How Will UC Students Be Affected by the Current Budget Crisis?

The budget crisis gripping California has resulted in the state legislature cutting or underfunding scores of programs and services. Not surprisingly, the states’ financial woes have trickled down to the University of California school system. UC will go into the 2009-10 school year with approximately a $450 million budget shortfall compared to funding levels from the previous year. Attempting to counteract this, on May 7, 2009 The University of California Board of Regents approved systemwide student fees increases. The cost hike, which went into effect this summer, makes going to a UC 9.3 percent more expensive than it was last year. In actual dollars, in-state undergraduates will pay $662 more; in-state graduate students are being asked to cough up an extra $750 for the school year.

“I don’t know where else to go,” UC President Mark G. Yudof said after announcing the fee increases during a May 7th Regents meeting. “I simply do not know where to go.”

Despite the implemented increases, actions taken by the University of California and the federal government will soften the blow for most students.

UC Grants will increase by $39 million, thanks to the university’s decision to set aside 33 percent of revenue generated by the undergraduate fee increase for grants to needy students. Additionally, the new Blue and Gold Opportunity Plan will keep students with financial need from being priced out of a UC education. Under the plan, students who come from households earning less than $60,000 per year and are eligible for financial aid will have their fees covered by scholarships or grants.

Funds from the federal stimulus package, which cover the $3 million tab for the Blue and Gold Opportunity Plan, will add $33 million in new grant funding for UC students this year. Specifically, those receiving Pell Grants should notice a jump in aid. The maximum amount for the government-funded grant has increased from $4731 to $5350. An additional $27 million in Cal Grant funding will also be available to students this year.

“Taken together, these programs are expected to provide, on average, between $1,150 and $1,500 in additional resources to UC undergraduate families with incomes below $180,000—fully offsetting the cost of the $662 fee increase for most of those families,” Ricardo Vazquez from the Strategic Communication department of University Affairs said in a press release following the announced hikes.

The cycle of new cuts and increased student costs is anything but surprising. While the amount of funds allocated to the UC system has continued to slide downward over the past two decades, student fees have rapidly trended upward. Taking into account a 7.3 percent systemwide fee increase last year, student fees have gone up six times since the 2002-03 school year, according to the UC 2009-10 Budget for Current Operations.

In a July 15th letter from the Regents to UCLA students, faculty and alumni, the Board juxtaposes the recent fortunes of the UC system with those of the states’ well-funded prison system.

“The 2009-10 core budget will be reduced by an estimated 20 percent. This will bring the amount of state investment in the University down to $2.4 billion - exactly where it was in real dollars a decade ago. In the same time frame, by the way, funding for state prisons has more than doubled, from $5 to $11 billion. It’s been reported that, based on current spending trends, California’s prison budget soon will overtake that of the state’s universities and community colleges.”

UC student fees are once again on the rise, but thanks to steps taken by the UC system and the federal government, the out-of-pocket effect will be minimal for undergraduates. Unfortunately for graduate students, the boost in Pell and Cal Grant money will not offset the increases fees because those grants are only awarded to undergraduates.

RIAA Makes Example Out of BU Student

A federal jury recently awarded in favor of the RIAA in their case against Boston College student Joel Tenenbaum. Tenenbaum, who was accused of illegally downloading 30 songs from peer-to-peer (P2P) site Kazaa back in 2004, has been ordered to pay $675,000--or $22,500 per song--to the RIAA.

In the only other case of its kind where a verdict has been reached, a Minnesota women was ordered to pay $1.92 million for downloading and sharing 24 songs back in June.

These hefty fines for doing what millions of people do all over the world are obviously the RIAA's version of shock-and-awe. Problem is, the RIAA's energy is misguided. Instead of dinging people for huge chunks of change the recording industry governing body likely will never see, the RIAA needs to come up with a viable business model that makes legally purchasing music a more attractive option than using Limewire, Kazaa, or Rapidshare to jack it.

How Compounding Interest Inflates Your Student Loan

According to the National Center for Education Statistics, debt level for graduating seniors with student loans increased by 108%, from $9,250 to $19,200, between 1994 and 2004. Those numbers are continuing to trend upward. The five or six digit debt accumulated while studying may seem like inconsequential numbers on a page now, but after graduation the terms agreed upon come into focus. Money will be owed regardless, but whether the amount you owe is a small part of your income or a small fortune often depends on the interest structure of your loan. The most common types of interest offered by lenders—simple and compound—vary greatly over a long period of time. Compound interest loans pose the most problems because by the time you get your head around how they work, you are more in debt than you would’ve been under the simple interest formula.

A compound interest loan adds the interest amount to the principal (balance) every time it is compounded. The frequency which this happens may be yearly, semiyearly or monthly depending on your borrowing terms. After being compounded, the new balance is then subject to the interest rate, rapidly increasing the amount of debt owed. For example, let’s say you owe $20,000 to your lender. The interest rate is 6.8%, which is compounded yearly. Your goal is to pay off the debt in ten years. At the end of a decade, you will end up shelling out $38,613.80. Under the rules of simple interest, on the other hand, the interest rate only applies to the initial balance. So after 10 years, if the balance and interest rate are the same as above, you will owe $33,600, nearly $6,000 less than compounding.

If stretched out to 20 years, the gap gets considerably wider. Compounding turns a $20,000 loan into a $74,551.28 debt. Compare that to the $47,200 paid on the same loan based on simple interest terms.

The best strategy for beating compounding interest student loans is to get the principal amount down quickly. This will lessen the amount of interest added when it’s time for the loan to compound. The longer a loan is drawn out, the more money that goes in the pocket of your lender. There’s a reason why Sallie Mae’s vice chairman and chief financial officer Jack Remondi made $13.3 million in 2008.

Remember, student loans are arguably the hardest type of debt to get rid of and even after bankruptcy they remain on your credit report. Defaulting on your student loans can severely impact your credit score, which in term will increase the interest you pay on everything from a car, to a house, to that Playstation 4 you’ll want to put on your Best Buy card in eight years.

The frequency that the lender compounds your interest varies, check with them to find out what terms you are obligated to.

The FAFSA: Finally Simplified

The online version of the Free Application for Student Aid, better known as the (FAFSA) will be much easier to get through in 2010-11 than it was in 2009-10, or any school year prior for that matter. Here are some of the important changes made to streamline the FAFSA:

-The number of questions will be reduced from 100 to 65.

-Using a new technology called "skip-logic", the number of screens it takes to get through the FAFSA will go from approximately 29 to 9.

-Parent and student income and tax information will instantly be available via the IRS. This saves students from having to ask their parents to mail, fax or email tax information. This will also expedite the financial verification process and greatly reduce the need for audits.

-Instant estimates of Pell Grant and student loan eligibility will be available upon completion of the FAFSA online.

Coupled with the changes coming from the likely passing of The Student Aid and Fiscal Responsibility Act of 2009
in the fall, this is great news for the future of higher education in America.

More on the Future of Student Lending

From The Kiplinger Letter:

Private lenders are losing the battle over student loans. By this time next summer, they will be cut out of the lucrative student lending market, with a handful of them relegated to the role of simply servicing loans made by Uncle Sam. On July 21, the House Committee on Education and Labor began marking up a bill, introduced by Rep. George Miller (D-CA), that seeks to eliminate government subsidized private student lending and replace it with direct loans to students through the Department of Education.

“This is the biggest change in federal loans for higher education since 1965 when the original program was created,” says Terry Hartle, senior vice president at the American Council on Education.

Sallie Mae was one of four companies awarded a loan servicing contract by the Department of Education. NelNet, American Education Services/PHEAA and Great Lakes Education Loan Services Inc. were the others. Even with the servicing contract, the bill means “we would be about half of our size,” says Martha Holler, spokesperson for Sallie Mae.

Look for Congress to pass the direct lending plan sometime this fall. The Congressional Budget Office estimates that it will save about $87 billion over the next 10 years. “Among other things, the savings will be used to significantly boost Pell Grant scholarships [ need-based grants given to low income students] to keep interest rates low on need-based federal student loans for years to come, to simplify the [Free Application for Federal Student Aid] form, [and] to invest in strengthening community colleges,” said Rachel Racusen, deputy communications director of the House Education and Labor Committee, in an e-mail.

Lenders worry that the savings will be used to plug other budget gaps rather than to fund additional higher education financing. Already, Congress’ plan dramatically cuts the level of Pell Grant entitlements envisioned in the Obama administration’s proposal to address the issue of who should be in the student lending market. Under that plan, less than half the savings would have gone toward that grant measure, with the other money going toward other purposes.

Meanwhile, many lenders argue that with only direct lending, students get less in the way of services. “We offer the ability to maintain the diversity needed to keep competition up and pressure on other lenders,” says Christopher Chapman, CEO of Access Group, a Wilmington, Del.- based nonprofit student lender. “We also provide the value-added services,” such as financial education.

Banks have their own turf to protect. The legislation means not only lost profits for banks now, but also a tougher time courting young borrowers in the future. In the past, college loans provided lenders easy entrée to establish a relationship with a future customer.

For schools, the legislation translates into a major overhaul of their lending programs. Only about a quarter of eligible schools participate in direct government lending. “To implement the proposal, about 4,500 schools would have to convert lending systems,” says Holler. “It’s not like putting a different disk in their PC; the whole system has to be reworked.”

Major Changes Coming to the Student Loan Industry

A House commitee cleared a bill last Tuesday that would all but remove private lenders from the federal loan industry. If passed, The Student Aid and Fiscal Responsibility Act of 2009, will do away with private loans subsidized by the federal government, which in turn will save the government $87 million over the next 10 years.

Democrats plan to use the savings to fund a $40 billion increase in federal Pell Grant scholarships over 10 years, $10 billion in community college upgrades and $8 billion in pre-kindergarten changes, among other uses.

Across the aisle, opposing Republicans see the Act as a federal takeover of the student loan industry.

The Student Aid and Fiscal Responsibility Act of 2009 will now go before the entire House for a vote. If approved by the House of Representative's Democratic majority, the Senate will vote whether to enact the Act into law.

The restructured student loan component of the Act will increase the maximum annual Pell Grant scholarship from $4,731 last school year to $5,500 in 2010-11 and $6,900 in 2019. Starting in 2011, the annual grant would be linked to cost-of-living increases.