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Definitions and Explanations

College planning comes with its own set of terms and acronyms. Rather than delve headlong into all the jargon, we'd like to provide assistance on the terms and concepts relevant to financing a college education.

If you find yourself (justifiably) confused by college terminology or the college financial process, contact us and we will put you in touch with one of our edCelerator™-Certified College Planners (eCCP) who will help you navigate your way.

As far as financing college goes, there are some terms, processes and costs that you should understand, prior to signing for a loan of any kind and there are some terms and definitions we use that are somewhat unique to us:

About AMOUNT

College Costs have inflated, according to the College Board, at an average annual rate of 6.9% since 1958. The US Bureau of Labor Statistics (BLS) notes that from 1979-2006, college costs increased on average 7.95% per year. edCelerator™ automatically imputes 6% annual inflation to your Annual College Funding Need input, over the Years of College Funding Need, to arrive at the figure for which we conduct our financing alternatives analysis. It is important to note that the figure you input for Annual College Funding Need should be the amount you or your family need to finance, net of any financial aid award money you may receive. For assistance with calculating the anticipated Net Cost of Attendance (NCOA), contact us.

About TEN-PAY

"Ten-Pay" is a nickname for a tuition payment plan that breaks down the large lump-sum payments due at the beginning of each semester into easier-to-manage installments. You still owe the same amount of tuition but because you spread the payments over ten (or sometimes twelve) months, the payments are smaller and perhaps, more manageable. Compare the Ten-Pay figure from the edCelerator™ Amount column with your own Monthly College Budget to determine whether your cash flow makes Ten-Pay a viable option. Ten-Pay (or more formally, Tuition Payment Plans) are interest-free and therefore, enable families to pay the actual Net Cost of Attendance (NCOA), instead of the NCOA plus interest charges. Most Ten-Pay plans cost $150 per year in fees. For further information about Ten-Pay, contact us.

About 401-K

"Why not Borrow from Ourselves?" is a question we sometimes hear from parents, when they refer to their 401-k Plans (not all of which allow for loans). edCelerator.com and edCelerator, LLC are not tax professionals and should not be relied upon for tax advice but many of our eCCPs can advise you on tax matters. For more information, contact us.

Borrowing from a 401-k Plan is almost always a bad idea, for a few reasons. edCelerator™ calculates the amount of money a family in the 35% combined tax bracket would need to earn in order to repay the 401-k loan. For instance, to repay a $10,000 401-k loan, a family needs to earn $15,385, pay 35% taxes on it ($5,385) to net the $10,000 needed to repay the loan. The IRS requires that the loan be repaid within five years, in substantially level payments. edCelerator™ calculates the earnings necessary to repay the 401-k loan and then divides those earning by 60 months to arrive at the monthly cash flow required to repay the loan on-time. The IRS also places a maximum loan amount of the lesser of 50% of the Plan balance or $50,000. If the loans are not repaid within 5 years (or 60-90 days after separation from service), the loans become taxable and are subjected to pre-59 1/2 10% penalties. The family would be asked to pay taxes on money it no longer has.

Finally, assuming you borrow from your 401-k to pay for college, when will you repay the loan and how much will college actually end up costing you?

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About PLUS

The Parent Loan for Undergraduate Students, or PLUS, has been around for many years. Since July 1, 2010 with passage of the Healthcare bill, all PLUS loans - apologies for the redundancy (i.e. "Parent Loan for Undergraduate Students loan") are now provided and serviced by the federal government. PLUS can be taken out, subject to a credit check, for the entire cost of education (tuition, room, board, books, fees, etc.), less any financial aid received. PLUS loans are not financial aid - any family with reasonably good credit qualifies - but are often included in a college's Student Aid Report (SAR) anyway.

PLUS loans are taken by semester, meaning the parents of a student that completes college in four years - something of a rarity these days - will be paying on a total of eight (8) PLUS loans. The loans are ten-year notes at a fixed rate of 7.9%. Loan origination fees on each loan are 4 points. edCelerator™ calculates the cost of PLUS loans as if one loan were taken out for the entire Net Cost of Attendance (NCOA). This has the effect of understating the origination fees and providing a potentially lower cost to PLUS loans than families may actually incur. Finaid.org has a good PLUS loan calculator that offers the same results as edCelerator™, here. Families should consider the use of Stafford (student) loans prior to considering PLUS because unsubsidized Staffords offer a lower 6.8% (versus 7.9%) rate. Financial aid-eligible families will receive a 3.4% rate on the subsidized Stafford loans they are offered for 2011-2012; for 2012 and beyond, the rate will be 6.8% for all Stafford (student) loans. Stafford loans have the same 4-Point origination fees. Perkins Loans are available to lower-income families with an interest rate of 5% and no origination fees.

The bottom line on PLUS loans is that repaying a ten-year, 7.9% note eventually becomes a cash-flow challenge (as seen in the edCelerator™ results table) and increases the cost of college by about 50%. For example, the total repayments on a $10,000 PLUS loan total $15,100. The Effective Cost of College is NOT the Net Cost of Attendance; it is the total cost to repay any loans used to fund the NCOA.

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About PRIVATE

Private Student Loans are offered by several banks to credit-worthy (typically, FICO scores over 650) families, in lieu of or in addition to Stafford or PLUS loans. Private Loans are not "financial aid;" they are a private arrangement between a finance company or bank and a student and/or a student's parents. If you co-sign a student loan, it is YOUR LOAN. These loans are offered as VARIABLE-RATE, NO-CAP loans so the payments - and the payoff amount (the Effective Cost of College) - can go much higher if interest rates rise. Betting that interest rates will go lower, or even remain low, may be unwise. Locking in a cost of college financing with a fixed-rate loan (not a Private Student Loan) is far more economically prudent when rates are near all-time lows.

Additionally, "Borrower Rewards"-like incentives (rate reductions, parents being discharged from the loan, etc.) are NOT achieved by over 97% of all borrowers and the contracts - read the fine print! - are greatly skewed to favor the lenders. We have seen loan documents that allowed the lender to change not only the interest rate but the frequency with which the interest capitalizes. In other words, if the lender changes the interest capitalization from monthly to daily, the borrower pays interest on interest more frequently and thus, more for the loan. Remember, the Effective Cost of College is not the post-financial aid amount (the Net Cost of Attendance); it is the cost to repay any loans that are used to finance the post-financial aid amount.

Paying for college with Private Student Loans is essentially the same thing as paying for college using your MasterCard. While some parents find the value of a college education to be "priceless," edCelerator™-Certified College Planners prefer to inform families, in advance, what college will actually cost them. Predicting the Effective Cost of College when variable rate loans are involved is impossible; parents who use variable loans are buying a product (college) without knowing its cost.

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PLUS Monthly Payments Schedule

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