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2006: A look back - A look ahead  
  Change was the name of the game in 2006 while the biggest push for reform in 2007 will be aimed at college-related debt.
 College financing
 Personal finance calendar  Personal finance calendar 

What's new for college financing: a look ahead

At the same time, students and their families are increasingly turning to private lenders to pay the tab of a higher education. Currently, individuals borrow $19 billion from private sources. That's up from $1 billion in the past decade. Government loans total $80 billion annually.

"The growth has been dramatic," says Richard Colvin, professor at Teachers College at Columbia University and an expert on the issue. "It used to be that mainly graduate students and professional school students borrowed from them. Now it's expanded to where we're seeing middle class and poorer students going to community college taking out these loans."

Concerns have arisen over the way private loans are marketed and how much they ultimately cost students and their families. It's not uncommon for them to have double-digit interest rates, as much as 19 percent, says Colvin. And unlike government loans, the private variety often doesn't give borrowers the opportunity to opt out of repaying debts in times of hardship. Critics maintain that such important repayment terms and bottom-line costs aren't made clear to borrowers, either.

"There's a huge need for the buyer to be beware, and there's a need for there to be a clear differentiation between private and public loans," says Shireman at The Project on Student Debt. "We're seeing them being packaged together. There may be a Sallie Mae Stafford loan and a Sallie Mae Signature loan. Many students won't know the difference between the (government) Stafford or the (private) Signature."

What can be done to protect individuals from less-than-forthright loan advertising? Congress could pass laws offering new guidelines. But Colvin says it may be easier to get lenders involved in making their own improvements.

"I think you'll start to see people asking for regulations," he predicts. "But I think the thing they can do most easily is to get lenders to agree to some voluntary industry standards."

Good news for savers
One way to avoid debt, of course, is to save as much as possible in advance. And in 2007 students who have stashed away cash for college won't get penalized as much for doing so.

Students next year will be able to keep more of their income and savings without being disqualified for financial assistance. As of July 1, 2007, they'll be required to use 20 percent of their assets on college expenses for financial aid purposes. Previously the requirement was 35 percent. The financial aid formula that's used to compute the family's expected contribution continues to count just 5.6 percent of parents' assets.

"By lowering the rate, there's not as big a disincentive to go out and work or save," says Dallas Martin, adding that the 20-percent level is "the lowest it's been in the last 30 years."

New and improved 529s
Now that their tax-exempt status was made permanent, 529 savings plans will have added sheen in 2007.

The plans allow earnings to grow and be withdrawn tax free if used for legitimate college expenses. Consumers may notice an increase in information flow from sellers of these plans. New marketing guidelines require brokers to disclose more information about the potential tax benefits of investing in a 529 plan that's sponsored by the state in which they live.

-- Posted: Nov. 1, 2006
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