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Financial Aid Advice

Posted On: 2005-11-01Length: 27:36

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Good morning everyone it is Tuesday November 1, 2005, All Saints Day. This is the Financial Aid Podcast episode 104 and my name is Chris, we have a lot to cover today as always talking about everything financial aid, plus some podsafe music and some other stuff. Before I begin I wanted to put a question out there to everyone who listens to the show, kind of an opinion survey question if you could e-mail your responses at www.financialaidpodcast.com or financialaidpodcast@gmail.com , that would be great. What I want to know is do you like current format of the Financial Aid Podcast? I was talking to Joe Crownin who is our President and CEO of the Student Loan Network yesterday and he expressed some interest in possibly trying a different format, where right basically you have segment, music, segment, music, segment music and so on and so forth, and we were talking about the possibility of doing segment, segment, segment, music. Something along those lines, the latter choice would probably make the podcast a little bit shorter because I would imagine, I would probably want to do maybe, instead of three podsafe songs per broadcast, probably do one or two at the most. The show really isn't a music show, it's a news show, but at the same time I think there is value to having Podsafe music in the show. Let me know what you think about the idea; financialaidpodcast@gmail.com.

Speaking of which, let's get right to the news. In the news this morning, you can't divorce the tuition bills. Inside Higher Ed reports that 75 colleges are now using a new system for handling financial aid applications from the children of divorced parents. The reason that this is important is traditionally financial aid systems and financial aid calculations are based on the assumption that mom and dad are still together and are treated as one financial unit for planning of aid, expenses and everything like that and obviously with the United States divorce rate being approximately 6:10, that's not a good assumption anymore. The systems that assess financial aid has not been updated. This new system is a development by a number of colleges including Amherst, Bates, Dartmouth, Hamilton, Mount Holioku, Wabash, Colgate, Cornell, Fordham, Georgetown, Harvard, Johns Hopkins, Southern Methodist University, University of Chicago, Michigan, Pennsylvania and Rodchester. This system is basically trying to account for the different financial systems between divorced parents; because one parent makes significantly more income than the other and you have to take into account things like alimony and child support as well into the overall financial aid picture. Over all the schools hope that this will help to put together a better picture of a student's actual financial health, particularly if you have estrangement between partners and things like that where one parent is basically trying to use college funding as a means of forcing the other former spouse to do something. So good news from the 75 colleges who are now using this new system, if it takes off, then what may happen is that more and more colleges may pick it up and that's good news.

Also in the news today and interesting article not necessarily good but an interesting article on MSNBC. It was actually on the Today Show, How to increase your student's financial aid, the advice given to Gene Chatski at the Today's Show came up a few things. One is filling out your FAFSA, of course and filling it out early is also good, filling out the FAFSA and looking for other financial aid at schools and an interesting piece of advice; recommending the people use and tap into their home equity for paying for college. Now this is interesting, I am actually going to talk about this a little bit later, but the article over all kind of misses out on two things and if you've been listening to this podcast for a while, you know what those two thing are. No.1 There was no mention at all of scholarships, which is bad because scholarships are free money and very little coverage of student loans. Now if you are talking about tapping into home equity and you are giving missed student loans, I think there is a flaw in the coverage that you are giving to some one, I don't that it is necessarily a good assessment. I want to talk about more about home equity in just a little bit. Right now let's do just a bit of Podsafe music and then we'll move onto a scholarship update, and then get into home equity loans discussion.

(music)

New Podsafe music from Paul Rose called "The Learning Curve." All right let's do a scholarship update real quick. Today's scholarship update is Devry University Presidential Scholarship, this is a scholarship for high school graduates, it is a full tuition scholarship. This is exciting because basically it's valued at $64,000, it's for 2006 high school graduates. Eligibility you must be a Dean Scholarship winner, which is another one of the DeVry things, you must be selected by a local campus community based essay, GPA and teacher recommendation. The deadline is March 10, 2006 offered in the U.S. and Canada. To qualify for the Dean Scholarship, which is a pre-requisite of the Presidential Scholarship, same thing, they are looking for high school graduates GED recipients, ACT score composite 24 or higher or SAT composite of 1100 or higher or if you are Canadian, composite of CPT of 430 or higher, Canada only. The deadline for that one is one year from high school graduation to apply and start at DeVry University. These scholarships are offered within the U.S. and Canada so is a good scholarship if you are from either country. And you have to admit and full tuition of $64,000 scholarship it's really good. DeVry University of course offering all sorts of technical programs and things like that. If you are still interested, there will be a link in the show notes to the scholarship and again the deadline is March 10, 2006, that is when you must apply by, it's ideally targeted towards high school graduates who will be graduating in 2006. The DeVry University presidential scholarship is today's scholarship update. Let's move onto yet another piece of Podsafe music.

(music)

"Effortless," by Alison Crowe new Podsafe music from the Podsafe Music Network. I want to talk about this home equity thing. There is a lot to talk about there and it's kind of confusing. Home equity has been largely touted as a financial aid options by this MSNBC article and various other financial aid experts. It's not necessarily as advantageous as you might think. Certainly your first line of student loan financing should not be your house, should not be anything in which you are trying to build equity in really. Federal student loans are your first and best bet, because they are un-secured in a consumer credit sense, they are actually secured by the government, they are low interest and they are available to a fairly wide range of students. Private student loans, equally good in the sense that they are also un-secured loans, they are based on credit, the interest rate on those are competitive as well. I've talked in the past the different website that you can go to like www.staffordloan.com , www.acteducationloans.com, www.parentplusloan.com. The PLUS loan by the way is a very important loan that is really just not given enough attention because it's-I don't know why it just never seems to make it on anyone's radar. Home equity loans and consumer financing come after those choices at least in my view of the financial aid world. There are a couple reasons for this: No.1 Your house is an investment, your home is an investment, it is a real estate investment which means that it has all the tricks traps and things that come with a piece of real estate and that can be very risky; particularly if the market starts getting funny.

When you are investing in a piece of property, you are basically sinking in a ton of money into and you are banking on the fact basically that when you take out a home equity loan the value of your property is increasing and exceeds the money you are borrowing against it. If for some strange reason the real estate market as a whole just tanked, and goes to hell in a hand basket with a ribbon on top; you will be in a situation which is called "being upside down," where the amount of money you have borrowed on the property exceeds the actual value of the property. So if you go to sell it, you would still have loans outstanding with balances on them that the property's value did not cover. The housing market in the United State's has done remarkably well in terms of house price value in the major urban markets, especially like Boston, Los Angeles, San Francisco, New York over the past decade. People get lulled into this idea that the market price which is going up is always going up and is always going to go up and that is not true. Real estate tends to operate in 20 years cycles and we are pretty much at the peak as far as most experts can tell who look at things like that. We're pretty much at the peak of this market so; taking out a home equity loan now, borrowing against the value of the house particularly if you don't a lot of equity in your house, could put you at the very real risk of being upside down If the market stagnates or if the market turns around and becomes fully a buyer's market where the prices of houses are coming down.

Let's say for example if it's not illustrated well, that you have a house you bought for $300,000 and the perceived value on the market is $500,000 for that piece of property and you've borrowed $100,000 to pay your child's education, or your education if you are looking at something like graduate school and you've got a house; mainly because most undergraduates don't own houses. If this is the case and you are banking essentially on the fact that your houses value will be at or greater than $400,000 all the time. Real estate over the very long term does tend to appreciate, but that's not necessarily going to be the case when you need the money most. Let's say you loose your job, unfortunately and the housing market takes decline at the same time. The house that you are banking on being $500,000 suddenly drops in value to $350,000. Now you have $400,000 of loans on that which means that if you try and sell the house you will still owe $50,000 on the debts, basically on the mortgages you have on the house. Because a home equity loan really is just another mortgage. Another danger with home equity loans is the interest rate; a lot of home equity loans, a fair number of them are variable rate loans. A lot of people's mortgages now a day are variable rate mortgages. In case you don't watch the market closely and I do encourage you to actually do that to take a couple minutes each day and surf the financial papers, because there is so much that is going on in the financial world that if you can at least get a glimpse of where things are moving, where the economy is moving as a whole, it will better prepare you for how to plan for your future.

Back to the interest rates thing, the over all rats of both home equity loans and mortgages have been moving up. The last few weeks mortgages have actually gone up quite a bit around 5.5% to around 5.75% almost 6% in some market and in some cases. What that means? If you have a variable rate loan on you house, essentially your payments are going to be getting more expensive. They will get more expensive on a monthly basis, if you were not able to purchase a property or get a home equity loan at a fixed rate. Putting these two things together you are basically looking at a financing picture for houses, for property investments that is not great, especially if you are trying to afford college, because college of course is going to keep getting more expensive too. Your best bet really is to use your property and your house, these realty investments as a long term investment. This something that you want to put a lot of money into, yes because you have to, you have to pay your mortgage, but you want to take that equity and store it essentially until you are in your later years and you want to think about retiring. That is when having that large investment of cash will come in handy when on a fixed income, when you retired, when you are not drawing down a large salary if you want to have a good retirement. Then home equity is a great place to draw down from it when you retire, when you're in your 60's or 70's or what ever. Drawing it down for education finance is not so good because effectively you are re-setting a clock, particularly if you re-finance, then you are not building up equity for long term, the big picture view. The best advice is the same advice we've been giving for a while now and I realize I sound like a broken record. Scholarships, if you as a home owner, if you as someone who is trying to finance someone else's education, or even if you are trying to finance your own education. Scholarships, it's a full time job trying to hunt for them, but it's a full time job that pays very well. If you think about that, DeVry scholarship, $64.000 value, if you don't make $64,000 a year as a salary, then obviously hunting for scholarships like that is going to be well worth your time because you can actually rake in a lot of money that you can use to pay for education. Federal student loans, the Stafford loan at www.staffordloan.com,. The parent PLUS loan at www.parentplusloan.com, both of these will be good instruments for helping finance education, if Federal aid isn't enough, then you move onto private education loans, like the ACT Education loan at www.acteducationloans.com, save your consumer credit availability from things like home equity loan, mortgages, credit cards and stuff like that, save that for other financial priorities and try and get the most out of the education finance instruments that you have. I think it would be much better for you in the long term financial health. Let's do one last piece of Podsafe music and I think we are going to tie it up after that so here we go.

(music)

New Podsafe music from George Frab that is "Exclamation Point," via the Podsafe Music Network. That is going to do it for today's show folks as usual, feedback please at financialaidpodcast@gmail.com. If you have any questions about the stuff we've covered comments, suggestions, e-mail me and let me know. Show notes at www.financialaidpodcast.com and we have two promotions now, we are dong win an Ipod Nano and there are directions on the www.financialaidpodcast.com for that and also this is going to be new this morning, it's going to be going out with the November newsletter, win a $15 iTunes music store gift card for filling out a three question survey, four questions if you count putting in your e-mail address. A three question survey because we want to try and get a better picture of where people are finding funds for their financial aid to pay for college. Please go to www.financialaidpodcast.com enter both contests, who knows might get really lucky and win the new Ipod with the headphones and a gift card to start filling it up right away. Stay tuned, stay subscribed if you like the show, get two of your friends subscribed to it and we will talk to you soon, take care.

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