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House Budget Reconciliation Bill and Students

Posted On: 2005-11-08Length: 27:40

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Good morning everyone it is Tuesday, November 8, 2005. Welcome to episode 110 of the Financial Aid Podcast, my name is Chris and I will be hosting today as I do everyday. We have a lot to talk about today, a lot of IRS stuff as well as financial aid news, politics and all the wonderful things that come along with financial aid. Let's get started today with the news. Newspapers and media outlets everywhere have noticed that the House Education, Higher Education Reauthorization Act and the House Budget Reconciliation Bill are taking gigantic chunks out of Federal Financial Aid. We've talked in the past about these, about the different cuts and things like that from taxes on student loan consolidation to increased interest rates really for thing like the PLUS loans, we've talked about those in previous shows. Two things that when the Badger Herald that I did not see previously. No.1, the LEAP program, which is I guess a sort of like a Head Start program; is going to have it's funding frozen as part of the Higher Education Act Reauthorization which is unfortunate. The second which more relevant to college students is the Federal Work Study program, if you've ever had a work study job on campus, it's actually moderate to minimum paying job essentially on campus that you use to pay towards education.

The funding for the program is essentially being frozen as well. What that means for college students is either no new work study jobs will be funded by Federal Financial Aid and or not existing jobs will receive pay increases or wage increases at least not from Federal Financial Aid sources, so any increases would have to come from other sources of revenue, provided either by the college or by donors, so on and so forth, certainly not from the Federal Government. The two freezes are-one thing about the way politics in Washington, there are people call a lot of things cuts. Especially if you have something where you pay "X" number of dollars per year and if there is not an increase in the next year, it's generally called a cut and there is some logic to that because; essentially if you don't keep pace with inflation then the purchasing power of the dollar is less than next year and it effectively is a spending cut. For example, if you are not familiar with inflation theory, the very basic version of it is money gets less valuable each year. A $1, in 1975 would have bought you a loaf of bread and container of milk and that would have been quite a bit. Today, you can't even get either of those unless one's a little tiny carton of milk for $1. That is the power of inflation; it makes the $1 worth less. Inflation generally comes from there being an increase in money supply, the more supply there is the less demand. The Government in fact creates more money; this can have bad effects as people know who saw what happened in World War I and World War II one of the biggest causes for the rise of the Third Reich, the Nazi Government was the hyper-inflation during the Vaimar Republic after World War I. Basically the German Government in order to try and get things moving after losing the first World War, printed money like it was going out of style and unfortunately in doing so, they effective made the money almost valueless. I forget what the historic anecdotes are but it took thousands of Deutche Marks just to buy a loaf of bread and this had a net affect of basically destroying the German Economy forcing undue economic hardship on the economy which made the country ripe for take over by someone who was a arguably the most powerful Demagogue to show up in history and also happened to be a psycho path who decided to lunge to wipe out entire races. That is the power of inflation taken to an extreme.

Getting back to politics, if you don't keep pace with inflation, when it comes to spending anything in life, then effectively you are not getting as much the next year as you are this year, that is why investors are always keen to point out and look at returns on investment after adjustment for inflation. If you put $1,000 in a saving account, and the interest rate that you are getting your savings account is 2%, inflation is 3%, you're effectively losing 1% on your investment because you are not getting that money back. Numerically you may have more dollars in that account than you would have previously to have put $100 in that account. Next year you would have $102. In the mean time what that $102 would buy is not as much so effectively you lost money. It's the joy of economics. Getting back to the politics of cuts to financial aid, essentially by putting a freeze on the Federal Work Study program and the LEAP program, the same money, $175 million effectively is what the one study said, by putting a freeze on that, next year that $175 million will be able to buy less in terms of the good it will do for students. The following year if the freeze continues in place it will buy less and so on and so forth until you get to the point where that money is not buying a whole heck of a lot. It's still not small change $175 million is by no means small change if someone handed me $175 million I certainly would not begrudge them and say, "Well you know could you do a little better?"

It's still, on the grand scheme of things, it's still not great news for students. One other thing that came out was-this just shows that mathematics not so much a strong point on politicians; the justification for these cuts to Federal Financial Aid, and it's okay to call them cuts or taxes what ever you want to call them. The justification, at least by Buck McKeon who is the ranking member in I think the Senate Committee is that college tuition is spiraling out of control and the best way to reign it in, in his opinion is to provide less financial aid. Buck clearly has no understanding of the difference between correlation and causality, which we've talked about on in the past and I will go over it briefly. Correlation is two things, trends together; causality is when one thing causes another. Very famous example in economics; ice cream, the consumption of ice cream goes up so do drowning and you may look at that and go "Wow, so ice cream cause drownings?" No, the real causality is summer time. People go swimming more in the summer time, people eat more ice cream in the summer time as a result, both of those things trend upwards but there is a third factor the whole seasonal thing that isn't explained. When you hear statistics in the news and people try to make correlation to causality they're effectively trying to tell you, well ice cream causes drowning so therefore we have to ban ice cream. Well you can't, it wont' help, it won't fix the problem, you are just going to annoy a lot of people who like ice cream. The same thing is true here, there has been no conclusive study, really not study at all period about the correlation and the causality of tuition increases and financial aid. I view it as highly unlikely that financial id causes college tuition increases more than anything.

We've talked to guests in the east like Mark Catruance and Dr. Joe Crownin the reasons for college tuition continuing to go up like twice the rate of inflation. A lot of it has to do with amenities; a lot of it has to do with what colleges have to do with their dollars. They are spending them on things that are not necessarily core educational expenditures, like athletic teams, facilities, and things like that, but students have come to expect those things as part of the college experience. In order for a college to remain competitive, that has to keep up with the Joneses. As a result you end up with a whole bunch of schools that are spending tons and tons of money on amenities to make sure that they are as appealing to students as their competitors in the same tier. Does that mean that colleges are spending simply because they know that financial aid is available? Not necessarily, especially given that with private schools which tend to be the most expensive, we've talked about this in the past. Private schools derive over all as a portion of their budget relatively little amounts of their tuition come from Federal Financial Aid. A lot of the money comes from endowments; a lot of the money comes from investments and things like that. When you look at schools like Harvard, or Cornell, arguably some of them are the most expensive schools in the nation. A lot of their revenue comes from the fact that they billion dollar endowments that generate cash. They have good investment managers to help generate that cash, so Federal Financial Aid is not really a factor in them acquiring additional revenues and is not really a factor in how they set their price tag. More than anything it's market economic forces, but apparently those things don't exist in Washington D.C. As a result you have Senators spouting off thins like financial aid causes tuition increases, ice cream causes drownings, it wouldn't surprise me if there was legislation to ban ice cream next summer. Enough politics for the day. Let's move on to some scholarship updates.

Two parts today scholarship update, the first is an IRS note and this is important. I was reading Publication 970 which is IRS Publication 970 which is basically taxes as how it revolves around the HOPE Education Credit, the Life Time Learning Credit and other ways that taxes impact your Federal Financial Aid or any financial aid you receive. One thing that I did not know, I did not realize this, if you receive a scholarship as a prize in a contest, not as an award that you apply for specifically as scholarship, but as a prize in a contest, the scholarship that you received is taxable income. Let me give you two examples, the first of course the DeVry University Presidential Scholarship, we've talked about that a couple podcasts ago. This is a scholarship that you apply for and it is essentially would not be taxable because it's not a prize, it's not a contest. There are criteria for winning that don't involve, just general stuff. There is academic criteria that if you apply for the scholarship and you won the scholarship it would not be something that you would declare on your taxes. I should also indicate at this point I'm not a tax professional I am a student loan guy; when it comes to filing your taxes, if you have questions on any of this stuff I highly recommend that you contact a licensed tax professional, a CPA, a CFA somebody who is qualified to actually do taxes and keep you safe from the auditing powers of the IRS. That is the disclaimer, this is what I have been basically reading and it's my take on it and I strongly encourage you if you want to take any of this advice in hand go see a tax professional, please save yourself a whole bunch of heart ache.

Second example, the Motorola Forward Scholarship we've talked about yesterday, the $10,000 scholarship plus a car plus a bunch of other stuff; taxable because it's a contest. Its' not necessarily an education scholarship because that $10,000 cash scholarship even though you have to be a student enrolled, the cash is not specifically-its' a cash scholarship it's not earmarked as a scholarship to be dispersed to your school, its' money that comes to you directly and therefore could theoretically be spent for things that don't qualify as educational expenses under IRS tax codes. If you apply for the Motorola Forward Scholarship be aware that the $10,000 in addition to impacting your Federal Financial Aid eligibility is taxable income, just something to keep in mind. Again I am not a tax professional and there are many people who listen to this podcast a few of whom are tax professionals-let me go to my gmail real quick and see if I can find that guy I was talking to a week ago on tax professions and CPA things. Here we are, Randall Rothstein, Certified Public Accountant, Accredited Personal Finance Specialist, Investment Advisor, Representative Rothstein and Associates, Marlton New Jersey. Probably Randall would be a good guy to talk too when it comes to tax stuff. I don't know if he does tax preparations but if he does give him a ring, you could just Google him; Rothstein & Associates.

Second thing, today's scholarship update now that we've covered taxes, the Alaska Geological Society Scholarships, this is an award, let me pull up the page here. One of AGS's primary goals is to help re-new the important resources of practicing Geo-Scientists by working to attract people into the field. What ever your personal goals if you are one of these dedicated individuals who want to encourage you to become a Geologist by offering additional financial aid support up to $1,500. You must be enrolled at an Alaskan University, so this is for students in Alaska. Application deadline is April 1, 2006. Scholarship winners will be notified prior to the May 2006 AGS luncheon. Eligibility you must be a full time junior or senior undergraduate or graduate student taking at least 12 credit hours at an Alaskan University. Your academic emphasis major or minor is Earth Sciences; you will need to apply with a cover letter which will also double as an essay of sorts. Recent transcripts of college experience, a thesis proposal if you are a graduate student and two letters of recommendation. You can find this scholarship as well as other scholarships in our new scholarship search database. Go to www.studenscholarshipsearch.com and I will put a link to the scholarship in our show notes to our page on our www.studentscholarshipsearch.com. So the Alaskan Geological Society Scholarships is today's scholarship update.

I apologize for how scratchy I sound folks; I can not shake this cold. It just won't let go. All right let's move onto some News You Can Use. Tax season is coming up and as a result this maybe depending on what happens with the President's Tax Panel and all that stuff, this maybe the last year you can take advantage of a lot of the tax credits for education. I wanted to cover two of them today, very briefly looking at them and how they apply to you. The Life Time Learning Credit and the Hope Credit, these are both education tax credits. The difference between a deduction and a credit is a deduction reduces the amount of income that you are taxed on; a credit that is money effectively paid back to you if you are paying taxes. Let's say if you get $70,000 in income, a tax deduction would reduce that amount, and then you would pay your taxes whatever they may be. The credit would be added to the amount that you would have to pay, would be deducted from the amount that you have to pay. So if you had to pay $5,000 in the amount of taxes, the tax credit would take would something like $3,500 or $3,000 so you would pay less in taxes; that is the difference between a deduction and a tax credit. The two credits that are most popular are the Life Time Learning Credit and the Hope Credit. The Life Time Learning Credit up to $2,000 in credit per return, per tax return available for all years of post secondary education and for courses to acquire or improve job skills available for unlimited number of years. The student does not need to be pursuing a degree or recognized education for credential they just have to be doing some kind of training, it's available for one or more courses and there are no rules about felony or drug convictions.

The Hope Education Credit, up to $1, 500 credits per eligible student available only until the first two years of post secondary education are completed. Available only for two years per eligible student, the student must be pursuing an undergraduate degree or recognized education credential. They must be enrolled at least half time for at least one academic year per-beginning during the year and the students can not have any felony drug convictions on record. Now given that brief summary, why would you pick one or the other? Especially when it sounds like the Life Time Learning Credit is a better deal. Well there are certain scenarios in which you would use one or the other. If you just have one student, the Life Time Learning Credit is probably the best choice because it's a $2,000 credit per tax return. If you have more than one kid however, especially if they are close together in age, the Hope Education Credit will allow you to deduct per student as opposed to per returns. If you had three kids and they were all triplets and they were all going to school in the same year, under the Life Time Learning Credit you can only declare $2,000 credit for that year's tax return. However, under the Hope Credit you could declare $4,500 because effectively it would be a $1,500 per student. That's effectively the-oh there is one other thing, the Life Time Learning Credit has a limit when it comes to your modified adjusted gross income. Effectively this one has a pretty strong limit; I believe its $5,200 or more for a single return or $105,000 in the case of a joint return. If you make more money than that amount, that credit gets phased out so the Hope credit I believe is available regardless of your income level.

Again, like I said I am not a tax professional so I would definitely recommend when you go to do your taxes in 2006, consider using a tax preparation specialist. I strongly encourage it. If you've got students, if you've got people who are in college, if you are in college, if you are a student, go to a tax professional and have them work on your taxes. A number of tax preparation specialists, they will do your taxes and they will not charge you until you are ready to file so you can see whether it would be worth your time to use their services or not. I know personally and this is not an endorsement, because we don't get paid for this, this just happens to be what I do personally. I use H&R Block in the spring time because they have saved me probably about $4,500 a year in taxes because they found deductions that I didn't think were deductible and stuff like that when you're walking down the street in the city you just toss a buck or two at a guy who asks for some spare change or whatever. That's deductible and there is a specific part of your taxes in which you can take things like that off, you don't need receipts for you don't need all kinds of things. I've found tax preparations specialist to be very helpful and I definitely encourage you, if you've got people who are-if you've got family members that you are responsible for or you are in college, to really take advantage of the services they offer because they're helpful. They'll probably find you money, will it be enough money justify using their services that's a good question? You won't know until you find out. Try and find one-like I said, I use H&R Block because they are one of the organizations that you don't pay until your return is done and ready to be filed. If it turns out that the person you are working with, you are not real happy with it, you just walk away and there is no harm done, other than chewing up an hour of your time. That is the News You Can Use for today. We are going to finish out today's show with some Podsafe music, "In the Quiet," from Olivia Greer, we've played Olivia's music a whole bunch of times in the past and I really enjoy her music. She is out of New York City, so here it is Olivia Greer, "In the Quiet."

(music)

Great new Podsafe music from Olivia Greer that was "In the Quiet," via the Podsafe Music Network the best source for really any kind of audio for podcasters. If you listen to Adam Curry's daily source code by the way, yesterday's episode 275 with the daily source code was a really important one. I expect 276 today to be even more important. Adam has been forced by legal issues to go all Podsafe, Adam if you are listening and hope you are, congratulations, I offer you a congratulations and welcome to being 100% Podsafe. It's great, there is so much good music on the Podsafe Music Network that we really need mainstream media anymore. Good luck to them. We've got our own music industry that sounds terrific. That is going to do it for today's show. If you have any questions, financialaidpodcast@gmail.com , I would be more than happy to take any questions and answer them on the air, and you can also send audio feedback there as well. If you like the show, get a friend subscribed to it, get two friends subscribed to it, it's really easy directions are on the www.financialaidpodcast.com , if you have iTunes it's literally one click, if you don't have iTunes, well it's almost one click but not quite. Reminder the Ipod Nano contest and the iTunes music store $15 gift card contests are on. The gift cards will be drawn this Friday, November 11. Winners will be announced here and only here on the Financial Aid Podcast. If you are not subscribed you should get subscribed and definitely tune into Friday's show so you can tell if you've won or not. Let's see anything else, show notes also on www.financialaidpodcast.com I am going to have links to everything that we discuss today, including IRS Publication 970, the tax credits and education publication, it's not the most exciting reading but it is important. The scholarship information also in the show notes as well. Until next time, wow this show ran a lot longer than I thought it would be. Almost up to 30 minutes. All right, until next time we'll see you tomorrow folks, take care.

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