New grant programs. Higher interest rates for student loans. A permanent tax exemption for 529 savings plans. In the college financing arena, the hottest trend in 2006 seemed to be change itself. A little tinkering here. Some sweeping overhauls there. What it all means depends on your personal circumstances. But no matter where you are today — whether salting away money for your toddler’s future higher education or working nights to foot the bill as a cash-strapped undergrad — it’s worth reviewing this year’s most important changes and trends in the college money game.

Debt and rising costs
Tuition at both public and private institutions continued to climb at a pace that outstripped inflation for the 2005-2006 academic year. According to The College Board’s annual report, Trends on College Pricing, the tab at four-year public schools rose 7 percent to $5,491. At private four-year colleges and universities, costs increased nearly 6 percent to $21,235. But as any college student — or any parent saving for their youngster’s future education — knows, these most recent increases are just part of a long, on-going ascent.

No wonder, then, that student debt emerged as this year’s most pressing focus for reform. Colleges, consumer groups, lawmakers, lenders and even Secretary of Education Margaret Spellings called for solutions to debt relief. Consider this: In 2004, the latest year for which data is available, two out of three students graduating from four-year colleges had debts averaging $19,200. In 1993, fewer than half of all grads left school with debt and it typically ran $9,250.

This year, The Project on Student Debt, a nonprofit policy research group based in Berkeley, Calif., led much of the effort to reduce post-college debt loads. With the support of higher education groups and lenders, the group formally petitioned the Department of Education to make five reforms.

Proposed changes include simplifying deferment applications for individuals who need to temporarily suspend loan repayments due to hardship situations, limiting student-loan payments to a manageable percentage of an individual’s income and shielding borrowers who suffer hardship from high interest rates. It also seeks to have remaining debts canceled for borrowers in hardship situations who’ve made regular payments for two decades.

While it’s unlikely the Department of Education will enact every proposal as written, the federal agency does have the power to make reforms without an act of Congress. That means there’s potential for some lightning-quick changes, at least by Washington, D.C., standards, says Robert Shireman, president of The Project on Student Debt.

“We could see some relief for borrowers in the spring of 2007,” he says.

Paying it off: Loans and grants
This year, Congress authorized two new awards for undergrads who qualify for federal Pell grants.

So-called Academic Competitiveness Grants are worth $750 and $1,300 to first- and second-year students who have completed “rigorous” coursework in high school. With the ink barely dry on the legislation, grants were just awarded for the first time ever in fall 2006. Grants, of course, do not have to be repaid.

The SMART Grant (short for “National Science and Mathematics Access to Retain Talent”) is worth up to $4,000 a year for third- and fourth-year undergrads majoring in math, science, engineering and certain foreign languages.

Meanwhile, a number of recent changes on the financial-aid front immediately affected those paying off their halcyon days at university.

For the first time ever, students taking out a federal Stafford loan will pay a fixed 6.8 percent for the life of the loan. Only Congress can amend the rate. That’s a radical shift. Previously, Stafford loans were variable, meaning rates were reset every year. The fixed rate applies to Staffords issued as of July 1, 2006.

Those with the older model Staffords pay variable rates, unless, of course, they consolidate, locking in a loan at a steady rate.

And in fact, that’s just what borrowers did earlier this year — to the tune of nearly $40 billion worth of consolidation. Looming increases drove the stampede to lock in deals at low rates, typically just over 5 percent, before the July 1 deadline.

The federal Plus loan was changed, too. The most unwelcome, no doubt, was its rate increase from 6.1 percent to 8.5 percent for Plus loans issued by private lenders. On the other hand, the Plus loan program, which had been limited to parents of college students, was expanded so that graduate students can borrow, too.

“That’s huge,” notes Brett Lief, president of National Council of Higher Education Loan Programs. “It’s opening a whole new program to graduate and professional students who previously had to borrow at commercial rates and providing them with a federally based loan that’s more affordable.”

Overhauling 529 plans
Even if your budding Einstein is years away from dorm life, 2006 brought changes that affect you, too.

That’s particularly true for those contributing to a 529 college savings plan. These investments, first introduced in 1996, are sponsored by individual states although you don’t have to be a resident to participate in a particular plan. Each 529 plan varies in terms of investment offerings, but earnings in all may be taken out free of federal taxes as long as they are used for bona fide higher education expenses.

And now these federal tax breaks are carved in stone. Until Congress acted this year, they were set to expire in 2010, meaning families who cashed out of 529s at decade’s end would have ended up pocketing far less.

Permanently extending the perks is sure to help make 529s more popular — though not especially simpler for consumers, who have to do quite a bit of research to find the plan that’s best suited to them. In fact, another trend in the 529 industry contended with the thorny issue of marketing by bankers, brokers and dealers who sell 529s to the public. (Keep in mind, however, that some plans aren’t sold by these financial types, but are instead sold directly to investors.)

After much discussion and proposals, the Municipal Securities Rulemaking Board, the governing body that oversees banks, brokers and dealers who sell 529s, adopted stricter requirements on how the plans are sold. The MSRB, however, did back away from a more ambitious plan to make brokers complete an extensive analysis of all 529 plans before selling them to clients.

Instead, brokers must follow new requirements, which took effect in August, to ensure that any 529 plan they sell is suitable for a particular client.

“They can’t assume that because they’re marketing something that’s really good, it’ll be good for anyone,” says Ernie Lanza, senior associate general counsel at MSRB. “They have to look at the specific needs of the customer.”

And they must warn individuals that they could miss out on additional perks, such as lower fees, matching funds or additional tax benefits, if they invest in an out-of-state 529 plan. How much they give up, however, depends on numerous factors, including on where they live since state benefits vary. In Pennsylvania, individuals can claim a state tax deduction up to $12,000, and married couples can deduct up to $24,000, for stashing cash in that state’s 529 plans. In New York, the limit is $5,000 per individual or $10,000 per couple. But roughly half the states offer no 529 tax deduction at all.

Such discrepancies highlight the third big trend in the 529 industry: tax parity.

“The idea with parity is extending state tax deductions to residents who contribute to any 529 plan,” says Jacqueline T. Williams, chair of the College Savings Plan Network and executive director of the Ohio Tuition Trust Authority.

Pennsylvania began offering tax parity in 2006. As of 2007, Maine and Kansas will offer tax deductions to their residents regardless of which state plan they open.

Prepaid plans get a break
Of course, 529s come in two flavors. The other type, the prepaid tuition plan, was also spruced up. Although they are less popular than their 529 savings plan cousins, prepaid plans allow families to pay future college or university tuition at predetermined prices. Eighteen states offer such models.

When picking such a plan, you need to read a few tea leaves to determine what kind of school your children will likely attend. Will they go to a public institution or to a more expensive private university? Or will they start off at a community college? Even if life doesn’t turn out as you expect (”Surprise, Mom and Dad! I got into Yale!”), you would be able to apply your prepaid plan dollars to another school, though you may have to do some last-minute hustling to make up for any shortfall.

Sounds reasonable, right? Until this past summer, prepaid plans had one big drawback. They could end up socking it to you when it comes to financial aid since every dollar salted away in a prepaid plan was counted against a student in terms of financial aid. If you paid for $12,000 worth of tuition in a prepaid plan, you’d lose that much in potential financial aid awards.

But the Deficit Reduction Act, passed in early 2006, rendered prepaid plans equal to other 529 savings plans as far as their treatment for financial aid purposes. In other words, they’re considered to be a parental asset rather than a student asset. Here’s the bottom line: Just 5.6 percent of assets are counted in the financial aid formula that determines a family’s expected contribution. That means students can qualify for more scholarships, grants or other forms of assistance.

“For prepaid program account owners, to have them treated as any other asset a parent might own is tremendous,” says Chris Hunter, program manager of College Savings Plan Network. “We’ve been working with Congress and the National Association of State Treasurers for the better part of the decade to get this improvement made.”

Tax changes that pinch
When it comes to tax filing time, news was dim for college savers.

First, families lost a potentially valuable credit for higher education expenses. The “above the line” tuition-and-fees deduction for college costs, worth up to $4,000, expired at the start of 2006 and has not yet been restored.

“It was tied up with estate-tax reform and minimum wage increases,” explains Mark Luscombe, principal tax analyst at CCH, the tax law publisher.

“Congress is still working on legislation to retroactively renew the deduction to the beginning of 2006, but if it gets to the point that people start filing their taxes for the year, that may not happen.”

The second hit — the extension of the so-called “kiddie tax” — affects families who’ve traditionally sheltered investments earmarked for college by giving those assets to their children. Kids up to age 18 now face up to three times as much in taxes on investment income that exceeds $1,700. That’s because they must pay their parents’ tax rate — in some cases as much as 35 percent. Prior to Jan. 1, the kiddie tax only affected children up to age 14, but the new law extends it to those up to age 18 — or matriculation age for college students.

Like other changes, both good and bad, it will push families to rethink how they save and pay for college.

Bankrate.com

This entry was posted on Wednesday, November 29th, 2006 at 9:41 pm and is filed under College Loans, Education, Financial Aid. Tags: College, Education, Financial Aid, Grant, Loans, Scholarship, Student, Student Loan. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.