One of the most positive financial aid developments in recent years involved the creation of the no-loan student aid package for the most needy students. It has been a much-heralded concept, described by many as having the potential to truly transform college attainment rates for financially strapped families.

But amidst today’s falling endowments, the concept that blossomed over the last five years has led at least two colleges to take a step back on their pledge. More importantly for students, experts insist many more schools will give careful consideration to reversing their pledges as well over the next few years.

Meeting 100% Need

For years, while many schools have insisted that they will meet 100% of a student’s financial need, those schools have included lending as part of the aid package. In other words, the pledge to meet 100% student need involved only a guarantee that student loans would be available should the student need them.

The result has been students and their parents often borrowing large sums of money to close out what was a significant hole in the 100% need funding process.

The no-loan student aid package took the 100% pledge to a more honest level. Students with significant financial aid needs received an aid package that covered the cost of school without mandating students take out loans.

While some schools took the step to its full conclusion, another group took a slightly different approach. Called the limited-loan schools, these institutions capped the total amount that financially needy students would have to borrow over the course of four years.

While still not meeting 100% need through grants, scholarships, and work study options, students attending a limited-loan school would know up front just how much they would be asked to borrow over the course of four years.

More than seventy schools have begun offering no-loans packages. Some of the colleges eliminating loans from the financial aid packages of all needy undergraduate students included: Princeton University, Davidson College, Amherst College, Harvard University, Pomona College, Swarthmore College, Haverford College, University of Pennsylvania, Yale University, Bowdoin College, Stanford University, Wellesley College, Columbia University, Claremont McKenna College and Vanderbilt University.

Endowment Headaches

Such a no-loan or limited-loan pledge came from these schools ever-growing endowments. From 2004-2008, the four-year rate of return on investments was 15.3%, 9.3%, 10.8%, and 17.2% respectively. With such investment successes and additional funds flowing in from alumni donors, it is easy to see why schools could begin to consider the loan pledge.

But then came the economic downturn and with it a crushing blow to these investments. First, 2008 saw a three percent average drop in the endowments for all schools. But that drop seemed almost inconsequential when contrasted with 2009 where colleges and universities saw an astonishing average endowment decline of 18.7%.

It was the worst average year for endowments over the nearly 40-year period the data has been tracked. It was also 50% higher than the previous worst year, an 11.4% decline in 1974.

The impact was even worse for those institutions with endowments topping $1 billion. On average the decrease stood at 20.5%, but for the three of the largest, Harvard, Yale, and Stanford, the decrease topped 25%.

Two Schools Reverse Policy

These poor investment results led two colleges that had previously eliminated loans from the financial aid packages of all undergraduate students to restore borrowing to the process: Dartmouth College and Williams College.

Thankfully the changes will be phased in at both institutions. In addition, the no-loan provision threshold remains for the most needy students.

For Dartmouth, it will reintroduce loans in the financial aid packages of students with family income greater than $75,000 commencing with the class entering in fall 2011. Those students already in the program as well as those that will enter this fall will not be affected by the change.

At Williams, the school will be reintroducing “modest loans” for some students receiving financial aid. As with Dartmouth, the change will occur in the fall of 2011 and the school will continue to eliminate loans for lowest income students.

Students Need to Be Alert

While these are the only two schools to date to make changes, the overall impact on college endowments will most likely cause some of the other 70 plus schools to reconsider their policy as well. Those students choosing their school based on the no-loan or limited-loan promise will need to carefully observe what takes place over the next few years.

One of the most significant ways to potentially reduce the cost of college centers upon a non-traditional approach to a degree. Given the difference in tuition and fees between colleges, more and more people are suggesting students consider attending community college for as much as the first two years of school.

The potential savings of taking such a step is enormous. According to the College Board (pdf), the average tuition at two-year community colleges is $2,544, or just a tad more than a third of the average instate-costs at four-year public schools ($7,020). Of course, that rate pales in comparison to the average costs at for-profit institutions ($14,174), out-of-state at four-year public schools ($18,548), or at private four-year institutions ($26,273).

Unfortunately, many see the CC step as one of settling for a lower caliber program. However, a recent summary from the Chronicle of Higher Education gives a clear indication that community colleges do offer quality programs.

Quoting data from the recent Survey of Earned Doctorates, the Chronicle reveals a significant percentage of those earning their doctorates attended community college for a portion of their schooling. First, one in five Americans (19.2%) who earned a doctorate in 2008 attended a community college at some point.

But even more significantly a larger portion of several minority groups used the path.The highest percentage subgroup was the American Indian; two out of five (39%) awarded a Ph.D. earned some of their credits at a community college. Two other groups, multiracial and Hispanic, relied on the option significantly as well with one in four (26% and 23.6% respectively) having attended a CC at some point.

Whites essentially matched the American average (19.6%). The two subgroups using the format least were Blacks (17%) and Asians (12.8%). On the flip side, Asians earned 2,543 research doctorates in 2008, more than members of any other U.S. racial/ethnic minority group.

Time and Money

But even though community colleges are less expensive, the debt students took on did not mirror the ratios mentioned above. For example, the highest percentage of attendees at community college, American Indians, posted the second highest overall accumulative debt for those earning their doctorate ($29,698). In addition, in yet another sign that we need to do more in the way of grant opportunities for minority groups, multiracial had an average debt load of $25,761, Hispanics at $27,553 and Blacks $ 38,586.

And while fewer Asians attended CC, the average overall debt for that subgroup totaled just $13,216. Clearly, these speak to another issue, that when it comes to accumulating debt, it is likely more about attitude and approach than simply taking advantage of the CC system.

At the same time, we can begin to understand these debt totals better by noting that attaining a graduate degree can be a very lengthy process for most students. Half of all those earning a Ph.D took at least 9.4 years to earn their doctorate. Even more significantly, half of those earning a Ph.D. took at least 7.7 years just to complete graduate school.

As a way of reducing the need for borrowing, many students were able to utilize teaching assistantships, research assistantships/traineeships, and fellowships/grants to help them fund their schooling. Three fourths of all graduates reported one of these three categories as their primary source of support during graduate school.

And in the best sign that college is possible without taking on gobs of debt, just over half (53%) of graduates reported having no graduate or undergraduate education-related debt at all. But on a sobering note, one in 12 graduates (8%) reported debt of $70,000+.

What one studies also is critical when it comes to debt management. The greatest average cumulative debt occurred in the social sciences ($27,083), the humanities ($23,033) and education ($22,351). In contrast, the lowest average cumulative debt could be found in the fields of engineering ($10,149) and the physical sciences ($10,516).

But in sum total, the most important data for students consists of the difference between accumulated undergraduate and graduate debt. The three most debt-ridden graduate categories (education, social sciences and the humanities) caused students pursuing a doctorate to quadruple their undergraduate college debt.

The key difference involved the number of research assistantships available in the hard sciences and engineering versus that of the social sciences, education and humanities. In contrast, each of the categories posted similar percentages of teaching assistantships as well as grant/fellowship/scholarship options.

Graduating Debt-Free

Taken collectively, these results make it clear that if a student is truly interested, he or she can earn a graduate degree without taking out college loans. No doubt, one clear method of saving is to attend community college for a portion of that schooling.

But the biggest factor to accumulating minimal debt appears to center as much upon the proper choice of major and the subsequent scholarship/funding that accompanies that specific programming as less conventional routes. Most importantly, whether one utilizes a CC for part of their course of study, it is clear that students with the proper attitude, approach and choice of academic area of study can even earn a Ph.D. without making college debt a part of their future.

Always a poor way to pay for college, private loans are now tougher to consolidate and more difficult to obtain.

When it comes to finding help for college everyone is advised to pursue free funds first. Securing grants and scholarships, money that you are not required to pay back, is always the most appreciated form of help. But somewhere along the line, many students have to turn to a less palatable form of support, loans.

However, every chance we get we caution students regarding borrowing sums of money to pay for school. Accumulating debt is not something to take lightly. That said, if you do have to borrow it is imperative that you understand the one type of loan you should avoid like the plague.

Private or Alternative Loans

In virtually every way imaginable, private bank or alternative loans should be avoided. In fact, students may well want to employ the baseball standard of three strikes and you’re out mentality.

Strike One

First, unlike federal loans, private loans have been less than desirable because both the interest rate and borrowing terms are dependent on credit records and the economic climate. If either you or your family does not have the highest of credit scores, you may be assessed a higher starting interest rate and a point or two surcharge on the face value of the loan. Furthermore, the loans will have a variable interest rate based on the current prime rate plus some buffer. Therefore, your interest rate can change dramatically over the course of the loan.

Strike Two

Second, unlike federal subsidized loans, students are assessed interest from the moment they borrow the money. It is true that you might not have to begin paying on the loan until six months after graduation but your debt will be growing every day you remain in school. And while it is also true the federal unsubsidized loans accrue interest from the time the money is loaned, those federal loans will not have the high variable interest rate or point issues that private loans carry.

Strike Three

Third, if you graduate from school only to have difficulty finding work, or if you are lucky enough to find work initially (no small task in today’s work environment) only to be laid off later with federal loans it can be possible to get an “economic hardship deferment” on your federal loans. Obtaining such a deferment from a private lender has proven to be generally impossible even when you have been granted deferment from the federal government. And most importantly, as is true of all loans for college, federal or private, they cannot be discharged in bankruptcy.

You’re Out!

Fourth, and what has to be the proverbial straw that breaks the camel’s back is yet another issue developing in today’s tougher economic climate. It seems that consolidating individual private loans upon graduation has become almost impossible.

Consolidation is a mainstay of the federal loan process. The process allows for the combining of multiple loans (if a student takes a loan of some amount to help pay each year in school) into a single payment based on one interest rate. Consolidation extends the repayment period and therefore lowers the monthly payment.

Unfortunately, many banks no longer offer consolidation even if they do offer multiple individual loans. And if they do, they will consider consolidation only after running a credit check. If that check provides a picture that you are at risk you can kiss the consolidation option good-bye. You may also be out of luck simply because the sum total of your debt is too large.

Avoiding Private Loans

Unfortunately, for a lengthy period of time students thought very little about the impact of private loans. That has led to some horrific stories of student debt.

Fortunately, the economic downturn has made private loans more difficult to secure. And whereas once upon a time it was easy for students to borrow on their own, today they are unable to secure such a loan without obtaining a cosigner that is also well-qualified.

Ultimately, that is a positive development for students. In fact, we advise students to make it a goal to not only graduate with as little debt as possible, whatever debt they accumulate should be devoid of private or alternative loans.

Once upon a time, the price of a year of schooling at elite private colleges matched the price of the average new car – not any more.

The news from The Chronicle of Higher Education certainly was not positive for students and families. After surveying private schools as to the charges for a year of attendance (tuition, fees, room and board), The Chronicle revealed that 58 private colleges had passed the 50K pricing milestone for 2009-2010.

Leading the way was one of the perennial front-runners, Sarah Lawrence College, at $55,788. Rounding out the top five were Landmark College, a school for students with learning disabilities ($53,900), Georgetown University ($52,161), New York University ($51,993), and George Washington University ($51,775).

Not Actually a New Barrier

While news, it is important to note that the $50K threshold had already been broken. It was just that a year ago, the Club had but five members.

And it is the calculus or rate of change for these numbers that is raising eyebrows. Ultimately, the sheer number of schools topping the threshold led The Chronicle to call $50K the new norm.

Amazingly, the $40K threshold once represented a major psychological milestone for many. But that figure has been rendered obsolete in the matter of just six years time.

In 2003, just two colleges set their tuition, fees, room, and board above $40,000. Including the members of the $50K club, 224 schools were above that threshold in 2009.

Unfortunately, reading the folks at The Chronicle, the average citizen may have even more bad news on the horizon. While some are wondering aloud if we are not on the edge of a precipice, others insist college prices are nowhere near a ceiling.

In fact, The Chronicle reports that “the most expensive institutions have seen no drop in demand.” Sadly, of these high costs, one school, Harvey Mudd, offered this assessment: “So long as we’re staying roughly in the same range, we don’t worry about it too much.”

Some Good News Exists

One positive in the midst of this data is that grants and other forms of financial aid help many students pay far less than the sticker price. Even more importantly, it seems that colleges have actually increased their financial aid at a faster rate than they have increased tuition and fees.

As one might expect, a large number of students receive need-based grants or merit-based scholarships with a significant amount of those funds come from the colleges themselves. The Chronicle was able to dissect data for 42 of the 58 colleges whose list price was more than $50,000 for 2009-10.

For 2008-2009, the average grant per full-time student was just over $13,000 – that meant that the “average bill last year for tuition, fees, room, and board, after grants, was about $36,000.”

However, the best news might be that some of these elite private schools are beginning to become concerned. Leadership at one of the schools that has become a member of the $50K club, Bryn Mawr, revealed they were “concerned because we fear the loss of access for students who deserve this education but might be priced out of it.” It should be noted that Bryn Mawr appears serious on both ends having offered an average grant package of about $30,000 last year.

$50K Too Pricey

But such figures also mask the real issue, that the costs of college are soaring at a rate that is unsustainable for the average student. And the clearest sign that $50K should flat out be considered too much is to return to the once relatively firm, age-old equivalent for private schools.

A year of college at the elite private institutions, the total costs including tuition, fees, room and board, should match the sticker price of a new Chevrolet.

And that might well be the most telling fact as to where things stand today. As at least one interviewee told The Chronicle:

“You don’t have to pay $50,000 for a new Chevy these days.”

As borrowing rates soar and debt accumulation spirals upward, the national student loan default rate hits a nine year high.

A recently released report from the U.S. Department of Education revealed yet another alarming trend regarding college graduates and student loans. According to the report, the 2007 national default rate hit 6.7 percent, an increase of nearly 30% over 2006.

It was also the highest percentage in nine years.

As a percentage, the 6.7% represents about one student in fifteen, but that overall statistic is extremely misleading. According to the criteria used to define non-payment, those reported to be in default are those students who were scheduled to begin loan repayment by September 2007 but failed to make payments by September of 2008. That means that one in fifteen graduates had defaulted by the end of the first year of the scheduled repayment period! There is little doubt, that if the data were to include a two year period or a three year period, the percentage would grow significantly.

Too Much Borrowing

While most folks point to the economic downturn as the key factor, some college financial experts see the issue a tad differently. Tom Schmidt, Office of Student Finance associate director at the University of Minnesota, provided Mackenzie Martin of the The Minnesota Daily an entirely different take on the matter.

“Students need to be aware of their student loan debt at all times,” Schmidt told Martin. The associate director went on to explain that while the economy might be considered a contributing factor, the issue was exacerbated by students taking out larger and larger sums of money to cover increasing tuition and living expenses.

At the same time, Schmidt suggested students might be borrowing more than they really needed, that perhaps students may be “living better than they probably need to live.”

In other words, too many students are not thinking properly about the debt they are accruing.

We have discussed many times our concern with student debt rates. According to the CollegeBoard’s 2008 Trends in Student Aid report, roughly 60 percent of bachelor’s degree recipients borrowed some amount to fund their education. As of 2007, the average debt of graduating seniors was nearly $23,000.

The percentage of borrowers is too high and the average debt is simply too large. Simply stated, the downturn in the economy provides a strong reminder that debt is not something to enter into carelessly. While some may think a debt load of $23,000 should prove very manageable, that amount is far too much for those struggling to find viable employment (the status of the majority of college graduates the past two years).

It is imperative that you graduate with as small a debt-load as possible: a reasonable goal is to keep it under five figures (<$10,000 maximum) though an even better goal is zero. And the best way to keep that debt to a manageable level is to reduce your expenses.

That process begins with selecting a school that is in your price range and ends by limiting unneeded expenditures. Yet both of those elements remind us of a clear message – think twice about taking on significant amounts of debt.

That college degree could actually do you more harm than good if you begin your post graduate life defaulting on loans and destroying your credit score before you have had the chance to build one.

Three Classic Mistakes to Avoid

Debt is a major issue for literally millions of Americans. However, when you find yourself overextended, the fact that many others are in the same boat offers little in the way of consolation.

As your debt accumulates, there is a strong tendency to make three very common mistakes. While it is easy to understand why people make them, they must be avoided at all costs.

Mistake 1: Making Only the Minimum Payment

This is easily the most common of mistakes but minimum payments are a trap. Because of how cards work, the goal of the credit card company is to enlarge your debt so that interest rates yield more in the profits.

Making only the minimum payments ensures you will be in debt for the longest possible time. Paying the typical minimum level for a $500 debt at current interest rates of 15-20 percent will keep you in debt for more than a decade, even if you never charge another item.

Of course, by paying the minimum amount your are maintaining your credit score. It’s just that your debt will grow instead of decrease.

The folks at Learn Financial Planning recommend that you set your own personal minimum payment level that is at least triple the minimum payment and stick to it.

Mistake 2- Taking a Payday Loan

There is debt that is worse than credit card debt. It is the debt created by payday loans.

A payday loan is short-term loan, generally offered on a two-week basis (from one pay period to the next) and ranging between $100 and $500. The idea of a payday loan is to provide you the cash needed for immediate expenses and is a loan against your next paycheck.

Payday loans feature administration fees, processing fees, broker’s fees and even early repayment fees. Typically, the finance charge per $100 borrowed is $25.

While it is easy to accumulate credit card debt, payday loan debt is considered as much as eight times more punishing. While it easy to think this is a good way to deal with an immediate issue it is one you should never consider.

Mistake 3 – Falling for a Debt Settlement Scam

When your debt reaches the breaking point, debt consolidation and debt settlement can be the right step. The first step to take in such a situation is to admit you have an issue and then contact your creditors to discuss possible mechanisms to work through your issue.

You may be able to make some simple progress with your company, perhaps even negotiate a lower interest rate. Simply stated, credit card companies do not benefit if you default.

However, you have probably heard on television or seen online an ad by some third party company that can help you eliminate your debt. While there are legitimate agencies that do provide such services, many other entities are simply hoping to take advantage of your plight. If you are not careful, you may soon find one of these companies is bleeding you worse than your credit card company.

A legitimate debt settlement company will consolidate your loans and negotiate with your creditors on your behalf. The basic structure involves you making one monthly payment based on the total amount owed. As funds are collected, payments are negotiated with each creditor separately, a step that can reduce your debt total by as much as 50%.

There will be a fee associated with the process but legitimate firms will set up a reasonable plan that will help you make modest progress immediately and significant progress long term.

Avoid Compounding Your Mistakes

It is easy to accrue debt in a multitude of formats. If you do not do due diligence, that debt can double or quadruple in the matter of months.

Avoid borrowing and purchasing with plastic. When you do borrow or purchase, pay the amounts off quickly, do not fall into the trap of making only the minimum required payment.

Doing so puts you on a downward spiral into the world of payday loans and debt settlement scammers.

Borrowing from a popular credit card commercial format, we toss out a longstanding fundamental belief about higher education.

Four years in-state tuition and fees: $17,360.00

Books and Supplies: $3,960.00

Computer Fees: $4,160.00

Room and Board: $31,200.00

Earning a College Diploma: Priceless

The Financial Benefits of a College Education

In general, most insist that you simply cannot put a dollar figure on a college diploma. It is truly a priceless commodity leading to greater future earnings and a better chance to pursue something one truly loves as a career option.

That said, in recent years, eyebrows have been raised. College costs have been soaring and critics have begun questioning the value of a college diploma.

For years, the generally accepted figure associated with earning a college diploma has been $1 million. Those calculated additional earnings a college graduate earns in his lifetime above and beyond of a classmate with just a high school diploma continue to be used as the rationale for earning that coveted diploma.

However, that generally accepted $1 million figure has recently been called into question by a gentleman named Charles Miller. According to his analysis, the value of a college diploma may actually be significantly less than the popular dollar figure generally tossed around.

A Much Lower Return?

Miller, the former head of the Commission on the Future of Higher Education, raises some interesting dialogue with his set of calculations. He, in sum total, insists that higher education just might have gotten too expensive for what it produces and is certainly too costly for the typical student.

To arrive at that conclusion, he first insists that the calculation procedure used to determine the $1 million figure contains too many false assumptions. For example, Miller rails against one fundamental criterion used in creating the million dollar figure.

When computing the $1 million in additional earnings, estimates are based on an assumption that students finish college in four years. Miller correctly notes that other college graduation data utilizes six years as the standard for earning a degree. So the first significant way that Miller’s numbers are adjusted is to take away two years of earnings for the average college graduate.

Miller also notes two other major calculation adjustments. First, current procedures typically report lifetime earnings in the “present value” of the dollar totals, rather than adjusting for inflation over time. Second, most calculations do not isolate the benefit of those who have only a bachelor’s degree.

Using his assumptions, Miller contends that the lifetime earnings differential for a bachelor’s degree over a high school diploma is a much more modest figure: $279,893.

Easy to See Why Concerns Are Being Raised

There are numerous folks who insist that Miller has low-balled the calculations. In their eyes, he has done everything he can to reduce the value.

Still, the difference is a rather significant number. Certainly, $280,000 in additional earnings is nothing to sneeze at.

However, if we do assume that this more modest differential is somewhat accurate, then the current cost of a college degree does raise interesting questions. Four years of in-state tuition at a local university will set a student back at least $60,000, especially if some time is spent living on campus.

As a monetary investment that number still seems reasonable. We certainly can advocate spending $60,000 knowing full well we can one day expect to pocket $280,000 as a result. Add in the ability to better control one’s career choice and the investment seems to be a no-brainer.

But what of those private schools, of those topping $50,000 per year? Four years of expenses will top the $200,000 mark.

Under such a scenario the monetary piece becomes suspect. In such an instance, the rate of return falls to less than 2% return on the money invested if figured on a per year basis.

With those numbers it is easy why folks are concerned with the skyrocketing costs of a college education. If the costs keep rising, the rate of return ultimately diminishes.

As President Obama has stated on multiple occasions, we must find ways to make college more affordable.

So Where Do We Stand?

Interestingly, Miller’s strong push has at least one agency acknowledging that the $1 million figure may not be entirely accurate. In responding to Miller’s criticisms, the College Board acknowledged that $1 million in additional earnings is misleading.

At the same time, the College Board noted a thought many concur with: there is a very high individual return from a higher education.

According to the Board, a public college graduate will break even by the age of 33. At the higher priced schools, the private colleges, the Board offers a break even point at age 40.

Given those assertions, it is easy to see why education does in fact pay off. Of course, if costs do continue to rise, those pay back ages would rise as well. Pushing them back another ten years would make the dollar return a far more questionable discussion point than as it currently stands.

Without a doubt, students must be mindful of the debt they are incurring as they earn that diploma. They must also have an excellent understanding of potential future earnings: a career in social work or a job as a teacher will not necessarily produce additional earnings towards the $1 million mark.

Great Experience

Ultimately, college can be a great place to spend four years. Students often get their first chance at learning to be on their own. At the same time, you still have a safety net, a “shelter where you can develop yourself.”

At the university level, you will also meet many interesting people and have access to adults who are willing to help you learn new things. Once in the world of work, there will be far fewer people willing to help you become successful.

So independent of the financial figures, college can be a great place to learn about you and about society. College is a place where students get a safe chance to mature even as they pursue a degree and a potential career.

And if you manage the financial piece appropriately, you can expect the opportunity to earn additional funds even as you work in your preferred field. Just don’t go around thinking that a bachelor’s degree is going to make you a millionaire.

On Wednesday, under the College Cost Reduction and Access Act of 2007, the repayment of college loans will become a whole lot more manageable for lower income wage earners.

New Options

The new Federal Student Loan Forgiveness Law is set to help student repayment in two significant ways:

• Lowering the monthly student loan payment on federal student loans (Income Based Repayment or IBR); and

• Canceling remaining loan debt after 10 years for those who have entered public service (Loan Forgiveness for Public Service).

Income Based Repayment (IBR)

Income based repayment (IBR) offers enormous potential reductions in the monthly payments for high debt/low income borrowers. Designed for those with “partial financial hardship,” IBR limits annual educational debt payments to 15% of a borrower’s discretionary income. For the purposes of the law, discretionary income is defined as adjusted gross income minus 150% of the poverty level for the borrower’s family size.

Under the IBR plan, the loans eligible for consideration include: all Federal Direct Loans (FDL) and federally guaranteed loans (FFEL) including subsidized and unsubsidized Federal Stafford loans; Federal Grad PLUS loans (but not Parent PLUS loans); and Federal Direct Consolidation loans. Federal Perkins Loans are only eligible when part of a Federal Direct Consolidation Loan.

The Detroit Free Press offers the following as an example of the potential savings:

Take a college grad who has $40,000 in federal student loans and an adjusted gross income of $30,000 each year.

If we use this example, the grad would pay $171.94 a month using the new plan — compared with $460.32 with a standard 10-year repayment plan or $277.63 a month for an extended 25-year repayment plan.

As a person receives annual salary increases, the monthly payment would rise only according to the percentage of salary increase. In the case of a married couple, each would be eligible for the program and the eligibility would be dependent on each individual’s situation, not the combined income of the two individuals.

The new IBR option goes into effect July 1, 2009. Members of the Class of 2009 become eligible within two months of graduation.

Loan Forgiveness for Public Service Employees

In addition to repayment reduction under the law, students entering public service are also eligible for loan forgiveness. Upon entering full-time public service, once a borrower makes 120 qualifying loan payments on a Federal Direct loan (including Federal Direct Consolidation loans), the unpaid balance remaining including the accumulated interest on the loan is forgiven. The worker must remain in public service for the entire ten year period and the 120 payments timeframe but there is no limit to the amount to be forgiven.

The time period for public service is retroactive to October 1, 2007 meaning those borrowers who have already elected public service may begin counting the ten year period at that point. Some restrictions occur for those who had already consolidated their loans and those restrictions may move the eligible period forward to July 1, 2008.

In the case of loan forgiveness, only Federal Direct loans (including Federal Direct Consolidation loans) are eligible. Payments made on federal loans in the Guaranteed (or FFEL) program are not eligible for the loan forgiveness aspect (only eligible for IBR).

A Major Step Forward

The new law represents an enormous positive development for those students who have accumulated significant federal college debt yet have limited income. To learn more about the program and examine the calculation process visit:

• Georgetown Professor Phil Shrag’s law review article detailing IBR and Loan Forgiveness for Public Service Employees (pdf).
• The IBR monthly repayment calculator.
• Federal direct consolidation loan information and applications.

Last week we featured the impact of the credit card legislation recently enacted by Congress, particularly the impact that legislation would have on college students.

Many have noted that for students, the changes represent a “throw the baby out with the bath water” approach. Certainly, college students and credit cards have not been an ideal mix as a universal rule.

One of the changes makes great sense, limiting credit lines to a student’s ability to pay makes perfect sense. But the changes will make credit more difficult to obtain for all individuals.

In what is dubbed as a move to protect students, the new legislation will require those under the age of 21 to have a cosigner to have access to a reasonable credit line. Without one, there will be exceptionally little credit available.

While such a step appears to make sense, the fact is not every student will be able to secure a cosigner. And those unable to obtain adult assistance are likely to be the group of students most in need of a basic credit line to be able to attend college.

Better Approach

Karen Gross, the president of Southern Vermont College in Bennington, Vt., recently offered a simple suggestion that would deal with the propensity for college students to get into credit card difficulties. Gross told Sandra Block of the USA Today that the new rules may well have very negative impacts on low-income students, the group that truly rely on credit cards to help them secure their opportunity for a degree.

She notes that those students that are unsuccessful finding a cosigner may well turn to other borrowing formats when money is short. Though the cosigner process is designed to protect students, those unable to secure a cosigner could end up turning to an even worse form of credit, payday lenders to help with expenses.

Instead, Gross believes it is time to develop a credit card specifically for college students. The concept she proposes allows for credit access but has two globally agreed upon limits that make sense for college age individuals.

She proposes both a limited credit line and an even lower monthly spending cap. Her suggestions were in the vicinity of a $600 credit limit combined with a $250 spending cap.

While those two numbers could be open for debate, such a design makes great sense. First and foremost, it allows low-income individuals limited access to credit even without a cosigner. Second, it would help students get started on a path to learning how to use a card without placing their future at significant risk.

As Gross notes, such a concept “would help students learn to use credit responsibly in ways that would maximize their credit score.”

Legislation Drawing Criticism

The new legislation has been drawing criticism in some circles. The key negative point centers upon the belief that the new regulations will result in higher rates and ongoing fees for those with excellent credit ratings.

But few are speaking out on behalf of college students. Students agreeing with the suggestions of Gross should contact their representative accordingly.

Perhaps with a little push from students Congress could revisit the issue and tweak the legislation accordingly.

The new credit card protections signed into law recently by President Obama have been both praised and belittled. On the positive side there is little doubt that the steps will eliminate some of the most contentious billing practices currently in place (raising interest rates without prior warning).

However, one group of critics insists that the costs of the new protections will be passed on to more reliable credit card holders. A second group of naysayers stipulates that some of the biggest issues have simply not been addressed.

In either case it is important for college students to understand that the legislation will have an enormous impact on their access to credit even as it seeks to protect them from predatory lending practices.

Credit No Longer as Easy to Get

In recent years, credit card companies have almost been throwing cards at students that were willing to sign up for one. Offering everything from t-shirts to iPods, these companies sought to develop brand recognition that they hoped would remain when college students began their post-campus lives.

Those days are likely over as the new legislation greatly reduces the availability of credit for students. Without a co-signer, full-time college students under 21 will now be able to obtain a line of credit only up to 20% of current income.

To get the full access that students once had a co-signer will be required. If a card holder does have a co-signer, most likely a parent, they will have enormous protection under the new law. The most recent legislation requires that any interest rate increase be approved by the co-signer.

Given the general financial status of most college students, the bottom line is that credit cards will be far more difficult for a student to obtain without a signature from a parent.

Major Negative Practice Still Permitted

The new law does not address one of the long-standing, college credit-card issues called affinity-card contracts. In simplest terms, colleges and universities can still sell a student’s contact information to a credit-card company.

According to BusinessWeek.com, this information represents incredible sources of money for colleges. The site notes that the e-mail addresses and contact information of the students at the University of Michigan are provided to Bank of America for the astonishing sum of $25.5 million.

The 11-year deal provides the Michigan Alumni Association 0.5% of the total purchases made using one of the school-branded cards. Therefore, the school has an incentive for students to acquire and use a specific credit card.

Given the current issues of mounting credit card debt for college students, the idea that schools would encourage debt accumulation is akin to heresy in many quarters. But the new law does not address this troubling issue.

General Positives for All Card Holders

For those holding credit cards and debt, the new law offers several protections. First, under the new legislation, interest rates may not be increased on outstanding balances until a person is 60 days late with a payment.

Second, the changes provide card holders a chance at redemption. If a card holder does become delinquent and is thus subject to a rate increase, they can regain their initial lower rate by paying on time for the next six months.

In yet another critical aspect for all card holders, the legislation also eliminates fees for paying balances online.

Changing Rules

Given the current status of credit card debt and the need for greater financial knowledge among college students, the restriction on predatory charges and the reduction in ease of credit will both be positives in the long run.

Easy credit has often meant the accumulation of debt and the potential for long term financial challenges for college students. Those challenges were then exacerbated by exorbitant interest rate charges.

Making credit tougher to get while reigning in rate increases represent a two-fold step in the right direction.