November 11, 2002 - Paying for College After You’ve Finished College

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Paying for College After You’ve Finished College
By Glenda K. Moehlenpah
November 11, 2002

Financing college is one of the most daunting aspects of attending, however it’s not so bad if you’re willing to plan. In this series of articles, we will explore ways to finance college at various stages of your life—from babyhood to post-graduation.

So this series is all well and good for others, but your only memory of college is the monthly payments that you’re still making on the loans that you incurred - you built up debts on credit cards and/or student loans. Happily, here are a few suggestions for someone in your situation.

Review
As mentioned in Paying for College When You’re Already in College,there are various savings or dollar stretching strategies that you might benefit from trying.

Learn to Budget
Several of the strategies in this article include either paying debt faster, or building up personal savings. However, if you are currently spending more than you earn, and are still adding to your debt balances, you will have difficulty in implementing these strategies until you set up a realistic budget, and stick to it. (Okay, fine, call it a “spending plan” if the word “budget” gives you the hives.)

Did I mention that the spending plan should be realistic? Let me repeat that—if you are currently paying $500 in rent, don’t budget for $400!

Also, don’t forget your tithes and offerings. And unless you’re really serious about riding your bike in rain, sleet, snow and/or heat, you better include money for gas, parking, auto insurance, and repairs.

Finally, use your ATM cards wisely, and don’t let yourself get charged $11.50 in fees for every $20 withdrawal.

College Education on Credit Cards
Even if you financed your college education on credit cards, the interest is still considered to be personal interest, and cannot be deducted on your tax return. If you have credit cards and you are not paying off the balance in full each month, you should start paying more than the minimum balance against the highest rate card first.

For more incentive, do an analysis of how much money you will pay in interest charges and how many years it will take to pay the balance in full by paying only the minimum each month, and how much money you can save by paying the cards off early! (If you’re not a math major or CPA, find someone who is, have them run the figures, then be prepared to pass out.)

Finally, if it’s overwhelming, snag one of those credit card mail offers promising “No interest for six months” and transfer everything (assuming there’s no charge involved). That will, at least, give you a head start on reducing the total. (Then you can transfer everything again to another card with the same offer in five months.) If you choose this option, be sure to read the fine print, and don’t be late with a payment or you may wind up with a higher interest rate than the original card.

College Education on Student Loans
If you have balances on both your Student Loans and your credit cards, make the minimum payments on your student loans, and pay off the credit cards first. Remember, in 2002, if your Modified Adjusted Gross Income (MAGI) is below $65,000 ($130,000 married filing jointly), you may be able to deduct up to $2,500 interest paid on your student loans. The tax law changed in 2002 to allow you to take the interest deduction beyond the first 60 months of payments, so if you’ve been paying on your loans for longer than that, you may be able to again deduct the interest.¹

Consolidate the Student Loans
If you have student loans, now may be an ideal time to consolidate them. At the time of this writing, interest rates are at an all-time low, and you may be able to consolidate the student loans into a fixed loan at slightly over 4 percent. After all, even though you may get a tax deduction on the interest, why pay more interest than you have to?

Student Loan Deferment or Forbearance
If you just can’t make the student loan payments, you may want to see if you can get a deferment or forbearance. Neither option gets you out of paying the loan, but either option may give you some breathing room. Your student loan provider should be able to give you more details on their programs. Generally speaking, however, if you’ve consolidated your loan, you may be ineligible for deferment or forbearance.

Become a Teacher
If you become a full-time teacher at a low-income school or in certain subject areas, you might be eligible to have some or all of your student loans cancelled, after several years of teaching.

Another Tax Tip - The Savers Credit
I believe that you ought to “Render to Caesar the things that are Caesar’s” (Mark 12:17, NKJV), but there’s no need to pay more taxes than you should. So you should know about (and take advantage of) a new, really cool, nonrefundable tax credit available to lower income savers for the years 2002-2006.

To be eligible, you must be 18 or older, not a full-time student, and not claimed as a dependent on someone else’s tax return. If your Adjusted Gross Income (AGI) is below $15,000 ($30,000 married filing jointly or $22,500 Head of Household), you may be eligible to receive a tax credit of up to 50 percent of the first $2,000 saved in a 401(k) plan, ROTH IRA, regular IRA, and many other qualified retirement plans.²

As an example, suppose in 2002 you are single, your annual wage is $16,000, and your employer offers a 401(k) plan with a 50 percent match of the first 6 percent that you save. If you contribute 10 percent or $1,600 to the plan, and have no other earnings or deductions, your AGI would be $14,400. The Savers Credit would wipe out your entire federal tax bill. If you didn’t save a dime, your federal tax bill would be approximately $945. So you are out of pocket only $655 ($1,600 less $945). In addition, your employer adds $480 of a match, so assuming you stay with the employer long enough to become vested, you now have over $2,000 saved for retirement! How’s that for a great deal?

The maximum percentage of the Savers Credit is reduced to 20 percent or 10 percent at higher income levels, and is eliminated completely at AGIs of over $25,000 (over $50,000 married filing jointly or over $37,500 Head of Household).

Of course, I still think saving for retirement is a great idea, even if you are making more money than the Savers Credit limits, so I don’t suggest that you deliberately limit your income.

ninetyandnine.com

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Glenda K. Moehlenpah, CPA, CFP® is the founder of Financial Bridges (www.myfinancialbridges.com), offering Fee-Only financial planning and investment advice to people from all walks of life on an hourly, as-needed basis.

1. Check with your tax advisor or the website of the IRS at www.irs.treas.gov for the most recent income limits.

2. Check with your tax advisor or the website of the IRS at www.irs.treas.gov for the complete list.