Tax Attic June 20, 2013

Jerry Coon
Jerry Coon

Last week was a good week for the Coon and the Cunningham families. Stephanie, our oldest daughter, and her husband, Devon Cunningham, had a baby boy, Rowan James, on Tuesday, the 11th. For both sets of proud grand-parents, Rowan is our first grandchild. The little fella might get spoiled just a bit. Since Stephanie and Devon live in Grand Rapids and Jim lives near Santa Barbara and Trudi lives in San Marcos, both in California, it will be up to Deb and me to spoil him in person. We can do that. I’m sure Jim and Trudi will find ways to spoil him from afar.

Last week, before the appearance of Rowan, I wrote about how students and parents were going to pay for the cost of college. Hopefully, there would be scholarships and grants to cover all of the costs. Realistically, the number of students who get a full ride is minuscule. Most end up receiving a combination of scholarships, grants, parents’ out-of-pocket funds, and loans to cover the entire cost. This week, let’s talk, specifically, about how the federal government loan process works.

Government student loans are called Direct Loans. The process for receiving a Direct Loan generally starts with filing a Free Application for Federal Student Aid (FAFSA). Direct Loans can be Subsidized, Unsubsidized, Plus, and Consolidated. 1. Direct Subsidized Loans are given to undergraduate students who, through the FAFSA, have shown they have a financial need. The advantage of a Subsidized Loan is that interest is not charged during the time that a student maintains at least half-time enrollment, during a grace period, and during a possible deferment period. Actually, interest is charged but the U.S. Department of Education pays the interest for the student during the stated periods. 2. On the flip side, Direct Unsubsidized Loans are not based on financial need. In these cases, the FAFSA generally must still be filed showing the student has no financial need based on the school’s cost. The disadvantage of the Unsubsidized Loans is that interest is charged from day one even when the student is in school and at all times thereafter. 3. Direct Plus Loans are unsubsidized loans that are given to parents of undergraduate students and also to graduate students. Interest is also charged from day one of the loan. The dollar amount of the Direct Plus Loans is limited to the total cost of attending the college less all other financial assistance amounts. As with the Unsubsidized Direct Loans, interest is charged at all times. 4. Consolidated Loans is the process of combining all eligible Direct Loans into one Consolidated Loan. Consolidating loans has the advantage of allowing one lower monthly payment to be made but it can result in a longer repayment period.

Direct Subsidized and Unsubsidized Loans have a combined limit that is based on the grade level of the student; whether the student is a dependent undergraduate, independent undergraduate, or a graduate student; and the cost of attendance at the school of the student. For a 1st year, dependent undergraduate student, up to $5,500 can be borrowed in total with up to$3,500 coming from the Direct Subsidized program and the other $2,000 coming from the Direct Unsubsidized program. For a 1st year, independent undergraduate student, the total maximum is $9,500 with $3,500 Subsidized and the remaining $6,000 being Unsubsidized. The amounts increase for each year the student remains in college with the 4th year amounts being a maximum of $7,500 for a dependent student and $12,500 for independent students. The total amount that can be borrowed by a dependent, undergraduate student is $31,000 with $23,000 being subsidized. The total borrowed by independent, undergraduate students is $57,500 with $23,000 also being subsidized. The amounts available for graduate students is substantially higher in that $20,500 is available for each year with up to $8,500 being subsidized and the remainder of $12,000 unsubsidized. The total available to graduate students is $138,500 with $65,500 subsidized and $73,000 unsubsidized. As noted previously, Direct Plus Loans are limited to the costs of the college minus all other financial aid amounts.

Obviously, if a student continues on to graduate school, a large amount of debt can be accumulated. That brings us to the amount of interest that is charged on these loans. Interest rates charged are based on the time period in which the loan amount is disbursed to the student. Currently, for loan amounts disbursed from July 1, 2012 through June 30, 2013, Direct Subsidized Loan recipients will be charged 3.4%. Direct Unsubsidized Loan recipients will pay at the rate of 6.8%. When you hear that Congress is trying to negotiate a bill that will lower the interest rate for student loans, the Direct Unsubsidized Loan rate is predominantly the rate that is potentially getting lowered. In my opinion, at 6.8%, it should be lowered to the rate at which the federal government is paying on its’ debt. I don’t think you can buy a federal bond today that will pay you 6.8% yet college students are being charged 6.8% to pay for college and/or graduate school. Our legislators should be ashamed of themselves. Rubbing a bit of salt in the wound is the fact that an additional 1% of the loan amount is deducted from the principal as a fee when the loan is disbursed. I won’t editorialize on the cost of attending college. But I don’t believe it’s kosher for the federal government to take over the Student Loan program and then charge exorbitant interest rates for the loans that it disburses. It’s time to get off my high horse, but last week with the birth of Rowan, I have joined the ranks of those who have grand-children to consider. Rowan might just want to go to college in 18 years or so and there might be some loans involved in covering that cost. I just think the interest rate charged should be fair. This is Jerry Coon signing off.


Jerry Coon is an Enrolled Agent and

a Registered Tax Return Preparer.

He owns Action Tax Service on

Northland Dr. in Rockford.

Contact Jerry through his website:

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