Financial Literacy
How to Finance an Education
A College education is one of the most important investments one makes in their lifetime.
Studies show that a person with a college degree earned nearly $22,000 more than a
person with a high school diploma in 2008, and were less than half as likely to be
unemployed (Baum, Ma, Payea, 2010).
The time is always NOW to save for college. There are many ways to take advantage
of the tax benefits of saving for college. Below are some additional resources that
can help guide the way.
529 Plans
529 plans are one of the most popular ways to save money for college. A 529 plan is
a state-run investment vehicle that allows for tax-free investing for education purposes.
Investment earnings and withdrawals are exempt from federal taxes if used for qualified
educational expenses.
There are two types of 529 plans, a savings plan or a prepaid tuition plan. A savings
plan is just that, an account designated specifically for the beneficiary’s future
education expenses. A prepaid tuition plan allows you to lock in future education
expenses for in-state schools at current prices. The cost of the plan varies depending
on when the beneficiary would enter college. Beneficiaries who choose to attend either
a private college or an out-of-state school receive a calculated value based on current
in-state tuition rates.
There are also state tax benefits for both Illinois plans, College Illinois! Pre-paid
Tuition Plan (https://www.collegeillinois.org) and the Bright Start Savings Plan (https://www.brightstart.com/).
It is not required to use an in-state 529 plan. More information can be found on 529
plans at https://www.collegesavings.org.
Other Savings Options and Tax Benefits
A 529 plan is not the only way to save for college. Coverdell, or Education IRAs (https://finaid.org/) and UGMA and UTMA accounts (https://finaid.org/savings/ugma/) are also structured to save for future education expenses.
There are significant tax benefits for education expenses as well. IRS Publication
970 covers them in detail (https://www.irs.gov/pub/irs-pdf/p970.pdf) but here are some important points to know:
Hope Scholarship Tax Credit
Provides a tax credit up to $2500 of tuition, fees, and course materials paid by the
taxpayer for the first four years of a student’s post-secondary education.
Lifetime Learning Credit
Tax credit of up to $2000 on the first $10000 of post-secondary expenses, available
for an unlimited number of years.
Student Loan Interest Deduction
A taxpayer can deduct up to $2500 in interest paid on federal and private student
loans.
Savings Calculator
You can use this calculator to estimate how much you should currently be saving to pay for college.
Additional Resources
CollegeBoard.org
FinAid.org: “The SmartStudent Guide to Financial Aid”
Managing Expenses
College is often the first time for students to make choices regarding their financial
future. Developing good habits while in school can set a foundation for a lifetime
of financial well-being. On the other hand, anxiety over financial matters has shown
to negatively affect academic performance, retention, and degree attainment (Chamberlain,
2011).
The first step in developing good spending habits is to create (and stick to!) a budget
or spending plan. Figuring out the difference between “wants” and “needs” Is an important
distinction when creating a spending plan. In a day where the image of the “broke
college student” is supplanted by an image of a student with an iPhone and a laptop,
the temptation to spend outside your budget has never been higher.
Spending Tips
Prior to creating a budget, monitor your spending for at least a month, keeping track
of all expenses. This will help you create a realistic budget.
Housing options: Be sure to do some research into finding your least expensive option,
a roommate or two can dramatically reduce expenses. Being closer to campus may cost
more in rent, but might provide savings by eliminating the need to drive to campus.
Food and personal expenses: These two areas are where “want” and “need” can be murky.
It may be tempting to buy new clothes, or music, or go out to eat on a regular basis,
but monitoring spending in these areas is crucial to meeting your budgeting goals.
Watching for sales, use coupons, or taking advantage of discounted nights can allow
you to balance your entertainment budget wisely.
Credit Cards
Credit cards can be a very useful tool in building one’s credit history, but if not
used correctly, can easily become a significant burden. 83% percent of college students
have at least one credit card on which they carry a balance, and 47% report having
four or more cards (Chamberlain, 2011).
Credit Report
A good credit report is a necessity to achieving many life goals, such as owning a
home. Getting off to a good start can make your life much easier down the road.
There are three major credit reporting agencies, and each are required to provide
you with one credit report per year at no charge. You can request them at annualcreditreport.com.
Cash Course
Cash Course is brought to you by the National Endowment for Financial Education (NEFE),
a non-profit organization with a goal of improving the financial well-being of all
Americans. There is no obligation, and any information provided will not be used for
marketing purposes.
Graduation and Repayment
Now that you have made it through college, in many ways, the real work begins. Many
students graduate with debt (the average college student graduated with $24,000 in
debt in 2009, according to the Project on Student Debt) (Cheng and Reed, 2010) and
learning to properly manage it is one of the most important tasks you will encounter.
The first step in managing your student loan debt is to understand what debt you have.
The National Student Loan Data System will have a record of all your federal Stafford
and Perkins loan balances, and loan holders. If you borrowed private student loans,
you will need to check your credit report for that same information.
Keep In Touch With Your Lender
If you are encountering any challenges with repaying your student loans, be sure to
contact your lender. There may be options to assist you temporarily, referred to as
loan forbearance or deferment. Forbearance is a loan status that can allow you to
postpone or reduce your payments while interest is still charged on your loan. In
a deferment status, loan payments are postponed, and interest may not be charged,
depending on the loan type. Common reasons for deferments or forbearances are attending
graduate school, unemployment, or other economic hardships. FinAid.org provides a
calculator to estimate eligibility for an economic hardship deferment.
It is also important to contact your lender if you move, change schools, or change
your name.
Consequences Of Not Repaying Your Student Loans
Your federal student loans are considered to be in default if you do not make payments
for 270 days. Defaulting on a federal student loan has very serious consequences,
listed as follows:
• Loss of federal and state income tax refunds
• Loss of eligibility for federal student aid programs
• Your interest rate will increase
• Your employer may be required to garnish your wages
• Your credit rating will be significantly damaged
Student Loan Consolidation
A frequent option for making loan repayment simpler is to consolidate your federal
student loans into one loan. A consolidation loan is an effective option if your federal
loans were originated by more than one lender while you were in school. There are
pros and cons to consolidation, it is not right for everyone.
Learn More about Your Options
Loan Forgiveness
There are a few circumstances in which some or all of your federal student loans can
be forgiven. Volunteer work, military service or teaching or practicing medicine in
specific areas can lead to loan forgiveness.
More details about qualifications
Public Service Loan Forgiveness
The College Cost Reduction and Access Act of 2007 established a loan forgiveness program
for those entering the field of public service. For those that qualify, remaining
balances on loans may be forgiven after 120 payments while in certain repayment plans.
Determine If You Qualify
If you have questions regarding any of the information presented here, please contact
the O Financial Aid Office at 618-537-6828
References
Chamberlain, L. (2011). Dollars and sense: how colleges and universities promote financial
literacy.STUDENT AID TRANSCRIPT ,22(1), 33-36.
