Financing Education

Personal Finance: a Gospel Perspective

Objectives

A. Understand how education relates to financial goals.

B. Understand the priority of money for financing school.

C. Understand how to save for your children’s education.

D. Understand how to reduce the cost of education and sign up for aid.

A. How Education Relates to Financial Goals

Level of Education  Annual Earnings  Lifetime Earnings Not a HS graduate  $21,314  $852,577High school graduate  30,560 1,222,396Two-year vocational 36,833 1,473,335Associate  38,118  1,524,703 Bachelor’s  49,334  1,973,760 Master’s  57,676 2,307,025 

Doctorate/Professional $71,573  $2,862,914 Source: “Give Yourself the Gift of a Degree: Vocational Education Worth Almost

$1.5 Million Over Working Lifetime," an EPF News Release from the Employment Policy Foundation.: December 19, 2001, Washington, D.C..

Does Education Pay?• Does education pay?

• The numbers indicate that education is a great investment for young people and parents, alike.

• Is education a good investment? • President Gordon B. Hinckley said:

• “Now is the season to train your minds and your hands for the work you wish to do. Education can prove to be the wisest and most profitable investment you will ever make.” (Tambuli, Sept. 1989, 49.)

• What do our leaders say?• “Get as much education as possible.” (“The Purpose of

the Aaronic Priesthood,” Aaronic Priesthood: Deacon, Fulfilling Our

Duty to God, 2001, 7.)

Does Education Pay?

President Hinckley further counseled:• Get all the schooling you can. Education is the key

that unlocks the door of opportunity. God has placed upon this people a mandate to acquire knowledge “even by study and also by faith” (D&C 88:118). (Gordon B. Hinckley, “Some Thoughts on Temples, Retention of Converts, and Missionary Service,” Ensign, Nov. 1997, 49.)

Is Education Cheap?

Cost Facts:• Average medical school debt in 1997 was $80,402

and rising.• Average top 50 MBA programs: $27,714 (the price

varies between universities)• Average cost in tuition, fees and lost salary:

$126,700• Average annual budget for students of Western

United States programs: $24,781• Average annual budget for students of BYU in

2003: $17,0581

Education isn’t cheap, but the cost of ignorance is even higher!

1. Average between undergraduate and graduate and LDS and non-LDS from BYU Student Financial Aid Office

Should Your Children Pursue an Education?

President Hinckley said:• “You young people, the little decisions that you make

can so affect your lives. Shall I go to school or not? Shall I continue on with my education? That is a big decision for some of you. Our doctrine suggests, although there may be some circumstances that would affect that decision, that the more education you receive the greater will be your opportunity to serve. That is why this Church encourages its young people to get the schooling that will qualify them to take their places in the society in which they will become a part. Make the right decisions. Take a long look.” (Pocatello, Idaho, regional conference, Idaho State University, 4 June 1995).

B. Understand the Priority of Moneyfor Education

Is there a priority of money for financing school?• Priority of Money for School

• A. Free Money: Scholarships and grants• B. Family Money: Personal savings and family

help• C. Employment: Employment during school and

work-study• D. Loans: Student loans, both federal and

private, subsidized and unsubsidized• E. Credit Cards: A rarely recommend last resort

• Credit cards and private loans are last on the list!

a. Free Money

Scholarships and Grants• This is free money which is not paid back

• Note: If you have to pay money to get a scholarship or grant, it is generally a scam!!

• Grants are different; generally based on need. • Pell Grant: Based on need, from approximately

$400-$4,000 per year. Fill out a FAFSA • Scholarships from schools and private sources

• You may need a supplemental application• Find out which ones you are eligible for on a

scholarship search engine and apply for each• Armed Forces Scholarships: See the recruiting office

b. Family Money

• Personal Savings and Help from Parents• If you pay for your education, you will likely use

your resources more wisely, as its your money you are spending.

• Start the process of financial self-reliance as soon as you can.

• Do as much as you can, then ask for help!• If your parents can help, that is wonderful.

• Regardless, be very appreciative of anyone who helps!

c. Employment

Employment• While there is not a federal work-study program

here, there are plenty of employment opportunities.• There is a trade-off

• Be careful not to spend so much time at work that you cannot give schooling the time and effort it deserves.

• You will likely make more money after your schooling than you will during your schooling.

• Be careful that you don’t short-change your education.

d. Loans

Federal Financial Aid Options• Must be a US resident, over 18, high school grad,

be enrolled at BYU in a degree-seeking program and filled out a FAFSA. Other requirements:

• Be a citizen or eligible non-citizen with a valid social security number

• Have a high school diploma, (GED), or have passed an approved "ability to benefit" test.

• Enroll in an eligible program as a regular student seeking a degree or certificate.

• Register or have registered for Selective Service for males.

• Have a result of Eligible or Partially Eligible on the Drug Conviction question (Question 31).

Loans (continued)

• In addition to the federal requirements, you must: Pell Grant Eligibility

• 1. Be admitted as an undergraduate to a BYU degree-seeking program for a current or future enrollment period during the academic year.

• 2. Not already have a baccalaureate degree. Stafford Loan Eligibility

• Be a U.S. citizen, permanent resident, or other eligible non-citizen with a high school diploma or equivalent.

• Be admitted to BYU in a degree-seeking program.• Be making satisfactory academic progress, and not

be in default on a federal student loan or grant

Loans (continued)

Subsidized Federal Loans• Subsidized Stafford Loans: Variable rates which

cap at 8.25%, loan fee repayment begins 6 months after graduation, government pays interest while student in school. Loan amounts range from $2,625 to $5,500, depending on class standing. If you are an independent or graduate, loan limits increase.

Unsubsidized Federal Loans• Unsubsidized Stafford Loan: Variable interest rate

which caps at 8.25%; loan fee; student responsible for interest that accrues. Funds range from $2,625 to $5,500, depending on class standing. Loan limits increase for independent or graduate students.

Loans (continued)

Subsidized Private Loans:• •Woolley Law Loan (law) - Available for full-time

law students. No interest while in school; payments begin 9 months after graduation or discontinuance of full-time status

• •Marriott School of Management Loan (business) –Available for full-time MSM graduate students. No interest while in school, payments begin six months after graduation or discontinuance

• •BYU Short-Term Loan - Available for part-time and full-time undergraduate and graduate students admitted to a degree-seeking program. Full amount must be repaid within the same term or semester loan is received.

Loans (continued)

Unsubsidized private loans• PLUS Loans: Parent Loans for Undergraduate

Students are available for parents of dependent students to help with school-related expenses. The FAFSA does not need to be submitted.

• Parents are the borrowers, interest rates are variable with an interest cap at 9%; parents can borrow up to cost of education less financial aid the student receives, and repayment begins 60 days after the loan is disbursed.

Loans (continued)

Unsubsidized Private Loans – steer clear of these• GAP Loans: These are regular loans offered by US

banks with all the constraints intact (be careful). • These loans have higher interest rates, higher

up-front fees higher, and may require a cosigner.

• Read the fine print VERY CAREFULLY.

e. Credit Cards

Credit Cards• The most expensive way to borrow

• They give you the least flexibility• They require you to pay it back immediately• There is no help in the payment of interest• The interest rates are extremely high and you are

in school• This is the least advisable way to finance schooling

and is usually the result of poor planning!!!

Consolidating Student Loans

If you are getting out of school, it may make sense to consolidate your student loans through UHEAA. Consolidated loans are at a fixed rate and interest rates are at an all-time low (until July 1, 2005).• Loans designated as part of the Federal Family

Education Loan Program (FFELP) qualify for consolidation.

Benefits• If automatic payments are retrieved from savings or

checking accounts, UHEAA will reduce the rates by 1.25%.

• After 48 payments on time, UHEAA rates will be reduced by 1.0%.

Contact UHEAA at 800-663-1662 or www.uheaa.org.

Heads Up! Deadline Approaching!

June 30, 2005 Deadline: In-School Stafford Consolidation with the Current Low Rate. Thereafter, students may continue to consolidate Stafford Loans while in school, but at a higher interest rate.

The U.S. Department of Education announced a new policy that may reduce the monthly payments and interest paid by Stafford Loan borrowers.

Individuals may now consolidate Stafford Loans while they are still in school, IF they have an outstanding balance of at least $7,500. 

Today’s Stafford Loan interest rates are the lowest in 40 years. Stafford Loan interest rates will go up significantly on July 1,

2005.

Heads Up… Stafford Loan Dates

Note: Be aware of this!!!!!• Individuals who consolidate their Stafford Loans by June

30, 2005, can secure a fixed, weighted-average interest rate that is very low by historical standards. 

• Students, whose oldest Stafford Loan was taken out in 1993, or thereafter, will have a 2.875% rate.  That rate can be reduced to 1.625% per year, IF the student sets up “automatic repayment” AND faithfully makes payments on time.  After four years of faithful automatic repayment, the rate can then be reduced to 0.625% per year.

• Students with loans borrowed before 1993 will have a weighted-average interest rate that is somewhat higher, if they choose to consolidate.

Heads Up …Utah Lenders & UHEAA

Interested individuals with a Stafford Loan from a Utah lender should contact Utah Higher Education Assistance Authority (UHEAA) at (877) 336-7378, or WWW.UHEAA.ORG to learn and carefully evaluate all relevant details before making a choice regarding consolidation. 

To consolidate through UHEAA, students must complete, sign and submit both the “In-School Consolidation Program Request for Immediate Repayment” and “Federal Consolidation Loan Application and Promissory Note” to UHEAA no later than June 30, 2005 to take advantage the current low interest rate. 

FAX transmissions are not acceptable.  Only original signatures on the original consolidation applications will work.  

Individuals who do not have a Utah lender should contact their respective guarantee agencies. 

(This message is not intended to be legal or financial advice.)

Heads Up … Grace Period

Students with only Stafford Loans will lose their six-month grace period upon consolidating.  However, those who graduate and do not immediately have full-time employment may request a six-month “lack of full-time employment deferment” that will serve the same purpose—until they secure full-time employment or three years passes, whichever is longer.

Students with at least one Direct Student Loan are free to consolidate both Direct and Stafford Loans with the U.S. Department of Education at any time to lock in a low interest rate.  Students with a Direct Student Loan who consolidate with the Department of Education will NOT lose their six-month grace period.  These students may also check with UHEAA to see whether or not, after they have consolidated under the Direct Loan program, there may be a way to consolidate again with UHEAA in order to take advantage of UHEAA’s generous borrower benefits, which include reduced interest rates for automatic repayment.  (This may require taking out a new, UHEAA Stafford Loan at the end of the process.)

C. How to Save for Your Children’s Education

College Savings Plans• Major ways to save for college:

a. Custodial Accounts

b. Series EE and Series I Government bonds

c. Education IRA

d. 529 Prepaid Tuition Plan

e. 529 Savings Plan

Custodial Accounts

Advantages:• Not considered the parents income after the child

reaches age 14.• Can be invested in all types of financial

instruments, stocks, bonds, mutual funds, etc.• Can be used for any educational or other expenses,

including missions.

Disadvantages:• No tax advantages.• Is considered the child’s money as soon as the child

is of age—it cannot be taken back by the issuer.

Series EE and Series I Bonds

• Advantages:• Earnings are tax-free if used for paying tuition and fees• Earnings are not taxed until bonds are cashed.• Interest rates are competitive.• Can be purchased in small denominations and on credit

cards.• Disadvantages:

• 3-month penalty on early withdrawal before 5 years, with minimum holding period of 1 year.

• $30,000 per year maximum in 2004.• Can only be used for tuition and fees, not other

expenses

Education IRA

• Advantages:• Distributions are tax-free (even beyond 2011).• You choose your investments.• Can be used for eligible elementary, secondary and

post-secondary education expenses.

• Disadvantages• Contribution limits of $2,000 per year, which may

phase out as your income increases beyond specific limits ($95k single, 190-220k married filing jointly).

• Funds must be used by age 30 (but can be transferred to other students).

529 Prepaid Tuition Plan

Advantages:• You know tuition will be covered, regardless of

raises in costs.• May be useful if you think you will not be eligible

for financial aid.Disadvantages:

• May not be offered in the state you/your child wants to attend.

• Does not allow you to choose your investments.• Your children are young, so you could be more

aggressive with your money, resulting in higher returns.

• Assets in this plan reduce financial aid dollar for dollar.

529 Savings Plan

• Advantages:• Control of the funds resides with the contributor,

who chooses the assets within options provided.• Distribution limits are higher.• Are not considered assets of the student, which

increases aid.• May offer tax deductions for contributions to your

local 529 funds (check by state).• Distributions are tax-free - up to 2011. (We assume

the tax deductibility will be renewed).• Disadvantages:

• May not cover all college expenses.• There may be risk of loss.

College Savings Plans Comparison Chart Coverdell

and 529 information From Robert Brokamp, the Motley Fool.com, May 1, 2002

Custodial Account Series EE/I Coverdell ESA 529: Prepaid Tuition 529: Savings Plan

Highlights Can be open by anyone An investment account available to contributors who earn less than $110K (for single filers) and $220K (for joint filers)

Contributions today are guaranteed to cover tuition costs in the future.

A state-sponsored investment account for the benefit of anyone -- your child, your cousin, your neighbor, yourself

Offered by… Brokerages, mutual fund companies, banks

US Government Brokerages, mutual fund companies, banks

States States (usually with help from a financial services companies)

Contribution limit None $30,000 per year for EE and I bonds

$2,000 per student per year

Depends on plan and age of student

Depends on plan -- varies from $100,000 to $305,000

Tax treatment of withdrawals

No favorable tax treatment

Tax-free if used for qualified expenses and if your income is within the government set limits. Taxes may be either paid annually or when redeemed.

Tax-free if used for qualified expenses

Tax-free if used for qualified expenses

Tax-free if used for qualified expenses until 2010 (distributions will count as income to the student in 2011 and beyond unless Congress extends the current law)

Qualified expenses None Tuition, fees, supplies and special needs. Room and board are not qualified expenses. The amount of qualified expenses are reduced by scholarships and other aid.

Tuition, room, board, fees, supplies, and special needs related to the attendance of a qualified elementary, secondary, or post-secondary institution

Tuition at a college within the plan (some plans will also cover room and board)

Tuition, fees, room, and board at qualified higher-education institutions

Source of Information: Charles Schwab www.Treasurydirect.gov MotleyFool.com MotleyFool.com MotleyFool.com

College Savings Plans Comparison Chart

College Savings Comparison (continued)

Custodial Account Series EE Coverdell ESA 529: Prepaid Tuition 529: Savings Plan

Tax-deductibility None None None Some states allow contributions to be partially or completely deductible.

Some states allow contributions to be partially or completely deductible.

Investment flexibility Assets can be invested in stocks, bonds, mutual funds, and cash equivalents. Investments can be bought and sold as often as desired.

Bonds must be held at least 5 years for full interest. An interest penalty of 3 months will be assessed on all bonds cashed before 5 years.

Assets can be invested in stocks, bonds, mutual funds, and cash equivalents. Investments can be bought and sold as often as desired.

Plan administrators invest all assets.

Assets are professionally managed. Depending on the plan, participants can choose from two to almost 30 mutual fund-type investments. Investment choice may be changed once every 12 months.

Ability to transfer account

None None Account may be transferred to other brokerage or mutual fund, or to a 529 plan, subject to fees and penalties.

Depends on plan May transfer to another 529 plan once every 12 months

Interaction with Hope and Lifetime Learning Credits

None None Credits can be claimed in the same year as tax-free withdrawal provided that the distribution is not used for the same expenses for which a credit is claimed.

Credits can be claimed in the same year as tax-free withdrawal provided that the distribution is not used for the same expenses for which a credit is claimed.

Credits can be claimed in the same year as tax-free withdrawal provided that the distribution is not used for the same expenses for which a credit is claimed.

Source of Information: Charles Schwab www.Treasurydirect.gov MotleyFool.com MotleyFool.com MotleyFool.com

College Savings Plans Comparison Chart

College Savings Comparison (continued)

Custodial Account Series EE Coverdell ESA 529: Prepaid Tuition 529: Savings Plan

Effect on financial aid Considered to be an asset of the student, which means a large portion of the assets will be considered in the financial aid calculation

Assets are considered to be property of the account owner, which -- unless the owner is also the beneficiary -- means only a small portion of the assets will be considered in the finanical aid calculation

Considered to be an asset of the student, which means a large portion of the assets will be considered in the financial aid calculation

Considered to be the student 's resource and thus reduces financial aid dollar-for-dollar

Assets are considered to be property of the account owner, which -- unless the owner is also the beneficiary -- means only a small portion of the assets will be considered in the finanical aid calculation

Control of the account In most states, account assets become property of the student at age 18.

In most states, control of account will always remain with contributor.

In most states, account assets become property of the student at age 18.

In most states, control of account will always remain with contributor.

In most states, control of account will always remain with contributor.

Must use funds by… No age limit No age limit Age 30 Varies by plan Varies by plan

Assignability to other relatives

Immediate family, including cousins, step-relatives, and in-laws

Immediate family, including cousins, step-relatives, and in-laws

Immediate family, including cousins, step-relatives, and in-laws

Penalty for non-qualified withdrawals

None Selling before 5 years results in a 3 month interest penalty

Earnings are taxed as ordinary income to contributor, plus a 10% penalty

Earnings are taxed as ordinary income to account owner, plus a 10% penalty

Earnings are taxed as ordinary income to account owner, plus a 10% penalty

Contribution deadline None None Tax-filing deadline for the year of the contribution

Depends on the plan Depends on the plan

Source of Information: Charles Schwab www.Treasurydirect.gov MotleyFool.com MotleyFool.com MotleyFool.com

College Savings Plans Comparison Chart

D. How Do You Reduce the Cost of Your Kid’s Education and Sign up for Aid?

1. Encourage parents to begin planning early.• We will discuss various vehicles later in this class.

2. Fill out the FAFSA (Free Application For Federal Student Aid) on the net at www.FAFSA.ed.gov (remember your PIN number).• Follow the instructions and do it early (usually after

your tax forms are completed). You may submit the FAFSA as early as January 1 for the fall term. The amount of your award is based on the FAFSA and credit hours, not when you apply.

Signing Up for Aid (continued)

3. Talk with the Financial Aid Office at BYU.• They will guide you in the process and help you in

determining your eligibility for aid www.financialaid.byu.edu

4. Look for other available aid on the web.• View the following sources and utilize them:

Helpful Websites Containing Information about Financing School

www.byu.edu select <students>, <financial links> and then <financial aid> or <scholarships>• BYU Financial Aid Office 801-378-4104. Now is

when to apply. To have your federal aid in place by fall semester, it is wise to submit the FAFSA by June 1 the same year, unless you are planning to marry; make an appointment with a counselor if you have questions.

• BYU Scholarship Office 801.422-2146. Check www.byu.edu/scholarships for deadlines. If you miss the scholarship deadline, you will not be considered for that time period.

Resources for Financing School (continued)

www.fafsa.ed.gov - Free Application for Federal Student Aid. This form must be filled out for any federal financial aid.

www.fastweb.monster.com – matches student profiles to a database of scholarships.

www.collegeboard.com– connects student profiles to a database of scholarships, internships, and loans.

www.srnexpress.com – contains resources on scholarships, fellowships, internships, and loan forgiveness programs.

Resources for Financing School (continued)

www.estudentloan.com/loanfinder - search for available loans.

www.wiredscholar.com – a good website for college preparation and information.

www.finAid.org – a comprehensive site that has information on loans, scholarships and savings plans.

Review of Objectives

A. Do you understand the importance of how education relates to your financial goals?

B. Do you understand the priority of money for financing school?

C. Do you understand how to save for your children’s education?

D. Do you understand how to reduce the cost of education and sign up for aid?