Will the American Opportunity Tax Credit be Another Victim of the Fiscal Cliff?

As I was driving to work yesterday, I heard an interesting article on NPR’s Morning Edition (link provided below).  Now, I am aware that everyone is probably either very tired of hearing about the Fiscal Cliff or very stressed!  However, as a heads up, here is another potential victim of the Fiscal Cliff – the American Opportunity Tax Credit.  Although originally set to expire in December of 2010, the Tax Relief and Job Creation Act of 2010 extended the American Opportunity Tax Credit for an additional two years, through December 2012.  In retrospection, a very bad date for the expiration of the tax credit because this lumps the American Opportunity Tax Credit in with all of the other services that will be under scrutiny for adjustment or elimination as Congress wrestles with the adjustments necessary to begin cutting the nation’s deficit.

Popular Student Tax Credit Will Expire:

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualified for a tax credit, the American Opportunity Tax Credit, to pay for college expenses.  A modification of Hope Credit, the American Opportunity Tax Credit has been in effect for tax years 2009, 2010 and, under ARRA, 2011 and 2012.  The American Opportunity Tax Credit has been very popular because it was accessible to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualified for the maximum annual credit of $2,500 per student.  Created to help tax payers whose modified adjusted gross income were $80,000 or less, or $160,000 or less for married couples filing a joint return, the credit allowed tax payers to actually receive the credit, whether they owed taxes or not, a feature that proved a huge benefit to lower income families. The credit was phased out for taxpayers with incomes above these levels. The income limits for the American Opportunity Tax Credit were higher than under the existing Hope and Lifetime Learning Credits.

Since extending this tax cut is estimated to cost $10 billion, I personally do not think it will be extended again, but I am optimistic and live in hope…..  So, what will happen if this tax credit is not extended?  The Hope College Tax Credit will come back into effect. 

Hope Tax Credit

Although the Hope Tax Credit is better than nothing, it iss a less generous program than the American Opportunity Tax Credit.  Here is a brief summary of some differences:

·         It is not refundable; it can only reduce the amount of federal taxes you pay.

·         It is worth up to $1,800.

·         100% of the first $1,200 in qualified tuition and related expenses.

·         50% of the next $1,200 in qualified tuition and related expenses.

·         It can only be used for tuition and required enrollment fees- not required course materials.

·         It can only be used for the first two years of undergraduate study.

·         It can only be claimed for two tax years.

·        The credit can be only be claimed in full for single filers' income of $50,000; partial credit is allowed up to $60,000. For joint filers, the full credit can be claimed for incomes up to $100,000; partial credit is allowed up to $120,000.

·       You can claim the Hope educational credit even if the qualified expenses were paid by college loans for students.

·       You can also claim the credit if the student withdrew from school and these expenses were not refunded.

·       Students are eligible if

• they have been enrolled at least half-time in a degree, certificate or otherwise recognized credentialed program for a semester that started in the tax year
• not already taken this education tax credit for two years
• not completed their first two post-secondary years before the tax year
• been free of a drug conviction as of the end of the tax year

SOURCES for this article were National Public Radio’s Morning Edition and the IRS Publications website. 

Link to the NPR news Article from December 11, 2012: http://www.npr.org/2012/12/11/166938090/could-the-opportunity-credit-be-eliminated

Hopefully, after the first of the year, this IRS website  will provide information for the upcoming year. (questions and answers

IF YOU ARE RETURNING TO SCHOOL, MAKE SURE YOU FOLLOW THESE FEW STEPS!

 

Beautiful leaves falling, crisp cooler days, and thoughts of school….. Fall is the season that inspires many of us to return to school to continue our education.

Whether you are finishing your first degree or returning to pursue an advanced degree, please make sure your current student loans are placed back into an in-school deferment.

Although the actual forms must be submitted by the school you are attending, as the borrower, it is your responsibility to make sure the forms have been submitted by the school and processed by your current servicer. Too often the forms are either not submitted or not processed by the servicer.

As a result the loans become delinquent and the march toward default begins. I see this all of the time – borrowers who have been attending classes, signing new financial aid forms, thinking they are doing the correct things; however, they ignore those pesky late notes and e-mails from their servicer - assuming  that they keep getting them " in error” and then one day, BAM! Their accounts are in default, financial aid funds and pell grants are cut off!

Don’t let this happen to you.

If you have recently returned to school take a moment and a few simple steps to ensure your student loan accounts are in their correct status:

1. Call your servicer or sign in to your on-line account to verify the current status of all of your student loans. (Don't know who your servicer is?  Visit www.nslds.ed.gov to locate your student loans)

2. Make sure all previous student loans are in a deferment, as opposed to forbearance. What’s the big deal? If your loans are in forbearance, all of the loans will accrue interest.  In a deferment, the interest will only accrue on your unsubsidized loans; it will not accrue on your subsidized loans. Believe me, this can really add up over the life of a loan.

3. If the loans are not in a deferment, immediately contact or visit your school’s financial aid office.  Have the in-school deferment completed while you are there – you should sign the form. Ask for a copy of the completed form for your records.

4. In order to verify the situation has been corrected, repeat steps 1, 2 and, if necessary, step 3.

5. Stay enrolled ½ time or greater until you complete your next education step!  You will not have to worry about this process again!

OK – with that off of your mind, it is time to hit the books!

Here's the Pitch .......

DEFAULT – such an ugly word and so much personal financial pain wrapped up in those 7 little letters.  In all of my many years of helping delinquent borrowers learn to manage their student loan debt more efficiently, the one thing that I believe to my very core is that very few borrowers set out to default on their loans. 

Life happens and often throws us some real curve balls. Probably 99% of the delinquent borrowers that I have worked with were in their situation because of an unrelated life crisis that overwhelmed or distracted them. By the time they realized they were behind on their student loan payments, the collection activity had already started – and the headaches that represents! I have always told my students that it is much easier to get results (and help) from customer service representative than from a collector. 

I was listening to Pandora this afternoon and I heard an ad "pitching" a company promising to help out if you had defaulted student loans, including stopping wage garnishment! Since I am always looking for additional sources of help for borrowers in distress, I wanted to check things out. Of course, as with most ads on Pandora, I couldn’t catch the company’s name from the ad’s speed talking announcer. After the third time, I did manage to get the full contact phone number, but I  still could not locate the company on the wide web.

Determined to track this source down, I decided to do a few internet searches for assistance with defaulted student loans or stopping wage garnishment. WOW – was I amazed by the results! I found over 10 companies promising to consolidate your loans. I found dozens of links to web sites promising assistance. It reminded me of the consolidation boom of early 2000 (when I first cut my teeth on the student loan industry). I was particularly surprised by the number of companies offering to help resolve a borrower’s default problems – especially since the ONLY way to consolidate Federal Student Loans and maintain your federal rights and entitlements is to use Direct Loans as your lending source. You can apply directly on-line ( http://loanconsolidation.ed.gov/ ) or you can ask your DOE loan servicer for assistance.

Buyer Beware:
I was unable to ferret out details about these companies, since their websites seemed to start with the application process.  Call me skeptical, but I am leery of any company that is not completely up front about their services, cost or affiliations.


I have urged this many times, but it bears repeating – you must take responsibility and become an educated consumer. Learn to make choices that are in your best interest. So when you are shopping for help on defaulted or very delinquent student loans, make sure you know exactly who you are dealing with. Unless you are using the approved source for Federal Student Loans, you will most likely be giving up some valuable rights and tools. 
 
Rights and Tools You May Need:
For example, when was the last time that the lender on your auto loan, mortgage or credit card said “oh, you’re out of work, we are very sorry. You don’t have to make you payment for the next 6 months”? I am assuming that would be a “NEVER”. If you use a private student consolidation loan, you will probably never have these options either.  However under the Federal Student Loan Program, you can temporarily defer loan payments if you are:

• Unemployed or
• Working less than 30 hours per week and looking for full-time employment or
• Are receiving state or federal assistance or
• Serving in the military

These are just a few of the deferment rights that borrowers are entitled to under the Federal Student Loan Program.  

OTHER BENEFITS:
When was the last time one of your creditors allowed you to select a new payment plan, because you had run into difficulties? Again, I am assuming that would be another “NEVER”. However, unlike private consolidation loans, the Federal Student Loan Program allows borrowers to change payment plans, then switch back again when things stabilize and change again later if the need arises.

Now, I am not going to kid you, the standard 120 month repayment plan is always the best way to pay your loans off. However, the alternative payment plans offer a lot of options to help temporarily manage loan debt. These plans can be very low, including $0 payments on the IBR (Income Based Repayment Plan). Now obviously, you are not going to clear your student loan debt with a $0 payment, but it can provide relief when you need it and allow you to get back on track when your finances stabilize. That is another benefit of the Federal Student Loan Program – there is never a prepayment penalty!

So to wind things up, I am not saying that the new companies are not offering a valuable product or service; however, I do urge borrowers to do their homework, shop wisely and consider the full picture. If you aren’t sure who to trust, contact your DOE servicer or your school’s financial aid department.

Save the Earth, Save Your Wallet....

OK – so this article seems to be a little off from my usual topic, but bear with me and hear me out. On Sunday, April 22 we will once again celebrate Earth Day. This began way back when I was a junior in High School, but we are still here, still trying to save the planet and, in this case, save some money too. Guess how I am going to suggest you use this “found” money? By making additional payments on your student loans, of course! Yes, you can help the planet and yourself too! You may be surprised by the amount you can save by simply switching to CFL (Compact Florescent Lights) or LED.

When you visit the lighting department of your favorite store, if you are like me, the first thing you will notice will be the price difference. These bulbs are more expensive than the incandescent bulb. They can range in price from slightly more expensive to outrageously more pricey. The good news is that the average CFL will pay for itself in energy savings within 6 months of use. Over the lifetime of a CFL bulb, you can save about $40, even more if you use the bulb in your high usage light fixtures. To see exactly how much you can save visit:

http://www.energystar.gov/index.cfm?c=cfls.pr_cfls_savings, click on the “calculate your savings “ link.

Newer and Better!  CFL bulbs have been improved over the past few years and are now available in dimmable versions, both for use with special “dimming” light fixtures, as well as bulbs that will “dim” in a standard light fixture (no expensive fixture replacements needed!).

Regardless of whether you switch to CFL or LED bulbs, our savings can really add up – up to $262 over 50,000 hour life span. (http://eartheasy.com/live_led_bulbs_comparison.html ).

Final thoughts: I am going to give you a break and I am not going to repeat how making additional payments to your student loan can help you save money and clear your debt faster (you can look at previous Blogs on this page). However, I would like to ask you to do one more thing.

Show Your Commitment: You can show your commitment to Earth Day and join a billion other people around the world. Click on the link below and select Change-Out My Light Bulbs.

http://act.earthday.org/ You may even find a few more Earth Saving ideas you’d like to join! 

Eating Healthy Doesn't Have to Bust the Budget!

YIKES - Summer’s just around the corner and, hey, here in Florida, swim suit season is almost year round. If you have added a few pounds this winter, you can control your weight and stay within your budget, while eating healthier & less expensively - even with a hectic college class schedule. Try these suggestions to avoid expensive vending machines to save money and calories too!

•  Drink water. Carry a refillable water bottle with you. Water is a healthy choice that increases stamina at work and play, fills you up, and costs less than sodas and coffee drinks. Now there are even bottles with water filters, so you can save money & the planet – what a deal!
• Substitute and save. What are your favorite high-calorie foods? A chocolate donut for breakfast? Sugary sodas? Look for lower-calorie substitutes such as cereal bars, brewed coffee or tea, and fruit. Cut calories and costs. (see the three really easy, quick breakfast ideas below).
• Try different stress busters. Many people turn to food-especially gooey, fatty kinds-when stress levels go up. Develop other stress busters that can work for you with minimal calories and cost, such as a brisk walk, a workout, or tea with a friend.
• Plan ahead. Does your resolve to eat better weaken when your schedule is hectic? Take healthy snacks such as fruit and nuts with you on busy days. This helps you avoid vending machine and snack bar purchases.
• Cut back on pre-packaged, pre-prepared food. Single-serve packages are more expensive(not to mention filled with lots of sodium and fats), so buy them sparingly. Flavored oatmeal in individual packets costs more than $3 per pound, while bulk oatmeal costs under $1. Loose popcorn, ready in seconds in an air popper, costs a fraction of microwave popcorn packages. Frozen dinners cost more than meals made from scratch

Healthy, Tasty Snack Choices

When hunger strikes and you've only got a few minutes between classes or you are rushing from work to class, often your options consist of expensive and usually high-fat, high-calorie snacks from vending machines or fast food outlets. As an alternative, keep a supply of healthier options in your fridge or cabinet and stash some in your backpack before heading to class. These are great to stuff in your family’s backpacks too, if you have a group to get out the door in the morning.

Protein-rich snacks such as peanut butter and low-fat yogurt or cheese, combined with meals that contain complex carbohydrates such as whole-grain breads and cereals, can help you keep your energy level up and your weight down. Try out a new snack food now and again. You may be surprised to find how many good-tasting, good-for-you options there are, including:

 Fresh fruits: grapes (try them frozen!), bananas, oranges, pears, apples
 Dried fruit: apricots, raisins, mangoes, cranberries
 Yogurt
 Yogurt fruit smoothies (great way to use the fruit that is getting past prime!)
 Trail mix
 Nuts and seeds: almonds, peanuts, walnuts, soy, pumpkin
 Sesame sticks
 Low-fat granola bars
 Low-fat string cheese
 Graham crackers
 Whole grain crackers
 Rice cakes
 Peanut butter
 Low-fat hummus: try all the flavors!
 Plain popcorn: try spray butter or soy sauce
 Pretzels or Baked chips
 Licorice bits

Three Quick Tasty, Healthy Breakfast Ideas to save you Time & Money: Courtesy of SWFC CashCourse and "Good Eats: Quick & Easy Food for Busy College Students", by Suzanne Sonneborn, R.D., L.D. and Cynthia W. Harriman.
 
BLUEBERRY-BANANA SMOOTHIE
1 serving, prep time: 3 minutes

• 1 large banana (the riper, the better)
• 1/2 cup frozen blueberries, or any other frozen fruit
• 1 cup milk (low-fat cow's milk or soy milk)

1. Put everything in a tall container (a really large empty jar is great!)
2. Blend with blender wand until smooth.
3. Drink!

Variations:
Use strawberries, raspberries, or any fresh fruit. Of course you can use a regular blender. (Remember that fruit that is getting a little ripe?)

THERMOS OATMEAL
1 serving, prep time: 5 minutes
cook time: overnight, but with no effort on your part!

• 1/2 cup fruit (frozen, fresh or dried)
• 1/4 cup steel-cut oatmeal
• 1 cup boiling water

Before you go to bed at night:
1. Put fruit and water in a saucepan and bring to a boil.
2. Put the oatmeal in a large wide-mouth thermos.
3. Add the boiling water & fruit, swish to mix, then cap the thermos.

In the morning the oatmeal is ready when you are!
1. Eat from the thermos, or dump it in a bowl.
2. Add maple syrup or brown sugar if desired.
3. Add a little milk (soy or dairy) if desired.
4. Enjoy!

Variations:
Blueberries, dried apples, peaches... actually, just about any kind of fruit tastes good.You could substitute rolled oats. But once you've tried the nutty, chewy flavor of steel-cut oats, you'll wonder why anyone eats rolled oats.

You can cook steel-cut oats on the spot. Just bring water and oats to a boil, turn down to just bubbling and cook uncovered (stirring occasionally) until all liquid is absorbed - about 20 minutes.  You can actually cut the cooking time in half by toasting the oats before cooking, but I personally recommend the overnight method - great for grab & go breakfasts, when you don' have time to think, let alone cook!

BREAKFAST BULGUR
While You Shower !
2 servings, prep time: 2 minutes
cook time: 25 minutes, while you do other things

• 2/3 cup bulgur (dried cracked wheat)
• 1 1/3 cups water
• some dried fruits (cranberries, apricots, etc. – any amount will do)
• some nuts (pecans are yummy; again, any amount will do)
• some favorite spices (like cinnamon & nutmeg, vanilla)
• some seeds (sunflower, pumpkin; you can use in place of nuts)

1. Put the bulgur and water in a saucepan and bring to a boil. Cover tightly, turn it off, and leave for 25 minutes while you shower and get dressed. If you like your fruit a little less chewy, you can add the dried fruit at this point & it will “plump” up nicely!
2. Add "mix-ins" - fruits, nuts, seeds, any spice or flavoring - whatever you want.
3. Dump everything into a bowl. Add sweetener (sugar, honey, syrup) and/or milk if desired.

Variations:

Bulgur takes about 12 minutes to cook (instead of 25) if you leave the heat on low and simmer it. But then you couldn't shower and get dressed while it cooks! Make a double batch and stick some in the fridge before you add syrup or milk. It's good later hot or cold!

For more great recipes, visit SWFC’s CashCourse: http://www.cashcourse.org/swfc/articles/id/1793/categoryid/110

BON APPETITE & SEE YOU ON THE BEACH!

TAX REFUND? Be Sure to "Pay Yourself" First!

By popular demand, we are repeating an article from March 2011.

So you received a tax refund check – Lucky You! Getting a lump sum of money is fun. Sometimes I think that dreaming of all the ways you could spend it are the biggest part of the fun – a well deserved vacation, a shopping spree, down payment toward a car……you can spend days dreaming and planning. However, before you make your final decision, think about “paying” yourself first! Seriously, would you like to would you like to make 47% on an investment? Sounds like a ponzi scheme or something but the savings are real and you can turn part of your tax refund into some serious money for yourself.

If you follow this Blog, then you know that I am a huge proponent of making small additional payments to “chip” away you student loan debt. However, paying larger sums toward your student loan will also help, significantly – even if it is only a one-time payment! Let’s look at two scenarios, to see how making a lump sum payment can benefit you. Each of these will be based on a $20, 000 loan debt, at 6.8% interest, with standard 10 year repayment plan.

Scenario 1: Payment of $1,000
No Extra Payments                                             With Extra Payments
Monthly Payment $230.16                                   Monthly Payment $1,230.16
10 years Pay-off time                                           7 years 8 months Pay-off time
$7,619.28 Interest Paid                                       $6,149.15 Interest Paid

Advantages of Additional Payments:
2 years 4 months Time Saved $1,470.13 Total Interest Savings

Balance Schedule for Scenario 1:
Year ---No Extra Pymt                        With Extra Pymt
2012 ---$18,553.54                             $18,553.54
2013 =-$17,005.60                              $17,005.60
2014 -=$15,349.06                              $15,349.06
2015 --.$13,576.29                              $12,524.12
2016 =-$11,679.15                              $  9,489.03
2017 =-$  9,648.90                              $  6,240.99
2018 =-$  7,476.21                              $  2,765.07
2019 =  $  5,151.09                             $         0.00
2020 = .$  2,662.83                             $         0.00
2021 =. $         0.00                             $        0.00

Scenario 2: Making $500 additional Payment
No Extra Payments                                                 With Extra Payments
$230.16 Monthly Payment                                       $730.16 Monthly Payment
Pay-off time 10 years                                               Pay-off time 8.75 years
$7,619.28 Interest Paid                                           $6,733.53 Interest Paid

Advantages of Additional Payments:
1 year 4 months Time Saved $885.75 Total Interest Savings

Balance Schedule for Scenario 2:
Year =-No Extra Pymnt                          With Extra Payments
2012 =-$18,553.54                                 $18,553.54
2013 =-$17,005.60                                 $17,005.60
2014 =-$15,349.06                                 $15,349.06
2015 =-$13,576.29                                 $13,050.21
2016 =-$11,679.15                                 $10,584.09
2017 =-$  9,648.90                                 $  7,944.95
2018 =-$  7,476.21                                 $  5,120.64
2019 =-$  5,151.09                                 $  2,098.19
2020 =-$  2,662.83                                 $         0.00
2021 =-$         0.00                                 $        0.00

If you would like to see how different amounts of “lump” sum payments can help you clear those loans faster, visit http://www.mortgagecalculatorsplus.com/calc-additionalpayment.php .

PAY YOURSELF FIRST – You Deserve It! It is tempting to splurge and spend your tax refund check on something fun or frivolous – I am not talking about using your whole refund to pay toward your student loans. I am a believer in having your cake and eating it too. However, if you will take just a small amount and pay toward your student loan debt, you can significantly shorten your repayment period. Think of all of the ways you could spend the money you currently have to pay on your student loan monthly payments once they are GONE! Now that’s something fun to dream about!

2012 Education Tax Credits and Deductions....

WHOPPEE – its tax time again! As you start to gather your 2011 tax documents, don’t forget to include your education costs or the interest paid on federal student loans. There are also two tax credits this year, so more opportunities for savings. Of course, you cannot “double dip”, claiming more than one credit or deduction for the same expense, so do your homework and make sure you take advantage of the most advantageous choice for you!

The American Opportunity Tax Credit (AOTC) replaced the HOPE tax credit and provides additional benefits, extending coverage from the first two years to college to four years, covering text books and AOTC is partially refundable (40% or $1,000 maximum). This means that, even if you do not have a federal tax liability, you might still qualify for a refund. To claim your credit, you must use form 8863 and attaché to your 1040 or 1040A. At this time, this credit will expire at the end of 2012.

The Lifetime Learning Credit remains in place for 2011 and can create a tax credit of up to $2,000 for any level of college education (even graduate school). One unique feature of this credit is that it doesn't require a minimum level of enrollment. However, the Lifetime Learning Credit has a narrower income range compared to the tuition deduction, so you need to look at all options before deciding which tax credits or deductions to submit.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit
• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit
• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

A Few Final Reminders: You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information, visit: http://www.irs.gov/newsroom/article/0,,id=218389,00.html or
http://www.savingtoinvest.com/2011/02/american-opportunity-tax-credit-extension-for-2011-and-2012-eligiblity-income-and-phase-out-limits.html

Finally, watch for the 2011 edition of the IRS Publications, referencing Education Tax Credits. As of January 9, 2011, the link still gave 2010 information. (http://www.irs.gov/pub/irs-pdf/p970.pdf )