Student Loan Facts They Wish They Had Known

Kim Liao realized the cost of her $22,500 in student loans when she discovered she would be paying $2.23 in interest each day. Credit Bryan R. Smith for The New York Times


How Much Student Loan Debt Should Parents Take On?




4 College Savings Strategies for Parents With Student Loans

A frustrated parent paying bills and budgeting.

Take stock of existing student debt, but don’t delay starting to save for the next generation.


​Lucy Knutson​ says she was fortunate because her parents helped pay for her undergraduate education. But when she decided to go to law school, she had to foot the bill, and she graduated with more than $100,000 in loans.Now that she’s a mom of two, she and her husband automatically put money from their paychecks toward college savings accounts for their almost 4-year-old daughter and 4-month-old son.

“If they want to go to college, I don’t want them to have to worry about the financial implications,” says the 33-year-old​, who lives in the San Diego area.

Still, reducing her student loan debt is a high priority for the Knutsons, and they recently took out a loan against their 401(k) retirement plan to pay off the student debt faster and at a lower interest rate.

More and more parents are being pulled by a financial tug-of-war: They want to start college savings for their children but are still burdened with lingering student debt of their own. About 40 million Americans have at least one student loan to repay, according to an analysis from credit bureau Experian.

“It can be tricky for parents to find the right balance of priorities,” says Heather Jarvis, an attorney and student loan expert who trains and educates advisers on the topic. “We have our own student loans, and we also want to save for our children’s college education so our children don’t have to have as many loans as we do.”

There are some strategies that allow savers to do both.

1. Take stock of your debt: Parents need to understand what types of student loans they have: private or federal. The cost and repayment options can be quite different, Jarvis says.Federal student loans tend to be more flexible and have unique consumer protections, such as disability and death discharge provisions, opportunities to postpone or reduce payments, and repayment options that are tied to income.

“Private student loans are generally more risky and expensive,” she says. “There are many people who should focus on repaying private student loans before beginning aggressive savings for their children’s college education.”

Jarvis suggests making a full list of your loans – both private and federal – and their interest rates. To look up federal financial loans, go to the National Student Loan Data System for Students website or

To get a list of all your student loans, including private ones, get a free copy of your credit report from

2. Consider debt interest rates: If you have student debt at a high interest rate, focus on paying off debt more aggressively, Jarvis says. Some people are paying interest as high as 8.5 percent for federal loans, while private loans can be between 15 and 18 percent, Jarvis says.

“You should really evaluate and critically assess the cost of your debt, and try to compare that to projected returns on savings and investments,” Jarvis says. “What you’ll find is that when debt is at a high, robust interest rate, it’s tricky to find investments that have those kinds of returns.”

However, borrowers with student loans at lower interest rates could take a slow and steady approach to paying off loans while also focusing on savings.

“If you’ve got loans at 3.5 percent, that’s a good interest rate,” Jarvis says. “That’s not costing you a lot of money. If that’s the case, I think your savings goals can take priority, as long as you know that you’re planning to save for a long enough time that you think you’re going to be able to recoup that difference.”

3. Don’t wait for the perfect time to start saving: “There’s really no good time to get started,” says Felicia Gopaul, a California-based certified financial planner and founder of College Funding Resource​. “So the most important thing is that they get started.”

Gopaul says she sees her clients get caught up in other priorities and never start saving for college. And while having an emergency fund is most important, it’s also relatively easy to open a college savings account with a low minimum.

“Getting started with their college savings often gets put on the back burner because they think they’ve got lots of time, but time kind of marches on whether they save or not,” she says. “My suggestion is always to get started and start saving now.”

4. Make college savings automatic and funnel surpluses there: Gopaul says she’s a big fan of 529 plans, which are tax-advantaged college savings accounts, because parents can set them up so that money is automatically deducted from a paycheck or checking account.

She also likes the fact that parents “can’t touch” money in those accounts because there’s a penalty if you don’t use it for education.

If borrowers get a tax refund or a raise, she suggests using a portion of the money for college savings and putting some of the money toward paying down debt.

Deborah Ziff

Deborah Ziff is a Chicago area-based freelance education reporter for U.S. News, covering college savings and 529 plans. You can follow her on Twitter.


Bigger, Better College Tax Credit

Updated for Tax Year 2014


A key tax credit that helps families pay for college got a major boost in the 2009 stimulus bill. The credit is bigger, covers more years of college, and helps more taxpayers.

The American Opportunity tax credit, previously called the Hope College credit, is valued at $2,500 for 2014, up from $1800 in 2008.

Because a tax credit reduces your tax bill dollar for dollar, this basically means Uncle Sam will give you up to $2,500 per year for each qualifying college student in your family.

And, unlike the old Hope credit, which was available only for a student’s first two years of college, the American Opportunity credit can be claimed for all four years of post-high-school education. You get the maximum credit if you spend at least $4,000 in qualifying expenses, which now include the cost of books as well as tuition and fees.

More credit for lower- and higher-income taxpayers

If you’re a lower-income taxpayer and the credit is worth more than your tax bill for the year, up to 40 percent of the credit (as much as $1,000) will be returned to you as a tax refund. The old Hope credit could wipe out your tax bill but never gave you cash back.

There’s also good news for some higher-income taxpayers: The new rules greatly expanded the number of families who qualify for the credit. The old Hope credit was phased out for single taxpayers with Adjusted Gross Income (AGI) of more than $50,000 and it disappeared altogether at $60,000. For couples filing jointly, the credit phased out between $100,000 and $120,000 of AGI. (AGI is basically taxable income before subtracting personal and dependent exemptions and standard or itemized deductions.)

Now the credit starts to decrease at $80,000 for single taxpayers and disappears at $90,000. For married taxpayers filing jointly, those thresholds are now $160,000 and $180,000.

What if you already used the Hope credit for the first two years of a child’s college bills? If your child is a junior or senior in 2014, you can use the American Opportunity credit for these expenses.

Who qualifies?

The other rules for qualifying for the American Opportunity credit are the same as for the Hope credit.

The student must be enrolled at least half-time in a program pursuing an undergraduate degree or other recognized educational credential. You can claim the credit for expenses paid for yourself, your spouse, or a child who is claimed as a dependent on your tax return. If the student is claimed as a dependent on a parent’s tax return, the parent gets the credit, regardless of who actually pays the qualifying expenses.

The changes in the Hope credit do not affect the Lifetime Learning credit (which applies to higher education not covered by the Hope or American Opportunity credit) for education after the first two or four years, or for classes taken (1) less than half-time or (2 ) not in pursuit of a degree.

The Lifetime Learning credit, which can be claimed for graduate school, for example, or a single post-high-school class, is worth up to $2,000. (The credit is actually 20 percent of the first $10,000 of qualifying costs.) The income phase-out zone is lower than for the new American Opportunity credit. For 2014, the Lifetime Learning credit gradually disappears as AGI rises from $50,000 to $60,000 on single returns and from $100,000 to $120,000 on joint returns.

IRS publication 970 has more information about the American Opportunity, Hope and Lifetime Learning tax credits.

Reference: Tax Credit


What is Form 1098-E: Student Loan Interest Statement?

Updated for Tax Year 2014


If you paid interest on a qualified student loan, you may be able to deduct some or even all of that interest on your federal income tax return. Student loan companies use IRS Form 1098-E to report how much you paid in interest. Borrowers get a copy of this form, and so does the IRS.

Who sends Form 1098-E?

The 1098-E is sent out by loan “servicers” — companies that collect loan payments. Some lenders service their own loans; others hire an outside company to handle it. Loan servicers must send a 1098-E to anyone who pays at least $600 in student loan interest, and they generally must send the forms out by the end of January. If you have outstanding loans with more than one servicer, you may receive multiple 1098-E forms.

If you don’t receive the 1098-E

If you paid less than $600 in interest, you might not get a 1098-E form. If you don’t receive a form, the U.S. Department of Education says you should contact your loan servicer to find out how much you paid in interest.

Check for a phone number on statements sent to you by the servicer. The home page of the servicer’s website should also have information about getting a 1098-E, advises the Education Department. If you have an online account with your student loan servicer, you may be able to login and download an interest statement as well.

What you use it for

You use the 1098-E to figure your student loan interest deduction. You can deduct up to $2,500 worth of student loan interest from your taxable income as long as you meet certain conditions:
• The interest was your legal obligation to pay, not someone else’s
• Your filing status is not married filing separately
• Neither you nor your spouse, if you’re filing a joint return, is claimed as a dependent on anyone else’s tax return
• Your income is below the annual limit

You don’t have to itemize your deductions to claim the student loan interest deduction, but you do have to file your tax return using either Form 1040 or Form 1040A. The deduction isn’t available to those who file the 1040EZ.

Income requirements

Eligibility for the student loan interest deduction is based on your modified adjusted gross income (MAGI). This is a number you calculate when you fill out your tax return. Your deduction is reduced or eliminated at higher income brackets. As of the 2014 tax year:
• For single taxpayers, the deduction is reduced once you have $65,000 of modified AGI and eliminated at $80,000
• For married taxpayers, the deduction is reduced at $130,000 of modified AGI and eliminated at $160,000

Reference: Tax Guides


Financing College No Matter What Your Income Level


If you have kids, then chances are you’ve already thought about college affordability and how or if you’ll be able meet the expenses associated with higher education.

But you shouldn’t allow the worry of college costs to consume your life.  There are many practical and successful ways to pay for college (without drowning in debt) no matter what your income level may be.

Many families labor financially to make ends meet and they feel like it will be impossible for their children to attend a 4-year university.  This simply isn’t the case.  I’m not saying it’s going to be easy, but there are ways to send your children to college on just about any level of income.

Saving For College – Reduce Your Debt

Anyone can save money for college; all you need is to remove the excuses from your life.  Starting with financial basics, the best way to begin saving for college is to pay off all your debt (or at least live within your means and be actively involved in a debt payoff plan).  Sound too difficult you say?  That sounds like an excuse to me.

Living with debilitating debt and allowing bills to circle your life like a vulture is a surefire way to live paycheck to paycheck and never have the available funds to save for college.  What I’m trying to say is this:  paying for college isn’t some magical happenstance that you uncover on some random day.  It’s going to take hard work, and in some cases, a change in your financial landscape.

Regardless of your current income level, you have the ability to save for your children’s college fund. You might have to trim your expenses, adjust your spending habits, and redirect your lifestyle in order to free up money for the college fund.  But if you want to send your kids to college without financing 100% of their education with borrowed money, then you’ll have to decide what’s more important.

Think of it like this; if you can scrounge up even $100 a month to save for your child’s college when they’re born, you’ll end up with $21,600 (and that’s without interest or anything).  Sure, that might not pay for 4 years of tuition, room, and board, but it’s definitely a great start.

Saving For College – 529 Plans and Educational Savings Accounts

A 529 Plan is a tax advantaged college savings account designed to encourage families of any income level to save for their children’s education.  529 Plans are “qualified tuition plans” sponsored by states, state agencies, and educational institutions and are authorized by section 529 of the IRS (hence the name 529 Plan).

The encouragement to save for college within a 529 Plan comes in two forms: the ability to save money free from Federal taxes and the ability to receive a deduction on State taxes.  One benefit to a 529 Plan is that anyone, upon creation of the account, can be named the account’s beneficiary, regardless of age.

The 529 Plan is a lot like a Roth IRA for your college savings fund. The savings will grow tax-deferred and any withdrawal is tax-free as long as you use the money withdrawn for qualifying educational expenses.

A Coverdell Educational Savings Account (ESA) is another tax advantaged college savings account which is meant to inspire families to save for future educational expenses.  The difference between an ESA and a 592 Plan is that an ESA’s beneficiary must be a student under the age of 18.

An ESA also has a maximum annual contribution limit of $2000 and the owner of the account has the freedom to choose what types of securities they would like to invest in (stocks, bonds, ETFs, mutual funds, etc.).

With both types of college savings accounts, you’ll incur a hefty 10% tax if you withdraw any amount of money from either account and use it for non-education related expenses.

Paying For College – Grants and Scholarships

No matter how much or how little you’re able to save for your child’s college education, you’ll always want to be aware of and informed about college grants and scholarships.  After all, this is free money we’re talking about.

Scholarships are offered by high schools, colleges, and other organizations usually recognizing some sort of educational, athletic, or humanitarian achievement.  Scholarships vary by amount and length. Some are one-time gifts and others are recurring payments made as long as grades and other collegiate performances are maintained.

Information about college scholarships is usually available from your high school, your hometown city hall, and the university you wish to attend.  You can also search for scholarships on the web.  Some of these scholarships may be smaller than a say a university’s alumni scholarship, but $500 here and $1000 there really starts to add up.

Grants are another “free money” option.  The government offers need-based grants to families with a low income.  Other organizations are free to offer grants to students that show academic promise or that meet other requirements.

Paying for College – Financial Aid Student Loans

There are numerous kinds of financial aid and student loan programs available, but these loans should be your last resort when it comes to financing college.  I’m not saying student loans are bad, but financially responsible parents won’t rely solely on borrowed money to fund their children’s college.  As I mentioned earlier, if you save even $100 a month, you can drastically cut the amount of money you need to borrow to send your child to college.

There are Federal Stafford Loans, Perkins Loans, Plus Loans, and numerous other student loans available from private institutions.  If you qualify, you can apply for subsidized student loans that are basically interest free until you graduate and begin loan repayment.  FAFSA is your Free Application for Federal Student Aid.

Final Comments

Jamie Scott from CreditDonkey also reminds you that while “student credit cards are a convenient option to help students pay for short-term small expenses such as groceries,” there are other options available for long-term larger expenses such as tuition.

The bottom line is that you’ll probably use two or three different sources to fund your child’s college expenses.  Don’t give up just because of your low income and don’t think that your high salary will always be there for you.  No matter where your income level is at, research, preparation, and responsibility will go a long way when it comes to saving and paying for college.


Today’s guest post is from Jamie Scott, social media advocate with CreditDonkey. Jamie helps parents and students prepare for college by evaluating student credit offers. As a parent herself, she knows all too well the concerns most families have about responsible credit usage.


Student Loan Debt Collection Assistant


Know your options

This tool provides information and advice for optimizing how you pay off your student loans based on some basic information about your situation. While we can’t give you advice for your exact situation, we hope it can point you in the right direction and help you learn about some of your options.

Get started by answering a few questions below.

Your situation

Are your student loans federal or private (non-federal), or a mixture of both?

Federal loans

Federal student loans are loans made or guaranteed by the Department of Education. They typically have names like Direct Loan, Stafford, PLUS or Perkins. They are the most common type of student loan.

Private loans

Private or non-federal student loans are any other type of student loans. They can be made by a bank, a credit union, a state student loan agency or a college or university. They may have names like “alternative” or “institutional” loans.


Many student loan borrowers have both private and federal student loans. Because repayment options for each type of loan are different, start by selecting the loan type that you are most concerned about. You can always return to the beginning of the tool and select the other loan type here in step one.

For more info please visit Consumer Financial Protection Bureau (CFPB)


Federal Tax Breaks for College Parents

ID-100128849Written by Wendy Nelson

Once my oldest daughter had decided on a college and I knew writing tuition checks would be in my near future, I decided to research federal tax breaks for college parents.  Finding this information was not as straight forward as I hoped it would be, but after researching in several different places, I was able to put together some general guidelines.

Top Tips For Claiming Your Kid’s College Expenses on Your Taxes

  • If your Modified Adjusted Gross Income (MAGI) is over $180,000  you cannot take any tax credits or deductions for your kid’s college expenses (based on the rules at the time I am writing this).  If you think your MAGI (usually the same as your AGI) will be close to the limit, but not far over, consider kicking more pre-tax dollars to a 401K or Flexible Spending Account.
  • You cannot claim both a tuition deduction and a credit (either Lifetime Learning Credit or American Opportunity Tax Credit) in the same year.  You need to compare the three and see which, if any, you are eligible for, and which will provide the biggest benefit.
  • Money spent on room and board can never be claimed on your taxes.  Only tuition, fees and sometimes supplies (depending on the deduction/credit) are eligible.
  • You cannot claim your kid’s college expenses if you use the filing status of Married Filing Separately.
  • If you claim an exemption for the student on your taxes, then you can claim the student’s educational expenses.  The student cannot claim these expenses on his/her tax return.
  • If you do not claim an exemption for the student on your taxes, then the student can claim his/her educational expenses on his/her tax return.  You cannot claim these expenses on your tax return.
  • It does not matter whether the money to pay the expenses came directly from you or came from the student.  If you are claiming the expense, both sources are treated as if you had paid them.
  • Your student’s school is required to provide a 1098-T Tuition Statement by January 31.  Use this form when filling out your taxes.
  • If you think you are eligible for a credit or deduction, make sure at least $4,000 is paid towards tuition and fees from an account that you or your child own.

Comparison Table of Federal Tax Credits and Deductions for Educational Expenses

indexDisclaimer:  I am not a tax professional and I am relying on the accuracy of information found on the IRS website and other sites.  If you have further questions on federal tax breaks for college parents, I suggest checking with your tax advisor.  If you do your own taxes, TurboTax makes it easy to enter your educational expenses and will figure out the best credit/deduction for you (if you qualify for one).