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 (http://www.collegeillinois.org/) and the Bright Start Savings Plan (http://www.brightstartsavings.com/).

It is not required to use an in-state 529 plan. More information can be found on 529 plans at http://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 (http://www.finaid.org/savings/coverdell.phtml) and UGMA and UTMA accounts (http://www.finaid.org/savings/ugma.phtml) 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 (http://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. Here is a simple template to help you get started.


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 Office of Financial Aid 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. Retrieved March 20, 2011, from http://www.nasfaa.org/EntrancePDF.aspx?id=4439

Student debt and the class of 2009. (n.d.). Project on student debt. Retrieved March 20, 2011, from http://projectonstudentdebt.org/files/pub/classof2009.pdf