discuss the options with their tax advisors, investment professionals/financial planners, and they should spend a lot of time reading all of the information on their state’s 529 website before making a decision. You will want to know how these accounts affect qualifying for financial aid, fees, and limitations.

How Does Obama’s College Loan Program Work?

Obama mentioned that as of January 2012, student loan re-payments will be limited to 10% of income, and any left over balance after 20 years, would be forgiven. Sounds good, similar to the current plan that already exists for some loans and some non-profit employment situations after 10 years. So the new plan seems to expand this to more people, but probably only some federal loans. More details are forthcoming, but how would the math work out? The answer is hard to tell, no one knows how much money they are going to make for the next 20 years. But for the fun of it, let’s assume a modest starting income of $25,000 (about $12 per hour), and increased 3% per year for 20 years: income increased to $43,838. Total payment if limited to 10% of income would total to $67,175.  The next part of the calculation I am not totally sure of: how is the loan calculated? Is unearned interest capitalized back into the loan? What will the interest rates be over the next 2o years?  To keep it simple, (but taking some chance of mathematical error), let’s assume a low 3% interest rate, loan calculated annually (not monthly payments), and a $50,000 loan. I calculate that the amount of loan left after 20 years is approximately $2,600. Not a big forgiveness – no big deal. Sounds better from the podium than in actuality. But wait… this has me thinking, what would stop me from borrowing a lot more, and take it easy my college years, not working to minimize loans- heck I will be limited to pay back only $$67k, party hardy!?  I’m sure there are more details to work out in the days and months to come. Stay posted. I think politicians of both parties need to take more math courses before being elected to office!