1 / 60

INDUSTRY UPDATE Nancy Coolidge University of California Office of the President

ACCESS GROUP Conference 2005. INDUSTRY UPDATE Nancy Coolidge University of California Office of the President. CAVEAT…. This update is based on the best information available.

peta
Download Presentation

INDUSTRY UPDATE Nancy Coolidge University of California Office of the President

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ACCESS GROUP Conference 2005 INDUSTRY UPDATENancy CoolidgeUniversity of CaliforniaOffice of the President

  2. CAVEAT…. • This update is based on the best information available. • This presentation for the ACCESS GROUP Conference was finalized on Tuesday, November 15, just as the House of Representatives was ready to vote on their reconciliation bill.

  3. AGENDA • Reconciliation and Reauthorization • Federal Savings and Higher Education • Interest Rates and Loan Fees • “Squeezing” the Lenders • Help Where We Can Find It • PLUS for Graduate Students • School-as-Lender • Loan Consolidation • Tax Credit

  4. Appropriations for FY ‘06 As of the date of this writing, Congress had not passed a Fiscal Year 2006 Appropriations bill, but the conference bill appears to keep most higher education programs under the Department of Education FLAT FUNDED.

  5. “RECONCILIATION” & “REAUTHORIZATION” YET TO COME • Congress is planning to reduce federal support for higher education as part of the planned budget reconciliations bills to “save” money for other priorities. • Without reconciliation “savings,” it will be harder to pass a federal tax cut bill as the Administration is planning and the national deficit will not be reduced.

  6. PROPOSED WAYS TO “SAVE” • Congress is looking to change the various “mandatory” federal programs so that they will be less costly. e.g., • Medicare • School Lunches • Foster Care funds • Food Stamp Program • Student Loans

  7. HIGHER EDUCATION’S SHARE OF FEDERAL BUDGET • All federal spending on education at all levels represents less than 3% of the annual federal budget expenditures. • Between 1/4th and 1/3rd of all “savings” for federal spending would come out of higher education – mainly out of the subsidies for Stafford Loans

  8. FY 2006 Budget Reconciliation Impact on Education Instructions to “save” influences the reauthorization of HEA Independent of the appropriation of new funds for the coming year

  9. Recommended INCREASED UPFRONT LOAN FEES • Increases in the lender and origination fees paid by borrowers - from 0%, in many cases, to 2.5% and from 0% to 1% respectively (These are the upfront fees, which for many borrowers have been 0% in the last few years and which could rise to a total of 3.5% in 2007.)

  10. MIXED NEWS ON INTEREST RATES • The House is proposing variable interest rates capped at 8.25% • The Senate is proposing fixed rates at 6.8%

  11. Proposed INTEREST RATES Greater potential increases in the interest rates charged to borrowers, by raising the cap from 6.8% (current law includes a fixed 6.8% rate staring next July 2006) to 8.25% if Congress moves to a variable rather than a fixed interest rate

  12. REDUCING RETURN-ON-INVESTMENT FOR LENDERS • Reduced subsidies to lenders and guarantors. • All or some of will be passed on to borrowers • Reduced buyouts of borrower up-front fees • Reduced repayment “incentives”

  13. ENTITLEMENT TO ICRP COULD BE ELIMINATED FOR FFELP BORROWERS • Congress is planning to reduce borrower access to the “income-contingent repayment program” (ICRP) • ICRP will no longer be a borrower entitlement as it is today • FFELP borrower access will require lenders giving borrowers permission

  14. PARENTS MAY PAY MORE TO BORROW • PLUS loans for parents could become more costly if fixed rate consolidations are eliminated in the PLUS program, also.

  15. Proposed CONSOLIDATION FEES • A 1% fee added to the principal when borrowers consolidate their loans • Potential loss of fixed-rate consolidation loans available today • Consolidation will be used to obtain longer terms, but the 1% “tax” will increase consolidation costs

  16. Now, For the GOOD NEWS…. The Senate has a proposal to make PLUS loans available to Graduate Students, in addition to a small bump in the annual maximum from the Stafford unsubsidized loan program. If this manages to survive the conference process, it would eliminate some of the current dependence on higher-cost private and alternative loan borrowing

  17. Help Where We Can Find It… • Our job is to help our students find ways to finance their educations. • Each student as well as each of us must act according to our individual consciences within the strictures of the law and the social norms of our institutions and communities. • This material is presented for your consideration…

  18. SCHOOL-AS-LENDER (I) • UC has looked into this possibility and is still considering its options, pending the outcome of the current bills before Congress to limit lender profits. • Schools can make money on this enterprise under the current system • There are serious ethical issues that can be mitigated by institutional choices.

  19. SCHOOL-AS-LENDER (II) • What uses are made of the “profits”? • Do borrowers have real, practical choice in selecting lenders? • What role does the school have in promoting the school’s brand of loans? • What role does the school have in making borrowers aware of lender options and their respective real value?

  20. SCHOOL-AS-LENDER (III) • Consider the role of administrative simplicity and resources in the choice • Consider the role of “non-financial perks” to school • Consider the role of alternative loan availability and pricing • Consider the transparency of the transactions to students and alumni as well as state and other public interests

  21. CONSOLIDATION IN SPRING ‘06 • This may be the last time that consolidation offers borrowers such a good deal. • Borrowers in school as well as recent grads should consider consolidation as interest rates are rising – locking down the current 4.7% may look GOOD this time next year!

  22. NEW CONSOLIDATION LOAN? • Borrowers are free to consolidate this year’s loans as a separate consolidation loan if they don’t wish to combine the new disbursements with their current consolidation loan. • A weighted average makes the costs of combining or not very similar overall, depending on the effects of the ROUNDING (up to the nearest 1/8th of a percent.) Typically, there is no significant savings associated with choosing to combine consolidation loans.

  23. LONGER CONSOLIDATION TERMS • If the term (# of years in repayment) is longer, the cost will increase, whether loans are combined or not. • Combining new loans with an existing consolidation loan may make the borrower eligible for a longer repayment term (30 years instead of 25).

  24. REAL LOAN REPAYMENT (I)

  25. REAL LOAN REPAYMENT (II)

  26. REAL LOAN REPAYMENT (III)

  27. HOW MUCH MORE PER MONTH?

  28. INCOME CONTINGENT REPAYMENT (I) • Borrowers who may not earn steady incomes right out of school • Borrowers whose debt to income ratio is too high – this may be chronic or temporary • Un- or under-employed but no remaining deferment or forbearance eligibility

  29. ICRP (II) Currently, access to ICRP is an borrower entitlement, but Congress is considering limiting access to FFELP borrowers whose lenders give them permission to seek the lower repayments under ICRP (may include negative amortization, unlike “income sensitive” repayment plans)

  30. ICRP (III) Borrowers in ICRP must agree once upfront to allow the Department of Education to check their income tax filings with the IRS each year. Required repayment installment amounts will vary according to changes in the borrower’s income over time

  31. ICRP (IV) • Borrowers who elect an ICRP plan may switch to another plan at any time. Switching to another plan makes sense when the borrower’s income increases substantially, otherwise the monthly payments under ICRP will be larger than the payments under an extended payment plan.Under ICRP, higher-income borrowers will pay off their loans earlier than would be the case under an extended plan. While this will save money on interest payments, some borrowers will need to target their increased earnings to higher interest debts first.

  32. ICRP (V) • When borrowers pay less each month than the interest that accrues on their loans, the unpaid interest is capped when/if it reaches 150% of the original loan amount

  33. ICRP (VI) Borrowers who make required payments in ICRP for 25 years are entitled to forgiveness of the balance remaining at that time, although it is technically a taxable “gift” to the borrower.

  34. ICRP was designed to be an alternative to default and delinquency – to improve the political standing of Federal Loan Programs, which were being criticized due to rising default rates, and also to provide humane treatment for those who “took a chance” on higher education, but for whom the monetary rewards did not follow. ICRP (VII)

  35. Income Contingent Repayment PlanInterest rate 4.7%, single, and U.S. mainland resident. Shaded area indicates lower monthly repayment plan is available.

  36. OUTSIDE THE BOX • Subsidies for students that are not from the usual sources of financial aid – the U.S. Tax Code • Citizens differ in their views of using the tax code to assist the country’s lowest income workers as avenues for helping students who work.

  37. TAX TIPS FOR STUDENTS IRS Publication 970 Tax Benefits for Education http://www.irs.gov/pub/irs-pdf/p970.pdf IRS Publication 596 Earned Income Credit http://www.irs.gov/pub/irs-pdf/p596.pdf

  38. EARNED INCOME TAX CREDITS (EITC) • A refundable federal income tax credit for low-income working individuals and families. • Filer must be >24 and <65 years old • Investment Income must be <$2,650 • Must have EARNED INCOME within specified ranges.

  39. EARNED INCOME TAX CREDITS (EITC) • EITC amounts may reduce taxes owed or be paid as a REFUND IN EXCESS OF TAXES WITHHELD • Eligible filers may received “refunds” for more than they paid in taxes after filing • Eligible workers can avoid having all or portions of normal “withholding” taken out of paychecks ahead of anticipated credit.

  40. EITC INCOME RANGES

  41. EARNED INCOME TAX CREDIT (EITC)HEAD OF HOUSEHOLD WITH 1 CHILD • Income of $30K would be eligible for $50 • Income of $20K would be eligible for $1,648 • Income of $10K would be eligible for $2,604 • Income of $7,500 would be eligible for $2,559 • Income of $5K would be eligible for $1,709

  42. EARNED INCOME TAX CREDIT (EITC)SINGLE PERSON • A refundable federal income tax credit for low-income working individuals and families. • Must be >24 and <65 years old • Investment Income must be <$2,650 • Must have earned income less than $11,490 to qualify for EITC.

  43. EARNED INCOME TAX CREDIT (EITC)SINGLE PERSON • Income of $2,500 would be eligible for $193 • Income of $5,000 would be eligible for $384 • Income of $7,500 would be eligible for $303 • Income of $10,000 would be eligible for $112

  44. EARNED INCOME TAX CREDIT FOR MARRIED COUPLES – NO CHILDREN • A refundable federal income tax credit for low-income working couples • One partner must be >24, but <65 yrs. • Must have earned income less than $12,490 to qualify for EITC. • Investment income may not be >$2,650

  45. EARNED INCOME TAX CREDIT FOR MARRIED COUPLES – NO CHILDREN • Earned Income of $5K would be eligible for $384 • Earned Income of $7,500 would be eligible for $380 • Earned Income of $10K would be eligible for $189 • Earned Income of $12,000 would be eligible for $36

  46. LIFE-TIME LEARNING CREDITS • REDUCES TAXES DOLLAR FOR DOLLAR – Maximum of $2000 • Maximum of 20% of “tuition and qualified educational expenses” up to max of $2,000 for TY 2005 per filer • AGI max of $52K for single filer and $105K for married filer – ratably reduced at top of range ($42K and $95K respectively)

  47. TAX CREDITS • A single filer must have an AGI of at least $20,700 to get the maximum credit. LTL credits cannot be greater than the tax liability – not refundable. • A head of household filer with one dependent - AGI of at least $24,250 • Married filer with no minor dependents – AGI of $28,100

  48. LIFETIME LEARNING TAX CREDITS

  49. TAX CREDITS ARE WORTH MORE For those eligible for a tax credit, this is always the best option in comparison to a tax deduction Tax deductions are less valuable, but they are available to higher-income filers than is the case with tax credits

More Related