bankruptcy and student loans - Page 4

kelsmom · 10-10-2009, 07:36 PM

Out of curiousity...at your school...if the COA is - say $30k for an OOS student, and his EFC is $15k, would your school also give an F/A package of mostly student loans? I'm guessing the answer might be yes. And, if the family can't pay the $15k EFC (maybe can only pay $5k), then won't they also likely have to take out loans for that (and those loans would be at a higher rate.)??

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You are correct. If the COA is $30K and the EFC is $15K, a typical freshman would receive $3500 sub, $2000 unsub, and a parent PLUS loan offer of $24,500. If I was asked by a family if they should take on that level of debt, I would not hesitate to say no. I will say that I have not seen any students with this situation, though. I am at a state school, and it is not the flagship. The OOS students I see with high EFCs are typically receiving merit or athletic money from our school. We do have some great merit money, which is very nice (but which also can be a bit misleading if students think they will get the big scholarships & don't).
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When your school gives an F/A package of - say $3k in student loans - what does that "cost" your school? Does it cost your school anything?
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Loans do not cost the school anything - we simply assist the student by offering the federal loans should they decide to borrow. However, loans CAN cost us in the long run ... default rates impact how we can disburse aid & if too high can impact whether or not we can participate in federal aid programs. It is in our best interest to try to keep loan amounts as low as possible because this will help keep our default rate as low as possible. However, with a mission of access it's a real balancing act. Those with less need to borrow more. If all of our low EFC students could live at home (or in the case of our many older students, if they all had sugar daddies/mamas supporting their noneducational expenses) borrowing would be minimal. That's not the way it is, though. We try to counsel & educate to keep borrowing as low as possible.

I do think this should be a goal for colleges to the extent it is within the colleges' control.

mom2collegekids · 10-10-2009, 07:49 PM

>>>> Also people start of very unaware of what the EFC means. For instance so many think that a 0 EFC means you are going for free. While that may be the case for some schools with large endowments it is just not the case for many schools and many students.

I remember a student last year who came on asking what he would get in the way of aid for the OOS public he was accepted to. He had a 0 EFC so thought everything would be covered. I listed all the max federal aid he would be eligible for, which of course was nowhere near the full cost of the school (he did not have the stats for merit aid). He got very irate with me and some other posters and did not believe us.
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Oh, I believe you!!! I've seen it here, myself. Either you get kids who have a 0 EFC thinking they'll get a free ride...OR...you have kids here who don't find out what their EFC is, but simply claim that their families' need aid.

I know that some kids here think I'm some kind of "wet blanket" because they'll post something like..."I want to go to XXXX, YYYY, or ZZZZ schools" (none are ivies), and I'll ask if they know if their parents can pay for it. They seem shocked (or annoyed) that I'm even bringing up the "dirty" subject of money. They think that just "wanting" to go a particular school means that they deserve to go...no matter what.

Many have never talked to their parents about money, they've never found out what their EFC is, and they think F/A is free money. They don't understand that smaller merit dollars only reduce F/A, they don't reduce EFC. And, just as bad...some don't even think about room, board, and books costs...they just look at tuition and say, "I think we can afford that...maybe."

mom2collegekids · 10-10-2009, 07:55 PM

When your school gives an F/A package of - say $3k in student loans - what does that "cost" your school? Does it cost your school anything?
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Loans do not cost the school anything - we simply assist the student by offering the federal loans should they decide to borrow.....However, loans CAN cost us in the long run ... default rates impact how we can disburse aid
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That's kind of what I thought....so why would any school claim to be generous with F/A when it just is the "middle man" for student loans, and it's not costing them anything (except for what you described above.) That would be like me claiming that I'm going to be generous with aid to my kids, but then I just have them sign loans from a 3rd party. I just think it's misleading.

I know that loans have to exist...I just wish the name was different. Something like: Loan Finders would be more accurate.

notrichenough · 10-10-2009, 08:53 PM

Quote:

Plus, only a tiny number of parents understand that EFC is based on the assumption that families are supposed to be saving for college all along...and not just pay out of current income.

This is certainly not true for FAFSA EFC, which is just a big complicated formula based on current assets and income, there are no assumptions about the past in it at all.

PROFILE schools... who knows what they do.

mom2collegekids · 10-10-2009, 09:03 PM

^^^

Maybe I'm wrong, but I've always heard that EFC is based on income and assets, with an assumption that you've been making that much money (or about) for awhile, so you should have been saving. The "formula" has that assumption built in. The problem is that people often have sudden increases in salary (such as when a mom returns to work, or a parent gets a big promotion).

That's why the EFC is often higher than what most families can pay out of current income. Families with strong incomes who haven't been saving for college are often the most shocked because they can't pay their EFC out of current income.

notrichenough · 10-10-2009, 09:45 PM

Quote:

The "formula" has that assumption built in.

Maybe you are right, but I've never seen this stated anywhere, especially in the doc that describes how EFC is calculated (I think the IRS must have helped design this, it's like 30 pages long, it is brutal).

You also hit the highest bracket (45% of each dollar goes into your EFC) at what seems to me is a really low level - its around 70-80K, it varies depending on the parents' age, whether both work, etc.

kelsmom · 10-10-2009, 10:49 PM

That is not true. At $70-80K, the EFC would be in the mid-high teens. Generally speaking, EFC is *about* 20-25% of gross income (obviously, this is not always the case).

jamma · 10-10-2009, 11:00 PM

owlice: Perhaps I wasn't clear. When financial aid loans were dischargeable, the financial aid system did not collapse because people filed bankruptcy only as a last resort. This was true because of the social stigma associated with bankruptcy. Today, there is no stigma and filing for bankruptcy is a first resort for many. It makes sense, therefore, that professional students would be much more likely to seek a discharge of their student loans today than they were in the 1950s.

notrichenough · 10-10-2009, 11:04 PM

Quote:

That is not true. At $70-80K, the EFC would be in the mid-high teens.[

Yes, but the *incremental rate* is 45%. That is, for the 70,001 dollar, 45 cents is allocated to EFC. For the first $70K, the rate is obviously less.

Here's the chart from the 2006-2007 EFC Formula Guide, I doubt it has changed much since then:

Code:

If parents’ AAI is—               The parents’ contribution from AAI is—
Less than -$3,409 -                         $750
-$3,409 to $12,900                                 22% of AAI
$12,901 to $16,200                    $2,838 + 25% of AAI over $12,900
$16,201 to $19,500                    $3,663 + 29% of AAI over $16,200
$19,501 to $22,800                    $4,620 + 34% of AAI over $19,500
$22,801 to $26,100                    $5,742 + 40% of AAI over $22,800
$26,101 or more                        $7,062 + 47% of AAI over $26,100

Your AAI (Adjusted Available Income) is basically your (adjusted gross income + untaxed benefits - taxes paid - income protection allowance - employment expense allowance) + (12% of assets - asset protection allowance).

Even if you have no assets you can see how fast you hit the 47% incremental rate.

Here's the link: http://studentaid.ed.gov/students/at...deDecFinal.pdf

notrichenough · 10-10-2009, 11:33 PM

Quote:

It makes sense, therefore, that professional students would be much more likely to seek a discharge of their student loans today than they were in the 1950s.

Wasn't it the bankruptcy law change in 2005 that changed this? Was there a big problem before that?

mom2collegekids · 10-11-2009, 12:35 AM

>>> That is not true. At $70-80K, the EFC would be in the mid-high teens. Generally speaking, EFC is *about* 20-25% of gross income (obviously, this is not always the case). <<<

I think this reinforces the idea that EFC is somewhat based on the idea that the family has been saving for college all along. It wouldn't be reasonable to simply think that a family can - all of the sudden - put 20-25% of its income towards education - especially since housing in many areas can take 40% of a family's income. A family with an income of - say - $80k isn't likely going to be able to afford spending $20k each year for the next 4 years out of current income.

I know that I've read on this forum that the EFC is based somewhat on the idea that families over a certain income are supposed to have been saving for college all along.

jamma · 10-11-2009, 12:48 AM

Notrich: In the 1970s, soon-to-be doctors and lawyers started filing for chapter 7 bankruptcy just before they started making a good salary. Congress then made student loans non-dischargeable in bankruptcy. The 2005 amendments didn't impact student loans. Its primary purpose was to make it more difficult to file chapter 7 (essentially, only those debtors making less than their state's mean salary qualify for chapter 7; all other must file chapters 11 or 13, which are repayment chapters).

Even now, it's possible to discharge a student loan but only if you can convince the court that paying back the loan would bring about "undue hardships" to you.

Bundle · 10-11-2009, 04:05 AM

Geez, mom2collegekids. Borrowing to cover the EFC? (I can't seem to quote your post. Sorry.) I've never heard about that, but I shouldn't be surprised.

I actually do have some mailings from colleges (for my daughter) that have charts which breakdown what percentage of their aid is from grants, scholarships, and loans, and what the average amount of a financial aid package they offer to freshmen. That's great that the colleges do that. However, in most cases, the average financial aid package is still way below the cost of attendance. For example, one school's aid package averages $33,000, but the cost to attend is over $51,000. I would hope that if someone has that kind of an offer from the school, she would not first jump into taking out a private loan for $18,000! (Assuming there's a 0 EFC.)

owlice · 10-11-2009, 08:41 AM

Quote:

Today, there is no stigma and filing for bankruptcy is a first resort for many.

Data, please, that bankruptcy is a first resort for many. Bankruptcy has a long-lasting effect on people's lives, there is certainly still a stigma attached to it (people don't go around proudly announcing they've declared bankruptcy), and a line like this, that bankruptcy is a first resort for many, sounds like a lobbyist's soundbite to me.

mom2collegekids · 10-11-2009, 09:25 AM

>>>>>>>>
Geez, mom2collegekids. Borrowing to cover the EFC? (I can't seem to quote your post. Sorry.) I've never heard about that, but I shouldn't be surprised.
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OMG....I know MANY parents who've have to borrow to pay their EFC...they've either had to take out regular loans, or they've had to refinance or take out second mortgages on their home. So, in effect, the family borrows to pay for EFC, and it borrows to pay for the F/A portion. F/A is kind of a myth for many.