A new look at college financing plans


The health care reform package signed into law this year also included changes that will affect college students who seek financial aid to help pay ever-increasing tuition costs.

While the new provisions don’t significantly ease the overall financial burden facing those who are paying more for higher education, they do make changes to the existing system of funding that students and their parents should take note of.

A new system for student loans

The existing Federal Family Education Loan program, where private lenders provided loan packages for college tuition and related expenses, is being eliminated.

Effective July 1, all federal student loans are made to borrowers by the federal government under what is referred to as the Direct Loan program.

This eliminates government subsidies for private lenders to encourage participation in education financing, with some of the savings directed to students.

The change may not be very visible except for the fact that there will be one source for student loans, rather than having to shop around for the best deal.

Find out more about how to access this money through the financial aid office of the institution the student attends.

Expansion of Pell Grants

The government’s most significant grant program, aimed at students who come from lower income families (typically those earning less that $45,000 per year) is set for modest enhancements.

The law now requires automatic inflation adjustments in Pell Grants beginning in 2013. The maximum Pell Grant is scheduled to be $5,500 for the 2010-2011 school year, an increase of $150 from the previous year.

It will remain at that level until the inflation adjustment provision kicks in. The value of a Pell Grant should steadily rise to about $5,900 by the 2019-2020 school year.

Easing of repayment terms

Current law sets the maximum required loan repayment by a student to 15 percent of discretionary income in any year.

Any remaining debt is forgiven after 25 years.

The terms become even more favorable for students in several years.

Those who take out new federal student loans after July 1, 2014 will be required to pay no more than 10 percent of their discretionary income.

Better yet, the term of the loan expires five years earlier than under existing law.

If a balance remains on the loan after 20 years, the remainder of the loan is forgiven.

This change, only affecting loans after July 1, 2014, will help make financing an education less of a burden over the long run.

Don’t forget the tax credit

Continuing for the 2010 tax year (and at this point, not beyond it) is another important provision that can trim the bottom line cost of higher education.

The American Opportunity Tax Credit provides up to a $2,500 tax credit for higher education costs such as tuition and fees for the first four years of undergraduate education.

The full credit is available for married couples filing a joint return with incomes of up to $160,000, and is phased out above that level. The income limit for single tax filers to qualify for the full credit is $80,000.

The tax credit is, in effect, a dollar-for-dollar reduction of the higher education bills you face if you qualify to earn it. After 2010, the Hope Scholarship credit continues but at lower levels.

Send your questions to

Mohammad Raghib, ChFC, is a business financial advisor, Chartered Financial Consultant and Certified Fianncial Planner. E-mail your questions to him at: mohammad.d.raghib@ampf.com

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A new look at college financing plans