Today President Obama signed into law an overhaul of the student loan program.  Since two-thirds of college students graduate with some debt, this new law will likely directly affect how you pay for your child’s education.  Notably, the new bill:

• Eliminates the subsidies paid to bank to create the loans.  This will save taxpayers an estimated $68 billion over the next eleven years.  The government has always backed the loans, so the banks have never assumed any risk.

• New loans will be issued directly by the government.  Banks will continue to service the loans, collecting payments when due.

• Loan repayment will be capped at 10% of a new graduate’s discretionary income.  I’ll be interested to see how they define “discretionary income.”  The conventional definition:  “income minus taxes and normal expenses, including rent, transportation, medical expenses…” will leave about $1.95 for most recent grads.

• After twenty years of conscientious repaying (ten years for public service workers), any balance on the loans will be forgiven — erased forever.  This will enable grads to work in relatively low-paying community service jobs, like teaching or public health, if they choose, without worrying about making enough to pay off their student loans.

• The act also directs $2 billion over four years to improve the nation’s community colleges.  The bill notes the important role that community colleges play in retraining displaced workers, helping them re-enter the workforce.  This seems like a great time to help the unemployed get the training they need.

Ending a wasteful subsidy and investing the proceeds in education — now that’s a program where everyone wins.

Well, almost everyone.  Not surprisingly, Sallie Mae lobbied for keeping the loan process in the private sector.  Sallie Mae started out as the Student Loan Marketing Association, a government-sponsored enterprise in 1972.  It became completely private in 2004.  It now operates as the SLM Corporation (SLM) with a market capitalization of over $6 billion.  SLM also owns Upromise, marketing 529 Qualified Tuition Programs in twelve states.

Image credit: Chris Radcliff at Flickr

Full disclosure: No positions in any company mentioned.

Carnival: This post was featured in this week’s Carnival of Personal Finance, hosted at The Wisdom Journal.

Tags: Health Care and Education Reconciliation Act, new student loan law, President Obama, Sallie Mae, SLM, SLM Corporation

Qualified Tuition Plans, commonly known as 529 Plans, are a great way to save for your child’s education.   Investment earnings are exempt from income tax if used for college expenses.  Unfortunately, there are often high management fees to pay on top of the expense ratios of the underlying investments.

For example, if you invest in the Aggressive Growth Portfolio in Idaho’s College Savings Program, you pay a total fee of 0.75% each year, of which 0.11% goes to the underlying mixture of Vanguard mutual funds.  The rest of the money (0.64%) goes to program management fees to Upromise and the State of Idaho.

Through the Idaho program, you pay more than five times the expense ratio for the privilege of having the money in a tax-advantaged account.

Why are there program management fees for 529′s?

Read the rest of this entry »

Tags: 529 plan, 529 tax deductions, funding education, investment fees

“Heresy!  Heresy!”

“Everyone knows that a 529 fund is the best way to save for your child’s education!!”

Before you throw the rotten tomatoes…

I have nothing against 529 plans.  They are a fantastic opportunity to save for your child’s college expenses.  I do, however, have a complaint against the high fees that some of the plans are charging.

In my recent study of 529 plans I came to three conclusions:

• Some plans charge exorbitant fees,
• Almost all of the plan literature is hard to wade through and compare to competing plans, and
• It needn’t be so complicated.

I set out to determine whether the high fees charge by many 529 programs offset the tax advantage.  Below is a spreadsheet I wrote to compare three scenarios.  (You’ll need to click on the image to make it readable).

Read the rest of this entry »

Tags: 529 fees, 529 funds, 529 tax advantage

My son is in first grade, and he’s already lived in three states.  He was born in New Jersey, but we moved to New York shortly after his first birthday.  New York didn’t work out, so soon after, we moved to Massachusetts.  Here, we plan to stay.

How we acquired so many accounts

In my family, nothing is more important that a good education.  Our son was born near the beautiful (but expensive!) Princeton campus, so we opened up a 529 Qualified Tuition Plan before he learned to sit up.  Ah, such enthusiastic new parents!  Unfortunately, I didn’t take any time to research the issue, and I assumed that you were supposed to invest in the 529 program sponsored by your state of residence, so we invested in New Jersey’s NJBEST College Saving Plan.

By the time we moved to New York, I knew that I could continue investing the New Jersey 529, but New York gave a state tax deduction if you invested in the New York plan, so while we enjoyed the hospitality of the Hudson Valley region, we bought into New York’s 529 College Savings Program Direct Plan.  

When we moved to Massachusetts, I couldn’t bear the thought of opening yet another account.  Massachusetts doesn’t give a tax deduction for 529 contributions (boo! hiss!) — surprising, considering that our state ranks #8 in the number of colleges per capita — so I plunked a couple of years worth of contributions into the New Jersey fund.

My partner and I keep separate accounts.  Because the Federal Government doesn’t recognize our marriage, I find it’s just simpler to track our finances separately.  Thus we currently have two NJ and two NY accounts.  That seems like a lot of overhead for just one small boy.

Could we simplify?

I would prefer to have fewer accounts and better investments.  It’s time I looked for a really good 529 program. Read the rest of this entry »

Tags: 529 funds, funding college, paying for college