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Education Planning


Many families find they must borrow at least some money to help pay expenses for their college-bound teenagers. Student loans can provide a significant share of a student’s total financial aid package. Although many college graduates often find themselves entering the job market burdened with thousands of dollars in college loan debt, a federal program may help ease that burden by offering attractive terms and rates.

The Federal Direct Loan Program (begun in 1994) allows students to borrow directly from the federal government. The direct loan program simplifies the process, and offers a variety of repayment options. The repayment plans are open both to participants in the direct loan program and to students wishing to consolidate multiple loans from private lenders or other federal programs.

Here are the available repayment options:

  • Standard Repayment. Loans are generally repaid over 10 years in 120 monthly payments, although a shorter repayment time may apply to small loan amounts. A variable interest rate is applied to the outstanding balance, but instead of varying the monthly payment amount, the payment remains constant and the number of payments is adjusted to account for a higher or lower interest rate. Under some circumstances, the student can request that payments be adjusted instead.
  • Income Contingent Repayment. This plan bases repayment on the student’s income after graduation, limiting payments to 20% of the borrower’s monthly discretionary income. The attractiveness of this plan is that payments will rise along with rising income, but there is a potential danger for borrowers who find themselves in low-paying jobs for an extended period of time. Should payments be so low as to not cover all of the interest due, the unpaid interest is added to the principal, increasing total costs. Any debt remaining after 25 years will be forgiven, but forgiven debt is considered taxable income, creating a potentially thorny tax problem. Nevertheless, income contingent repayment plans might make sense for graduates whose career paths have a high probability of rising income.
  • Graduated Repayment. Under this plan, a loan can stretch for up to 30 years with payments initially low and rising over time. The assumption behind the plan is similar to that with income contingent repayment–i.e., that income is likely to rise the longer one has been working. However, the graduated repayments are structured to increase automatically over time, independently of income which could rise, fall, or remain flat.
  • Extended Repayment. The repayment schedule can be stretched out depending on the size of the loan, generally from 12 years to as much as 30 years for loan amounts over $60,000. One significant feature of the direct loan program is that borrowers are not locked into a repayment plan—switching among options is permitted and prepayment can be made without penalty. This flexibility may help young adults who are just getting started in an uncertain work world, and who may face job loss or career transitions.

If you are currently dealing with college expenses, or will be facing them shortly, you may want to take advantage of federal incentives to save for post-secondary education as well as federal programs to assist in financing academic pursuits.

For more information:
The Federal Student Aid Information Center: (800) 433-3243
The Office of Post-Secondary Education:
The College Board:

Guardian does not offer student loans or any counseling to attain or pay down student loans.


For college students and their families, financial aid is meted out according to an equation set by the federal need analysis. This table measures a family’s income and discretionary income in order to determine how much they can contribute to their child’s college expenses, and allows families to deduct a portion of educational expenses from state and local taxes. In May of 2003, the Department of Education altered the federal need analysis and, consequently, many students will now receive a reduced amount of financial aid.

Change on the Horizon
Federal laws mandate that the tables should be updated annually, and the information upon which the tables are structured is derived from data supplied by the Internal Revenue Service (IRS). This data is now outdated, according to the Department of Education, reflecting a time when state taxes were much lower. With the changes, aid will be reduced in varying amounts, since such circumstances as family size, number of children in college, etc., will differ from family to family.

In addition, Pell grants, which are awarded to lower income students, will also be reduced. A report from the Congressional Research Service (CRS, 2003) estimates that Pell grants will be reduced by $270 million. Since Pell grants are also awarded based on discretionary income, a projected 4.8 million students will receive smaller grants, and some will be denied.

Planning Tips
Parents who hope to increase their children’s financial aid approval odds may want to consider a few money management strategies. Since the formula is based on a family’s discretionary income, some may want to think about taking steps to reduce this amount. Here are some financial strategies that could work for your family:

  • If you have been thinking about transferring assets into your child’s name, you should remember that 35% of a child’s assets would be considered available to pay for tuition. While this may not be a problem for those with funds created expressly for the purposes of tuition, bear in mind that a significantly smaller percentage of a parent’s assets will be deemed “available.”
  • Often, retirement accounts are not considered part of a family’s disposable income. Some parents might benefit from maximizing their contributions to 401(k)s, annuities, or Individual Retirement Accounts (IRAs). However, it should be noted that contributions to 401(k) and 403(b) plans would be considered untaxed income on financial aid forms.
  • One of the first things financial aid offices look at is a family’s adjusted gross income (AGI). Those who are expecting capital gains or dividend payments may choose to defer during a child’s remaining high school years, because otherwise, schools will assume that the income and gains reported on your tax returns are yearly.
  • Think about spending down. Those who have been contemplating home repairs, or buying a new car, may find the time has never been better. Public schools do not include home equity in disposable income, although private schools will, but they may be dissuaded by loans. Spend wisely, and consider buying items that your child will inevitably need at school, such as a computer, or even a car.
  • Expected contributions will be reduced by half for those with two family members attending college at least half time at the same time. Parents considering returning to college may find it in their best interest to coordinate their attendance with that of their child.

A college education is invaluable. However, the cost is becoming increasingly prohibitive. Talk with your financial or tax professional today, and improve upon your family’s financially savvy money management.


Applying to colleges requires a course of study all its own. When you add the need for financial assistance, you may feel you are faced with a situation you would rather avoid altogether. The benefits of completing the required forms in a timely manner, however, can make the effort worthwhile, especially if it pays off by allowing your child to attend the school of his or her choice.

The U.S. Department of Education has several programs, involving grants, loans, and work-study, available for post-secondary education. Aid from most programs is awarded on the basis of financial need, with a couple of exceptions in the loan programs. In determining need, both the cost of education and an Expected Family Contribution (EFC) are considered.

The EFC is calculated using a formula established by Congress. Factors such as taxable and nontaxable income, assets (e.g., savings, checking accounts, family businesses, and real estate holdings), and benefits (unemployment and Social Security, for instance) are all considered in the calculation.

Federal programs include the following:

  • Pell Grants - These grants are generally awarded to undergraduates based on need and family income qualifications. The size of the grant depends on program funding. The maximum award for the 2009-2010 award year was $5,350.
  • Supplemental Educational Opportunity Grants - These grants are earmarked for undergraduates who are in greater need than Pell Grant applicants. This money is supplied by the federal government, but the distribution of funds is carried out by individual colleges. The availability of these grants may be limited, depending on how much funding is allocated to a particular school. Annual grants range from $100 to $4,000.
  • Federal Perkins Loan - These loans are generally available for students with exceptional financial needs. Factors that determine qualification for a Perkins Loan are: 1) when the application is submitted; 2) a student’s financial need; and 3) the funding level for the particular school. An eligible undergraduate student can borrow up to $4,000 per undergraduate year of study, not to exceed a total of $20,000. An eligible undergraduate student can borrow up to $5,500 per undergraduate year of study, not to exceed a total of $27,500. An eligible graduate student can borrow up to $8,000 per graduate year of study, not to exceed a total of $60,000. Interest is 5 percent. If the borrower is more than a half-time student, repayment begins nine months after the recipient graduates or leaves school. (These nine months are called the “grace period.” Students who are attending school less than half time may have a shorter grace period). Payments can be spaced over a maximum of ten years after the grace period expires.
  • Federal Work-Study Program - This program essentially provides an award in exchange for work. The typical school work schedule is about 12 to 15 hours per week (up to 40 hours per week during vacations). These jobs may be on or off campus, but, if off campus, are generally with a government agency or non-profit organization (under some circumstances, a school may have arrangements with a private for-profit company). When possible, the jobs are related to the student’s major. The pay is generally modest, but is at least minimum wage. However, hours and compensation cannot exceed the Federal Work-Study award.
  • Direct Stafford Loans - This is a federally insured, subsidized loan program that permits eligible students to borrow at favorable interest rates. These loans are typically arranged through private lenders. The program offers four flexible loan repayment options.
  • PLUS (formerly “Parents’ Loans for Undergraduate Students”) - Parents are eligible for this loan if they pass a credit check. The amount of the loan is generally limited to the actual “cost of attendance” minus any financial aid already received. Parents taking this loan must begin repayment sixty days after the final loan disbursement for the academic year. Interest on PLUS loans is variable, but cannot exceed 9 percent.

Some states base their programs not only on need but also on academic performance. The recipients of state loans generally must be legal residents of the state and enrolled in a college or university within their state. In addition, some states have “reciprocity agreements” with other states.

No matter how slight you believe your chances of receiving aid are, apply. You may qualify for more aid than you think.


It takes four years, on average, to graduate from most colleges and universities. During that time, students can amass some hefty debts. But, for many people the degree is certainly well worth the burden of accumulated debt. So, these questions remain: How should you repay the debt? And, are there any plans that can help make the “payback” any easier?

Today, there are more plans available that offer students flexible payment schedules. If you are applying for a federal student loan now, you can choose a graduated repayment plan that will allow you to make smaller payments upon graduating and larger payments at a later time when you may be earning more money in the working world.

You may also have the choice of an income-contingent repayment plan. This plan calls for you to pay a fixed percentage of your postgraduate income toward your student loan. This percentage could be approximately 5-10 percent of anything above the poverty level of a single person, currently $9,310 (U.S. Census Bureau, 2005).

A third choice is an extended repayment plan that can lower your monthly payments an estimated 20% to 30% and allow you to stretch out your loan payment schedule from 10 to 15 or even 20 years.

Consolidation Offers Flexibility
There is good news also for students who are already debt-laden. Under the Student Loan Reform Act of 1993, you have the opportunity to consolidate your existing loans with a direct loan from the government. This plan offers a more flexible repayment schedule while interest rates remain the same.

To be eligible for this plan, you will need to ask your original lender for an “income sensitive” repayment option. This plan adjusts the monthly payments for the loan’s capital, but not the interest, to your annual income. If the original lender will not agree to this option, you may then be eligible for a direct loan from the government.

Two advantages of a direct government loan are as follows: First, the monthly installment payments of principal and interest are contingent upon your income. Because the payments are withdrawn from your wages, there will be less paperwork to muddle through. Second, as your wages increase, the percentage withdrawn from your pay will also rise, allowing you to pay off your loan more quickly and with less accrued interest charges.

If you need to borrow for the current school year, direct loans (and the income-adjusted repayment plan) are also available if you are attending one of the schools participating in this plan. Parents may also be able to take out a direct loan for as much as the entire cost of their children’s college education. It is hoped that the Education Department will soon make direct loans available everywhere.

For information or inquiries regarding federal student aid programs, contact the Federal Student Aid Information Center at 1-800-4FED-AID (800-433-3243).

Note: Guardian does not offer student loans or any counseling to attain or pay down student loans.