ACCESS GROUP Conference 2005 INDUSTRY UPDATE Nancy Coolidge

ACCESS GROUP Conference 2005 INDUSTRY UPDATE Nancy Coolidge University of California Office of the President

CAVEAT…. This update is based on the best information available. • This presentation for the ACCESS GROUP Conference was finalized on Tuesday, November 15, just as the House of Representatives was ready to vote on their reconciliation bill. • 2

AGENDA Reconciliation and Reauthorization • Federal Savings and Higher Education • Interest Rates and Loan Fees • “Squeezing” the Lenders • Help Where We Can Find It • PLUS for Graduate Students • School-as-Lender • Loan Consolidation • Tax Credit • 3

Appropriations for FY ‘ 06 As of the date of this writing, Congress had not passed a Fiscal Year 2006 Appropriations bill, but the conference bill appears to keep most higher education programs under the Department of Education FLAT FUNDED.

“RECONCILIATION” & “REAUTHORIZATION” YET TO COME • Congress is planning to reduce federal support for higher education as part of the planned budget reconciliations bills to “save” money for other priorities. • Without reconciliation “savings, ” it will be harder to pass a federal tax cut bill as the Administration is planning and the national deficit will not be reduced. 5

PROPOSED WAYS TO “SAVE” • Congress is looking to change the various “mandatory” federal programs so that they will be less costly. e. g. , • Medicare • School Lunches • Foster Care funds • Food Stamp Program • Student Loans 6

HIGHER EDUCATION’S SHARE OF FEDERAL BUDGET • All federal spending on education at all levels represents less than 3% of the annual federal budget expenditures. • Between 1/4 th and 1/3 rd of all “savings” for federal spending would come out of higher education – mainly out of the subsidies for Stafford Loans 7

FY 2006 Budget Reconciliation Impact on Education Instructions to “save” influences the reauthorization of HEA Independent of the appropriation of new funds for the coming year 8

House RECONCILIATION Senate – S. 1932 $50 billion over 5 years Total, Governmentwide Net Budget Savings $39. 1 billion over 5 years (awaiting Budget Committee and floor consideration) $13. 7 billion Ed & the Workforce Committee $6. 2 billion $22. 3 billion $5. 0 billion ($71 billion in gross savings; offset $32 billion in new spending) Education Committee instructions for savings $13. 6 billion Cut from Pensions $6. 7 billion $20. 8 billion Cut from Student Loans Spent on Programs/Loans Spent on Katrina HELP Committee $11. 2 billion $2. 7 billion $14. 6 billion Net Education Cuts $1. 5 billion $8. 1 billion $18. 1 billion Net Deficit Reduction $13. 3 billion 9

Recommended INCREASED UPFRONT LOAN FEES Increases in the lender and origination fees paid by borrowers - from 0%, in many cases, to 2. 5% and from 0% to 1% respectively (These are the upfront fees, which for many borrowers have been 0% in the last few years and which could rise to a total of 3. 5% in 2007. ) 10

MIXED NEWS ON INTEREST RATES • The House is proposing variable interest rates capped at 8. 25% • The Senate is proposing fixed rates at 6. 8% 11

Proposed INTEREST RATES Greater potential increases in the interest rates charged to borrowers, by raising the cap from 6. 8% (current law includes a fixed 6. 8% rate staring next July 2006) to 8. 25% if Congress moves to a variable rather than a fixed interest rate 12

REDUCING RETURN-ON-INVESTMENT FOR LENDERS Reduced subsidies to lenders and guarantors. All or some of will be passed on to borrowers Reduced buyouts of borrower up-front fees Reduced repayment “incentives” 13

ENTITLEMENT TO ICRP COULD BE ELIMINATED FOR FFELP BORROWERS Congress is planning to reduce borrower access to the “income-contingent repayment program” (ICRP) ICRP will no longer be a borrower entitlement as it is today FFELP borrower access will require lenders giving borrowers permission 14

PARENTS MAY PAY MORE TO BORROW PLUS loans for parents could become more costly if fixed rate consolidations are eliminated in the PLUS program, also. 15

Proposed CONSOLIDATION FEES A 1% fee added to the principal when borrowers consolidate their loans Potential loss of fixed-rate consolidation loans available today Consolidation will be used to obtain longer terms, but the 1% “tax” will increase consolidation costs 16

Now, For the GOOD NEWS…. The Senate has a proposal to make PLUS loans available to Graduate Students, in addition to a small bump in the annual maximum from the Stafford unsubsidized loan program. If this manages to survive the conference process, it would eliminate some of the current dependence on higher -cost private and alternative loan borrowing 18

Help Where We Can Find It… Our job is to help our students find ways to finance their educations. • Each student as well as each of us must according to our individual consciences within the strictures of the law and the social norms of our institutions and communities. • This material is presented for your consideration… • 19

SCHOOL-AS-LENDER (I) UC has looked into this possibility and is still considering its options, pending the outcome of the current bills before Congress to limit lender profits. • Schools can make money on this enterprise under the current system • There are serious ethical issues that can be mitigated by institutional choices. • 20

SCHOOL-AS-LENDER (II) • • What uses are made of the “profits”? Do borrowers have real, practical choice in selecting lenders? What role does the school have in promoting the school’s brand of loans? What role does the school have in making borrowers aware of lender options and their respective real value? 21

SCHOOL-AS-LENDER (III) • • Consider the role of administrative simplicity and resources in the choice Consider the role of “non-financial perks” to school Consider the role of alternative loan availability and pricing Consider the transparency of the transactions to students and alumni as well as state and other public interests 22

CONSOLIDATION IN SPRING ‘ 06 • This may be the last time that consolidation offers borrowers such a good deal. • Borrowers in school as well as recent grads should consider consolidation as interest rates are rising – locking down the current 4. 7% may look GOOD this time next year! 23

NEW CONSOLIDATION LOAN? Borrowers are free to consolidate this year’s loans as a separate consolidation loan if they don’t wish to combine the new disbursements with their current consolidation loan. • A weighted average makes the costs of combining or not very similar overall, depending on the effects of the ROUNDING (up to the nearest 1/8 th of a percent. ) Typically, there is no significant savings associated with choosing to combine consolidation loans. • 24

LONGER CONSOLIDATION TERMS If the term (# of years in repayment) is longer, the cost will increase, whether loans are combined or not. • Combining new loans with an existing consolidation loan may make the borrower eligible for a longer repayment term (30 years instead of 25). • 25

REAL LOAN REPAYMENT (I) Loan Amount (based on 4. 7% interest rate) $50, 000 $100, 000 consolidation Years to Pay Off Monthly Payment 10 $523 25 $284 10 $1, 046 25 $567 30 $522 26

REAL LOAN REPAYMENT (II) Loan Amount (based on 6. 8% interest rate) $50, 000 $100, 000 consolidation Years to Pay Off Monthly Payment 10 $575 25 $347 10 $1, 151 25 $694 30 $657 27

REAL LOAN REPAYMENT (III) Loan Amount (based on 8% interest rate) $50, 000 $100, 000 consolidation Years to Pay Off Monthly Payment 10 $607 25 $386 10 $1, 213 25 $772 30 $734 28

HOW MUCH MORE PER MONTH? $$$$ $50 K years 4. 7% 10 $523 $50 K 25 $100 K 10 $100 K 25 $100 K 30 consol. 6. 8% $575 +52 $284 $347 +$63 $1, 046 $1, 151 +$105 $567 $694 +$127 $522 $657 +$135 8% $607 +$84 $386 +$102 $1, 213 +$167 $722 +$155 $734 +$212 29

INCOME CONTINGENT REPAYMENT (I) • Borrowers who may not earn steady incomes right out of school • Borrowers whose debt to income ratio is too high – this may be chronic or temporary • Un- or under-employed but no remaining deferment or forbearance eligibility 30

ICRP (II) Currently, access to ICRP is an borrower entitlement, but Congress is considering limiting access to FFELP borrowers whose lenders give them permission to seek the lower repayments under ICRP (may include negative amortization, unlike “income sensitive” repayment plans) 31

ICRP (III) Borrowers in ICRP must agree once upfront to allow the Department of Education to check their income tax filings with the IRS each year. Required repayment installment amounts will vary according to changes in the borrower’s income over time 32

ICRP (IV) • Borrowers who elect an ICRP plan may switch to another plan at any time. Switching to another plan makes sense when the borrower’s income increases substantially, otherwise the monthly payments under ICRP will be larger than the payments under an extended payment plan. Under ICRP, higher-income borrowers will pay off their loans earlier than would be the case under an extended plan. While this will save money on interest payments, some borrowers will need to target their increased earnings to higher interest debts first. 33

ICRP (V) • When borrowers pay less each month than the interest that accrues on their loans, the unpaid interest is capped when/if it reaches 150% of the original loan amount 34

ICRP (VI) Borrowers who make required payments in ICRP for 25 years are entitled to forgiveness of the balance remaining at that time, although it is technically a taxable “gift” to the borrower. 35

ICRP (VII) ICRP was designed to be an alternative to default and delinquency – to improve the political standing of Federal Loan Programs, which were being criticized due to rising default rates, and also to provide humane treatment for those who “took a chance” on higher education, but for whom the monetary rewards did not follow. 36

Income Contingent Repayment Plan Interest rate 4. 7%, single, and U. S. mainland resident. Shaded area indicates lower monthly repayment plan is available. Loans Outstanding AGI $15, 000 $30, 000 $45, 000 $60, 000 $75, 000 $100, 000 $150, 000 $9, 750 $5. 00 $5. 00 $10, 000 $7. 17 $7. 17 $12, 000 $40. 50 $40. 50 $15, 000 $81. 73 $90. 50 $20, 000 $91. 52 $173. 83 $25, 000 $103. 54 $207. 08 $257. 17 $30, 000 $114. 07 $228. 15 $340. 50 $40, 000 $131. 81 $262. 36 $393. 54 $507. 17 $50, 000 $136. 49 $272. 97 $409. 46 $545. 95 $673. 83 37

OUTSIDE THE BOX Subsidies for students that are not from the usual sources of financial aid – the U. S. Tax Code • Citizens differ in their views of using the tax code to assist the country’s lowest income workers as avenues for helping students who work. • 38

TAX TIPS FOR STUDENTS IRS Publication 970 Tax Benefits for Education http: //www. irs. gov/pub/irs-pdf/p 970. pdf IRS Publication 596 Earned Income Credit http: //www. irs. gov/pub/irs-pdf/p 596. pdf 39

EARNED INCOME TAX CREDITS (EITC) • A refundable federal income tax credit for low-income working individuals and families. Filer must be >24 and <65 years old • Investment Income must be <$2, 650 • Must have EARNED INCOME within specified ranges. • 40

EARNED INCOME TAX CREDITS (EITC) EITC amounts may reduce taxes owed or be paid as a REFUND IN EXCESS OF TAXES WITHHELD • Eligible filers may received “refunds” for more than they paid in taxes after filing • Eligible workers can avoid having all or portions of normal “withholding” taken out of paychecks ahead of anticipated credit. • 41

EITC INCOME RANGES Earned Income Tax Credit SINGLE, age 25+ Earned Income Up to ceilings for $11, 490 eligibility-(not AGI) Head of Married – Household no children, – one child age 25+ Up to $30, 338 Up to 12, 490 42

EARNED INCOME TAX CREDIT (EITC) HEAD OF HOUSEHOLD WITH 1 CHILD • Income of $30 K would be eligible for $50 • Income of $20 K would be eligible for $1, 648 • Income of $10 K would be eligible for $2, 604 • Income of $7, 500 would be eligible for $2, 559 • Income of $5 K would be eligible for $1, 709 43

EARNED INCOME TAX CREDIT (EITC) SINGLE PERSON • • A refundable federal income tax credit for low-income working individuals and families. Must be >24 and <65 years old Investment Income must be <$2, 650 Must have earned income less than $11, 490 to qualify for EITC. 44

EARNED INCOME TAX CREDIT (EITC) SINGLE PERSON • Income of $2, 500 would be eligible for $193 • Income of $5, 000 would be eligible for $384 • Income of $7, 500 would be eligible for $303 • Income of $10, 000 would be eligible for $112 45

EARNED INCOME TAX CREDIT FOR MARRIED COUPLES – NO CHILDREN • A refundable federal income tax credit for lowincome working couples • One partner must be >24, but <65 yrs. • Must have earned income less than $12, 490 to qualify for EITC. • Investment income may not be >$2, 650 46

EARNED INCOME TAX CREDIT FOR MARRIED COUPLES – NO CHILDREN • Earned Income of $5 K would be eligible for $384 • Earned Income of $7, 500 would be eligible for $380 • Earned Income of $10 K would be eligible for $189 • Earned Income of $12, 000 would be eligible for $36 47

LIFE-TIME LEARNING CREDITS REDUCES TAXES DOLLAR FOR DOLLAR – Maximum of $2000 • Maximum of 20% of “tuition and qualified educational expenses” up to max of $2, 000 for TY 2005 per filer • AGI max of $52 K for single filer and $105 K for married filer – ratably reduced at top of range ($42 K and $95 K respectively) • 48

TAX CREDITS A single filer must have an AGI of at least $20, 700 to get the maximum credit. LTL credits cannot be greater than the tax liability – not refundable. • A head of household filer with one dependent - AGI of at least $24, 250 • Married filer with no minor dependents – AGI of $28, 100 • 49

LIFETIME LEARNING TAX CREDITS Lifetime Learning Tax Credit Eligible Income ranges – ratably reduced at top of range SINGLE Head of Married – Household no children, – one child $9, 955 to $52, 000 – $15, 355 to $52, 000 $17, 905 to $105, 000 MAX credit available at >$20, 700 MAX credit available at > $24, 250 MAX credit available at > $28, 100 50

TAX CREDITS ARE WORTH MORE For those eligible for a tax credit, this is always the best option in comparison to a tax deduction Tax deductions are less valuable, but they are available to higher-income filers than is the case with tax credits 51

TAX DEDUCTIONS FOR STUDENTS • Deduction for up to $4, 000 per filer for qualified tuition and fees • Reduces AGI “above the line” so filers do not have to “itemize” on Schedule “A” • EASY TO DO: CALCULATE THE NET TUITION amounts from 1098 -T 52

TUITION AND FEE DEDUCTION Reduces AGI either SINGLE $4 K or $2 K HEAD of HOUSEHOLD – one child MARRIED no children AGI for $4, 000 deduction $11, 955 to $65, 000 $17, 355 to $65, 000 $19, 905 to $130, 000 AGI for $2, 000 deduction $65, 001 to $80, 000 $130, 001 to $160, 000 53

DOLLAR VALUE OF DEDUCTION Single and Head of Household – one child < $65 K saves $400 $1000 Married – no <$130 K children saves $400 $1000 >$65 - $80 K saves $500 - $560 >$130 K <$160, 001 saves $500 - $560 54

DEDUCTION FOR STUDENT LOAN INTEREST PAID • Up to $2500 in interest payments may be deducted by borrower • Incomes up to $65 K for single and $130 K joint return • Lender should send borrower a 1098 -E statement each year detailing interest 55

DOLLAR VALUE OF INTEREST DEDUCTION Single and Head of Household – one child Married – no children < $50 K saves $0 - $625 >$50, 001 - $65 K saves $625 - $0 <$100 K saves $0 - $613 >$100, 001 <$130 K saves $613 - $0 56

POSSIBLE BUSINESS DEDUCTION FOR CERTAIN MBA STUDENTS (Treasury Regulation 1. 162 -5) - tuition and other education expenses are DEDUCTIBLE ONLY IF 1) Maintaining or improving skills required in the trade or business 2) Required as a condition of continued employment or salary level 57

BUSINESS DEDUCTION FOR MBAs Q: Why would this business deduction be more desirable than the Education Tuition and Fee Deduction discussed earlier in the presentation? A: This deduction is not limited to $4, 000 per year, is not limited to those single filers with AGIs less than $80 K or married filers with AGIs less than$160 K. 58

NOT DEDUCTIBLE IF… • Incurred to meet the minimum educational requirements for job, including a license or certification (e. g. , most candidates for MD, DDS, teaching credential, etc. ) • Education is part of a program to prepare for a new business or type of employment 59

TAX COURT RE: MBA IN ALLEMEIER V. COMMISSIONER, T. C. MEMO 2005 -207 Tuition and other educational expenses connected to the acquisition of an MBA are deductible if the student then engages in “the same general activities” as before the MBA. “WHILE THE MBA MAY HAVE SPED UP HIS ADVANCEMENT WITH THE COMPANY, THE BASIC NATURE OF HIS DUTIES DID NOT SIGNIFICALNTLY CHANGE. ” 60

THIS PRESENTATION AVAILABLE AT… http: //www. ucop. edu/sas/sfs/other_material/other_ material. htm The content of this presentation is not endorsed or vetted by the U. S. Department of Education, the Internal Revenue Service, or even the Regents of the University of California. This is an informal colleague-to-colleague message, not legal advice. All errors are my own. Contact Nancy Coolidge - 61