Saving and Borrowing for College

Next to buying a home or saving enough for retirement, the biggest financial hurdle in life can be paying for the education of one's children. For a child born today, a four-year public university education will take about $150,000. Make that $375,000 or more if you aim for a prestigious private school!

The days of a student working all summer to pay a year of expenses, as many of us may have done, are ancient history. Today, a student who could earn $30,000 for three month's work in the summer might question the need to spend the other nine months in a classroom if that earning rate could be annualized!

The real world for most families is that a significant amount of the college costs will come from borrowed funds. Distasteful as more debt might appear, there is some good news for student and parent borrowers.

First, two of the nation's most popular loan programs dropped their interest rates, retroactively, by half a percentage point as of July 1, 1999. Students with Stafford loans issued on or after July 1, 1998, will be paying 6.92% interest, while parents who borrowed through the Parents Loan to Undergraduate Students (PLUS) program after July 1, 1998, will be paying 7.72% interest for the year ahead.

Stafford government loans, offered by most colleges, are granted based upon need. These loans are considered to be an entitlement-no credit check necessary. The loans come in two flavors. The government pays the interest while the student remains in school in the subsidized version. With the unsubsidized version, interest is accrued until repayment starts after graduation.

The PLUS program is one of the most used college loan programs by parents because of the favorable interest rates and because the loans are not based on financial need. These loans are usually offered through a local bank or credit union and carry a lower interest rate than most other loans. Credit qualifying standards are quite liberal and the parent may borrow up to the total cost of education expenses.

After completing his/her education, the graduate will be contacted by a loan servicing company and offered several repayment options for Stafford loans. First, the term of the loan can be extended, but that could add hundreds to the interest bill.

Many lenders will offer slightly lower interest rates if the payment can be set up on an automatic bank account deduction. Some, once the borrower has established a 48-month record of on-time payments, may even offer an interest rate reduction.

More good news . . . recent legislation has made some student loan interest tax deductible. The maximum deduction (depending on the amount of your loan and your family's adjusted gross income) in 1999 is $1,500 in interest paid. Next year, the limit will rise to $2,000, and to $2,500 in 2001.

The Hope Scholarship and Lifetime Learning credits, added as part of the education incentive package in 1997, also provide limited income tax credits for a portion of the qualifying higher education expenses paid by a taxpayer. The credits first became available for expenses incurred after December 31, 1997.

The Hope Scholarship credit is available only for the first two years of each student's post secondary education. The maximum amount of the credit is $1,500. The Lifetime Learning credit is available for any year in which post secondary expenses are paid. The maximum permitted amount of the credit is $1,000.

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