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.
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.
2
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
3
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.
“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.
5
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
6
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
7
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
8
House
RECONCILIATION
Senate – S. 1932
$50 billion over 5
years
Total, Governmentwide Net Budget
Savings
$39.1 billion over 5
years
(awaiting Budget Committee and
floor consideration)
($71 billion in gross savings;
offset $32 billion in new
spending)
$13.6 billion
Ed & the Workforce Committee
Education Committee
instructions for savings
$6.2 billion
Cut from Pensions
$6.7 billion
$22.3 billion
Cut from Student
Loans
$20.8 billion
$13.7 billion
$5.0 billion
Spent on
Programs/Loans
HELP Committee
$11.2 billion
$2.7 billion
Spent on Katrina
$1.5 billion
$14.6 billion
Net Education Cuts
$8.1 billion
$18.1 billion
Net Deficit Reduction
$13.3 billion
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
18
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…
19
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.
20
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?
21
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
22
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!
23
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.
•
24
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).
25
REAL LOAN REPAYMENT (I)
Loan Amount
(based on 4.7%
interest rate)
$50,000
$100,000
$100,000
consolidation
Years to
Pay Off
Monthly
Payment
10
$523
25
$284
10
$1,046
25
$567
30
$522
26
REAL LOAN REPAYMENT (II)
Loan Amount
(based on 6.8%
interest rate)
$50,000
$100,000
$100,000
consolidation
Years to
Pay Off
Monthly
Payment
10
$575
25
$347
10
$1,151
25
$694
30
$657
27
REAL LOAN REPAYMENT (III)
Loan Amount
(based on 8%
interest rate)
$50,000
$100,000
$100,000
consolidation
Years to
Pay Off
Monthly
Payment
10
$607
25
$386
10
$1,213
25
$772
30
$734
28
HOW MUCH MORE PER MONTH?
$$$$
years 4.7%
$50K
10
$50K
25
$100K 10
$100K 25
$100K 30
consol.
$523
6.8%
$575
+52
$284 $347
+$63
$1,046 $1,151
+$105
$567 $694
+$127
$522 $657
+$135
8%
$607
+$84
$386
+$102
$1,213
+$167
$722
+$155
$734
+$212
29
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
30
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)
31
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
32
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.
33
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
34
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.
35
ICRP (VII)
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.
36
Income Contingent Repayment Plan
Interest rate 4.7%, single, and U.S. mainland resident. Shaded area indicates lower monthly repayment plan is available.
Loans Outstanding
AGI
$15,000
$30,000
$45,000
$60,000
$75,000
$100,000
$150,000
$9,750
$5.00
$5.00
$5.00
$5.00
$5.00
$5.00
$5.00
$10,000
$7.17
$7.17
$7.17
$7.17
$7.17
$7.17
$7.17
$12,000
$40.50
$40.50
$40.50
$40.50
$40.50
$40.50
$40.50
$15,000
$81.73
$90.50
$90.50
$90.50
$90.50
$90.50
$90.50
$20,000
$91.52
$173.83
$173.83
$173.83
$173.83
$173.83
$173.83
$25,000
$103.54
$207.08
$257.17
$257.17
$257.17
$257.17
$257.17
$30,000
$114.07
$228.15
$340.50
$340.50
$340.50
$340.50
$340.50
$40,000
$131.81
$262.36
$393.54
$507.17
$507.17
$507.17
$507.17
$50,000
$136.49
$272.97
$409.46
$545.95
$673.83
$673.83
$673.83
37
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.
38
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
39
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.
•
•
40
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.
41
EITC INCOME RANGES
Earned
Income Tax
Credit
Earned
Income
ceilings for
eligibility-(not AGI)
SINGLE,
age 25+
Up to
$11,490
Head of
Married –
Household no children,
– one child age 25+
Up to
$30,338
Up to
12,490
42
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
43
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.
44
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
45
EARNED INCOME TAX CREDIT
FOR MARRIED COUPLES – NO CHILDREN
•
A refundable federal income tax credit for lowincome 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
46
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
47
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)
48
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
49
LIFETIME LEARNING TAX CREDITS
Lifetime
Learning
Tax Credit
Eligible
Income
ranges –
ratably
reduced at
top of
range
SINGLE
$9,955 to
$52,000 –
Head of Married –
Household no children,
– one child
$15,355 to
$52,000
$17,905 to
$105,000
MAX credit MAX credit MAX credit
available at available at available at
> $24,250 > $28,100
>$20,700
50
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
51
TAX DEDUCTIONS FOR STUDENTS
•
Deduction for up to $4,000 per filer for
qualified tuition and fees
•
Reduces AGI “above the line” so filers do
not have to “itemize” on Schedule “A”
•
EASY TO DO: CALCULATE THE NET
TUITION amounts from 1098-T
52
TUITION AND FEE DEDUCTION
Reduces
AGI either SINGLE
$4K or $2K
HEAD of
HOUSEHOLD –
one child
MARRIED no children
AGI for
$4,000
deduction
$11,955 to
$65,000
$17,355 to
$65,000
$19,905 to
$130,000
AGI for
$2,000
deduction
$65,001 to
$80,000
$65,001 to
$80,000
$130,001
to
$160,000
53
DOLLAR VALUE OF DEDUCTION
Single and
Head of
Household –
one child
Married – no
children
< $65K
saves
$400 $1000
<$130K
saves
$400 $1000
>$65 - $80K saves
$500 - $560
>$130K <$160,001 saves
$500 - $560
54
DEDUCTION FOR STUDENT LOAN
INTEREST PAID
•
Up to $2500 in interest payments may
be deducted by borrower
•
Incomes up to $65K for single and
$130K joint return
•
Lender should send borrower a 1098-E
statement each year detailing interest
55
DOLLAR VALUE OF INTEREST
DEDUCTION
Single and
Head of
Household –
one child
< $50K
saves
$0 - $625
>$50,001 - $65K
saves
$625 - $0
Married – no
children
<$100K
saves
$0 - $613
>$100,001 <$130K saves
$613 - $0
56
POSSIBLE BUSINESS DEDUCTION
FOR CERTAIN MBA STUDENTS
(Treasury Regulation 1.162-5) - tuition
and other education expenses are
DEDUCTIBLE ONLY IF
1) Maintaining or improving skills
required in the trade or business
2) Required as a condition of continued
employment or salary level
57
BUSINESS DEDUCTION FOR MBAs
Q: Why would this business deduction be
more desirable than the Education
Tuition and Fee Deduction discussed
earlier in the presentation?
A: This deduction is not limited to $4,000
per year, is not limited to those single
filers with AGIs less than $80K or
married filers with AGIs less
than$160K.
58
NOT DEDUCTIBLE IF…
•
Incurred to meet the minimum educational
requirements for job, including a license or
certification (e.g., most candidates for MD,
DDS, teaching credential, etc.)
•
Education is part of a program to prepare
for a new business or type of employment
59
TAX COURT RE: MBA IN ALLEMEIER V.
COMMISSIONER, T.C. MEMO 2005-207
Tuition and other educational expenses connected
to the acquisition of an MBA are deductible if the
student then engages in “the same general
activities” as before the MBA.
“WHILE THE MBA MAY HAVE SPED UP HIS
ADVANCEMENT WITH THE COMPANY, THE
BASIC NATURE OF HIS DUTIES DID NOT
SIGNIFICALNTLY CHANGE.”
60
THIS PRESENTATION AVAILABLE AT…
http://www.ucop.edu/sas/sfs/other_material/other_
material.htm
The content of this presentation is not endorsed or
vetted by the U.S. Department of Education, the
Internal Revenue Service, or even the Regents
of the University of California. This is an
informal colleague-to-colleague message, not
legal advice. All errors are my own. Contact
Nancy Coolidge - <nancy.coolidge@ucop.edu>
61