This One Change to Financial Aid Could Negatively Impact Many Families

Apple on Book

At the end of 2020, Congress passed the Consolidated Appropriations Act. Most of the attention around this act, a $2.3 trillion spending bill, was focused on the COVID-19 relief provisions. However, also buried in that massive document were dramatic changes to student financial aid rules.  These changes will go into effect during the 2023-2024 school year when the FAFSA becomes available on October 1, 2022.  Some of these changes are long overdue and will be a benefit to families.  However, not all changes will be beneficial.

First, here is a brief rundown on some of the changes you can expect in the future: 

The FAFSA will be shorter and easier to fill out

The FAFSA currently has over 100 questions included in the application and many of them are confusing.  The new simplified version will have approximately 36 questions.  It also allows applicants to have both their taxed and untaxed income transferred to the FAFSA automatically, as opposed to manually entering it or having to self-report it.

“Expected Family Contribution” will be renamed “Student Aid Index”

The Expected Family Contribution, or EFC, is an index that schools use to determine a family’s eligibility for financial aid.  The formula includes such things as a family’s income, non-retirement assets, marital status, number of dependents, and how many children will be attending college at the same time.  Theoretically, the lower the EFC, the more aid could be available to a family.  This will get renamed to Student Aid Index, or SAI, but will operate similar to the EFC so there will be no impact to families financially.

Change in Custodial Parent

Under the current rules, the custodial parent in two household families (as a result of divorce or separation for instance) is the parent whose financial information is supplied.  The custodial parent is defined as the parent with whom the child lives with for the majority of the year.  As of 2022, the parent who supplies the most financial support will be required to fill out the FAFSA application, and this may not necessarily be the custodial parent.  The result – a higher EFC and less financial aid available to the family.

Pell Grant Eligibility

Pell Grants are a form of need-based financial aid that are awarded to low-income students to help offset college costs.  These typically do not need to be repaid.  This change is one of the positives of the new legislation. Under the current method, Pell eligibility is determined by a family’s EFC, the cost of attendance at the chosen school, and whether the enrollment status is part time or full time.  With the new rules, the size of the student’s family and their adjusted gross income will determine their Pell eligibility and size of the award.  Families that make less than the 175% federal poverty level will receive the maximum award, which is $6,495.

The above summarizes some of the changes you can expect to see in the 2023-24 school year. Now let’s focus on one that will negatively impact many families.  Currently, financial aid eligibility increases for families with more than one student enrolled in college at the same time.  Under the new law, the aid eligible to families will significantly decrease.

Let me explain with a fictitious family that includes two children who are two years apart. The first child will be in college by himself for his freshman and sophomore year, but the younger child will start college when the older one begins his junior year.  Therefore, the family will have two kids in college at the same time for two years. Both parents work and their combined income is $150,000.  The family also has assets of $150,000 which include cash and savings, taxable investment assets, and 529 plans.   The calculated expected family contribution (EFC) for this family is $40,000.

Before we dive deeper into the above family’s college financial situation, I would like to explain how the EFC is utilized by schools.  Your EFC is an indexed number that college financial aid offices use to determine how much financial aid a family is eligible for.  The formula for financial need is the Cost of Attendance (COA) less the Expected Family Contribution (EFC).  For example, if your EFC is $30,000 and you are applying to a school that costs $70,000, you will be eligible for $40,000 of need based aid.  ($70,000 COA – $30,000 EFC = $40,000 need).  It is important to point out – just because you are eligible for $40,000 in need-based aid, it does not mean you will receive this from the school your child applied to.  All schools vary in the determination of financial aid, so this will be solely dependent on the individual institution.

Now back to our fictitious family.  Under current guidelines with two students in college at the same time, this family’s EFC would be cut roughly in half for each student.  When this family has only one child in college for the first two years, the EFC that the college will use is $40,000.  However, once the second child starts school, the EFC will be roughly be cut in half to $20,000 per student.  The total EFC does not change, but the distribution of it does.  Therefore, the school that the older child attends will factor in the following EFC numbers for the four years he/she is in college as $40,000, $40,000, $20,000 and $20,000 and adjust the need based financial aid package accordingly, with more aid from the school being distributed in the last two years.  End result: the family is still expected to pay a total of $40,000 annually.

Under the new bill, the EFC no longer will be reduced with multiple kids in college at the same time.  Therefore, the above family’s EFC contribution would be $40,000 in year one and two for the oldest child and then $40,000 per child for the next two years.  That reduction is eliminated and so is the additional need-based aid that would come with it.  This will significantly increase the financial strain on families with two children attending college simultaneously.

The Expected Family Contribution index was designed to give insight to colleges on what a family could afford to pay each year. For families who have, or will have, multiple children attending college at the same time, this new rule is a major setback. Instead of being more accommodating to families facing the rising cost of college, this new rule essentially doubles a family’s expected contribution, which would decrease the amount of aid they’re eligible for.  We encourage all families who will be adversely impacted by this change to consider writing your Congressman or Congresswoman and requesting action to repeal this part of the bill.

Cosigning a Student Loan: Pros & Cons

Student Loan Cosigner

Cosigning a Student Loan: Pros & Cons

The process of taking SAT/ACT exams, sending out handfuls of college applications, and eventually deciding on your school of choice is an emotional rollercoaster ride for even the most prepared and least anxious of students. At the very end of this arduous process, students (and parents!) find themselves at the very beginning of the next undertaking: financing a college education.

For lucky students, their parents or extended relatives are there to help. For many others, student loans are oftentimes the only viable option. As an immediate family member, extended relative, or family friend of someone pursuing a university-level education, you may be approached to cosign a student loan.

Much attention is given to student loans, however little attention is given to the impact of cosigning a student loan. For anyone that is considering a role as a cosigner, besides acknowledging the obvious benefit to the student borrower (i.e. they’ll be able to qualify for the loan!), it’s also necessary to know what’s at stake for you.

Who can cosign a student loan:
More often than not, a cosigner can be anyone with a strong credit history who has a willingness to help the student in question.

All lenders have their own cosigner requirements, however many institutions require cosigners to have a credit score of 670 or better and sufficient income to pay back the loan in the event the primary borrower defaults and is unable to repay. There are cases when lenders will go a step further to get a better sense of the cosigner’s overall stability – this can include reviewing the cosigner’s job history, how long they’ve lived in their home, and whether they’ve been in their job for at least a year.

Additionally, one of the least discussed (yet most important!) topics for deciding who should cosign a loan is the cosigner’s health. Many private lenders include language in the lending agreements that allow them to demand that the loan be paid in full upon the death of the cosigner. This is a point that deserves more attention considering that it’s not uncommon for grandparents (many who are older and may not be in their best health) to serve as cosigners.

What does it mean to cosign a student loan:
Personally, I’ve never encountered a student fresh out of high school who met the requirements to take out a student loan without a cosigner. This is likely due to their limited income and minimal (often non-existent) credit history. As the cosigner of a student loan, you are guaranteeing repayment of the debt. As cosigner, you hold a legal obligation to take over debt repayment in the event the borrower cannot keep up.

When banks lend money to borrowers for real estate in the form of a mortgage, the property itself serves as collateral. If the borrower is unable to keep up with their payments, the lender has peace of mind knowing it can cut its losses by seizing the property and selling it to a new buyer.

Considering that student loans are not backed by any physical collateral that can be seized and resold, a cosigner is a bank’s best option to recover an owed student debt.

Naturally, many students look towards their financially-stable family members to cosign student loans.

When parents or family friends of the borrower ask me for my thoughts on cosigning a student’s debt, I ask two questions:

  • Are you prepared for the responsibility to pay off this debt if the borrower cannot keep up with payments?
    • If no, DON’T cosign!
    • If yes, next question…
  • Do you, personally, have any large upcoming purchases/investments that will require borrowing a large sum of money (such as a new home purchase/mortgage or business loan)?
    • If yes, maybe don’t cosign. REASON: The cosigned loans will show up on your credit report and may complicate/restrict your ability to borrow.
    • If no, consider the borrower, your relationship with that person, and your confidence that they will be responsible in repaying the debt. If you accept the risks of being a cosigner and trust the borrower’s explicit commitment to repay the debt – go for it.

Benefits of cosigning a student loan:
For starters, the student borrowers are the primary beneficiaries of a cosigned loan. Cosigners allow students who would otherwise not qualify for a student loan to qualify and secure the funding needed to pursue their education. Additionally, if the cosigner is someone with stellar credit and strong income, the lender may take these facts into account and offer loans with lower, more competitive interest rates.

Many borrowers need cosigners for student loans due to not having much (if any) credit history. By having a student loan in their name and staying consistent on their monthly repayment, student borrowers are making significant (albeit unintentional) strides in establishing a personal credit history.

For cosigners, there’s little personal benefit to cosigning a loan (besides seeing a potential loved one pursue their dreams).

Drawbacks of cosigning a student loan:
A cosigner’s credit score will be impacted if the primary borrower misses a payment. Despite effectively serving as co-borrowers, cosigners rarely ever receive any formal notice that the primary borrower (i.e. the student) has missed payments. Unfortunately, missed payments are a common occurrence that frequently occur when borrowers are not setup for autopay or when a new loan servicer assumes the loan.

Another drawback to cosigning a loan is its impact on the cosigner’s debt-to-income ratio. As discussed before, the cosigned loan will show up on a cosigner’s credit report and may therefore reduce the cosigner’s ability to qualify for a personal loan or mortgage. Even if able to qualify for the loan, the increased debt-to-income ratio may result in the cosigner ending up with a less competitive interest rate.

In the event that the borrower is unable to repay the loan, collection agencies will look to the cosigner for payment. For most cosigners, this is the most significant drawback to cosigning a student loan and the one that must be most seriously considered when deciding to serve as a cosigner.

Even in the best of circumstances, a borrower and cosigner’s financial entanglement leaves the door wide open for relational stress.

How to decide whether to cosign a loan:
Making the final decision whether or not to cosign is personal. At a minimum, cosigners should have a sincere conversation with the prospective borrower to ensure the borrower understands the implications, and risk, to a) themselves and b) the cosigner.

It’s recommended that prospective cosigners also take an inventory of their own finances during this process. Be sure to consider your credit and to factor in whether or not any upcoming expenses will require a loan.

How to get a cosigner release:
Unfortunately, loan servicing companies never voluntarily let borrowers or cosigners know when they qualify for a cosigner release. Getting a cosigner release for a student loan typically requires that the borrower has graduated from school, has made at least 12 on-time payments, and has a sufficient credit score (credit score > 600) and income to repay the debt on their own. Additionally, it’s also typical that loan servicers will request the borrower (not the cosigner) to initiate the release process.

As a financial planning firm, we have clients who are the borrowers and others who are the cosigners. Regardless of borrower/cosigner status, we always work to have cosigners released as soon as possible.

  • Benefit of cosigner release to borrowers: Many private student loan promissory notes have provisions that allow the servicer to place the borrower in default (even if payments have been made on time) if the cosigner dies or files for bankruptcy. Releasing the cosigner as early as possible can prevent borrowers from experiencing surprise defaults and student loan balances automatically being due in full that are no fault of their own.
  • Benefit of cosigner release to cosigners: A parent or family member opts to cosign a student loan so that the borrower can pursue an advanced education. From the very beginning, it should be understood that releasing the cosigner should be a priority following the borrower’s graduation. Getting released as a cosigner means the former cosigner’s credit will no longer be impacted by missed payments and that the original borrower will be fully accountable for the debt.

The Consumer Federal Protection Bureau (CFPB) offers sample letter templates that borrowers/cosigners can send to servicers to request a consigner release.

For additional reading, our co-founder, Dennis McNamara, was featured in Forbes on this topic: https://www.forbes.com/advisor/student-loans/pros-and-cons-of-co-signing-a-student-loan/

Webinar: Financial Crash Course For DOCTORS

Medical Professionals

FINANCIAL CRASH COURSE FOR DOCTORS

wHealth Advisors is excited to announce a free webinar to help doctors (and those in training) get on a path towards financial independence.

Financial independence? Say what?

In a nutshell, financial independence means being financially secure enough that you continue working because you want to, not because you need to. Everyone’s situation is unique. Just as a good salary does not guarantee financial independence, mountains of student debt does not disqualify you.

For some, financial independence will mean making sacrifices. To others, it’s life as usual. In any case, it requires a vision, setting intentions, and having a roadmap that can evolve with you over time.

When: The Financial Crash Course for DOCTORS webinar will be given FOUR times (live) each Wednesday at 5pm (EDT) through the month of May. Seating is limited to 100 participants per webinar. We ask that you register using your work/school email – priority will be given to medical professionals.

What we’ll cover: Timely and timeless topics including:

  • COVID-19 Legislation: The impact on stimulus checks, student loans (including PSLF), and mortgages.
  • The NINE money mistakes doctors keep making
  • Fundamentals of Fiscal Fitness
  • Building a rock-solid financial foundation
  • The Juggle: Investing vs. student loan repayment
  • Physician mortgages: When they make sense (and when they don’t!)
  • Human capital: Investing in yourself

Why doctors? wHealth Advisors was founded on serving the medical community. While we can’t provide the resources they need most during this time (namely, PPE), we can offer what we know best: objective, evidenced-based financial guidance with no sales agenda or conflicts of interest.

The intended audience for this webinar includes those who are:

  • Medical/dental students
  • Interns/residents/fellows
  • Attendings or established docs that graduated medical/dental school within past 15 years

FIGS Giveaway: Following each webinar we will be randomly selecting a winner for a $25 FIGS gift card. Registering for the event is an automatic entry. Also – be sure to tag friends, classmates, and colleagues on our webinar-related Instagram posts (@whealthadvisors). More tags = more entries (limit = 10 total).

For any questions, please feel free to contact us at hello@whealthfa.com.

Follow links below to register on preferred date:

May 6, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_eZ7hj5awSyaVwOqBejqDOg

May 13, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_O2-njPcSQ_OeyH_H_57FJw

May 20, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_tX3J4IHTSh6IyNEqVNZtRw

May 27, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_FvLsh_flRRWpOf2GdV6SjQ

 

Terms & Conditions

Additional Resources:

Student Loans:

  • freestudentloanadvice.org: Great resource and created to ensure that all consumers have access to fair, free, student loan advice and dispute resolution.
  • www.nslds.ed.gov: National Student Loan Data System – best place to go when creating an inventory of your Federal loans.
  • www.annualcreditreport.com: Best place to go when creating an inventory of your private student loans.
  • Gradaway.com: Affordable student loan refinancing/consolidation company
    • $248 for balances < $100k
    • $349 for balances $100k – $250k
    • $449 for balances over $250k

Stimulus Checks:

NAPFA-Advisor-Checklist: NAPFA Checklist for interviewing Financial Advisors

Five Fundamentals of Fiscal Fitness

The SECURE Act: What you need to know

The SECURE Act

Written by: Dennis McNamara

Congress just passed a year-end bill known as the SECURE Act (i.e. Setting Every Community Up for Retirement Enhancement Act of 2019). While the name suggests both promise and opportunity in solving our nation’s retirement crisis, we at wHealth Advisors dug into the weeds and wanted to use our last blog post of 2019 to share some thoughts.

Let’s start with the GOOD:

  • Retirement deductions for those over 70.5 years old: For those who have earned income and happen to be over age 70.5, you can now contribute to an IRA.
  • Required minimum distributions bumped back from 70.5 to 72: For those who are not yet 72, required minimum distributions from qualified retirement accounts will now begin at 72 rather than 70.5.
  • Multiple Employer Retirement Plans: Allows two or more unrelated employers to join a pooled employer retirement plan (Dental and Medical practice owners/partners: This is for you!). These plans will need to be administered by a Registered Investment Advisor firm (like wHealth Advisors). If done correctly, this provision can create significant savings for both owners and participating employees.
  • Kiddie tax rates: Unearned income for a child under 18, or under 24 and a full-time student, to now be taxed at the parent’s marginal tax rate (as opposed to the previous trust tax rates which in most cases were higher than the parent’s tax rates).
  • 529 plan expansion of qualified expenses: Allows 529 funds to be used for registered apprenticeships, home/private/religious schooling, and up to $10,000 of qualified student loan repayments.

And now the BAD:

  • No more “stretch IRAs” for inherited retirement accounts: Before the SECURE Act, if you passed away and left a qualified retirement plan to your descendants (think: 401k, IRA, 403b etc.), the beneficiaries could take distributions from the inherited account over their own personal life expectancy (calculated by IRS). For example, suppose a 30 year old inherited an IRA from their parent. That 30 year old was previously able to take annual, piecemeal distributions and “stretch” the distributions from the qualified account until their death. After the SECURE Act, non-spouse inheritors of qualified retirement accounts must now have the funds distributed within 10 years of inheriting (note: this change begins for accounts inherited in 2020).
    • This is extremely detrimental to the average investor. REASON: Forces larger income distributions to beneficiaries even if the income is not needed. This will not only minimize the tax deferral benefits (having to take the money sooner prevents the funds from having a longer time horizon to grow tax free) but will also trigger many investors to be bumped into higher tax brackets. From a behavioral standpoint, forcing distributions over a 10 year period will likely result in more folks squandering inherited retirement accounts (thus giving annuity reps another mouth-watering opportunity to sell annuity products).
  • Employer retirement plans can offer “Lifetime Income Providers”: TRANSLATION – annuity companies and their advisors can now place more of their high-cost annuity products into employer retirement plans. Additionally, and according to the SECURE Act, there is no requirement for a fiduciary to select the least expensive option.

OTHER provisions worth noting:

  • In 2021 the IRS will make slight tweaks to it’s life expectancy tables (which will impact required minimum distributions). A small change but a positive one.
  • Increased tax credit for employers starting a retirement plan and for employers that setup a plan with auto-enrollment (again, a nice perk for the Dental/Medical practice owners!).
  • Penalty-free withdrawal (up to $5k) from retirement plans for individuals in case of birth of a child or adoption.
  • Federal medical expense deduction reduced to 7.5% of AGI (down from 10%).

As is often the case, what legislation gives with one hand it takes with the other. While we’re happy with some of the improvements, the most impactful changes (elimination of stretch IRAs, annuities in 401k plans) make it clear that the real winner of the SECURE Act is the insurance lobby.

For any questions or clarifications please feel free to contact us hello@whealthfa.com.