Impact
of Increased Child Tax Credits and SUV’s
as Tax Deductions
I want to call your attention to two items in the recently
passed tax bill, which will have an impact on financial aid
recalculations done by financial aid officers:
One has received a lot of press,
the increase from $600 to $1,000 for the child tax credit for
each child under age 17. At $600 per child the revisions I made
were usually small, at $1,000 per child this credit begins to
make a significant difference in the amount of income tax due,
which will also impact subsequent financial aid awards. I know
many families put the wrong amount on the FAFSA, line 75. Many
families input the amount of tax withheld from their pay, not
their actual tax liability
from Form 1040 line 55 or Form 1040A line 36. With the $400
increase in the amount of this credit the family's actual tax
due can be impacted significantly. And, if a family has more
than 3 children they are allowed an additional credit which is
determined using Form 8812, then that figure is carried to 2002
Form 1040, line 66 or Form 1040A line 42. This is untaxed
income (like the earned income credit) that I always recapture
when determining a financial aid award. It should be listed on
the FAFSA page 8, worksheet a line 2.
Secondly, the section 179 - expense deduction, increases from
$25,000 to $100,000 for 2003!!! This is the figure that often
shows up on 2002 Form 1040 Schedule C line 13. It will also
come into play for Partnerships and S-Corps. This is the figure
that often generates discussion as to whether a financial aid
director should 'add back' the section 179 expense amount.
Increasing the amount by $75,000 will definitely create some
discussion!
And, as an aside, if a business owner buys a truck or SUV in
excess of 6000 pounds, which is used for business (and aren't
they always used 100% for business?) he can use the expense
deduction to write off the entire purchase, up to $100,000.
Look for a big jump in the number of SUV's and trucks purchased
(might be a good time to buy stock in Ford or GM).
Submitted by Mike Szydlowski
To
Consolidate or Not to Consolidate
Something to
Think About!
Loan-Consolidation Considerations
The new,
record-low interest rates, effective July 1 on Federal Stafford
and Federal PLUS loans, should prompt nearly every eligible
borrower to investigate loan consolidation as a means to lock in
these low rates for the remainder of their repayment term.
Although loan consolidation may benefit many borrowers, they
should understand the following ramifications before they submit
their consolidation-loan applications:
Do you
really want to be paying off your student loans when your
children are in college? Loan consolidation permits a
borrower to extend the repayment term up to 30 years, depending
on the total outstanding balance of the borrower’s education
loans. For borrowers who cannot afford their monthly
student-loan payments, this extended-repayment term can reduce
their monthly installments. On the other hand, borrowers who
have high balances and want to “refinance” their loans to take
advantage of historically low rates could end up making
consolidation-loan payments while they’re paying for their
children’s college costs.
Lower
interest rates don’t necessarily mean lower total interest
costs. Borrowers who consolidate to lock in a low interest
rate and repay their loans over the extended period permitted by
loan consolidation are likely to negate the benefits of the low
rate. For example, a borrower who repays a $25,000 consolidation
loan at 3.5 percent over a 20-year term pays approximately the
same amount of interest as a borrower who repays $25,000 in
unconsolidated Stafford loans over 10 years at a constant rate
of 7 percent.
Balance
affordable monthly payments against the shortest-possible
repayment term. Many loan-consolidation promotions tout the
benefits of reducing a borrower’s student-loan payments by as
much as 55 percent. This payment reduction can be a benefit for
some borrowers. Borrowers who consolidate primarily to lock in
low interest rates, however, should select the repayment term
that produces an affordable monthly payment and
repays the loan in the shortest-possible period.
Borrowers
can lose some benefits when consolidating Perkins loans.
Although federal law permits the consolidation of Federal
Perkins loans, borrowers should be aware of some disadvantages.
By consolidating, Perkins-loan borrowers give up the
interest-subsidy benefit they receive if they qualify for
deferment of their payments. In addition, Perkins borrowers may
lose some loan-cancellation and deferment options by
consolidating.
In-grace
consolidation may be beneficial if you don’t mind giving up the
rest of your grace period. Borrowers who are in the
six-month, post-school grace periods and consolidate Stafford
loans issued since July 1, 1995, can obtain a slightly lower
consolidation-loan interest rate than if they wait until their
loans are in repayment. These borrowers should understand,
however, that by consolidating they give up the remainder of
their grace period.
Loan
consolidation is probably not a good idea for borrowers in the
last year of repayment. Stafford-loan borrowers who are in
the final year of their repayment term automatically receive the
new, lower Stafford-loan rates effective July 1, 2003, through
June 30, 2004. By consolidating, these borrowers are likely to
receive a higher interest rate because the formula for
calculating consolidation rates rounds the rate up to the
nearest one-eighth of 1 percent.
Borrowers
should consider additional issues regarding loan consolidation.
Borrowers should ask if the lender offers consolidation-loan
borrower benefits to further reduce interest costs. Borrowers
should understand which organization will service their
consolidation loan, where they will make payments and what level
of customer assistance they can expect from the servicing
entity. Borrowers also should find out if the lender offers an
online-application process and how long it takes to process the
application. In addition, borrowers should explore the level of
loan-consolidation counseling they receive from the lender/servicer.
Submitted by
Jacqueline Bell, USA Funds
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