February Newsline
Articles

Student Loan Interest Deduction Reinstated

Interest on federally guaranteed student loans repaid during the first 60 months after payments begin will again be partially deductible from federal income taxes, thanks to certain provisions of the Taxpayer Relief Act of 1997. The student loan interest deduction is available only for interest payments due and paid on or after Jan. 1, 1998. The first time taxpayers will be able to claim the deduction is when they file 1998 tax returns in 1999.

On both itemized and non-itemized tax returns, the maximum deduction is $1,000 in 1998. This maximum will go up annually by $500 until reaching $2,500 in 2001. The maximum after that year will remain at $2,500.

These maximum deductions are available for individual taxpayers with a modified adjusted gross income of $40,000 or less and for married taxpayers filing jointly with a modified adjusted gross income of $60,000 or less. The amount of a taxpayer’s deduction is gradually reduced based on income. Taxpayers with a modified adjusted gross income of more than $55,000 ($75,000 for joint filers) are ineligible for the student loan interest deduction. Income limits will be adjusted for inflation, but not until 2003. The maximum amount of the deduction, however, will not be adjusted for inflation.

Following are some points taxpayers should remember if they are considering the student loan interest deduction.

• It is available for borrowers who have taken loans for themselves, their spouses and/or their dependents.

• Loans eligible for the deduction include Stafford Loans, Perkins Loans, PLUS Loans, Federal and Direct Consolidation Loans, loans issued under federal loan programs for health-care professionals and education loans issued by schools, banks and other private lenders. Personal loans from relatives or friends are not deductible.

• The deduction is available for interest paid on loans used to pay for graduate school.

• Taxpayers claiming the deduction may not be claimed as dependents on another person’s return.

• No student loan interest deduction will be allowed for interest due or paid before 1998.

• Borrowers already in repayment may take advantage of the interest deduction for any loan payments due and paid after Jan. 1, 1998, as long as the borrower has not exceeded the 60-month payment limit, and the 60-month period does not include any periods of deferment or forbearance.

• The loan must have been used to pay the costs of attending any eligible educational institution as at least a half time student. Cost of attendance includes tuition, fees, room, board, books, equipment and other necessary expenses such as transportation.

Taxpayers who enter repayment in 1998 or later can deduct as much as $9,500 to $12,500 in student loan interest paid over a five-year period. For a borrower in the 15-percent tax bracket, this deduction translates into potential, cumulative tax savings of $1,425 to $1,875. For a taxpayer in the 28-percent tax bracket, the deduction could reduce the amount of tax paid over five years by as much as $2,660 to $3,500. Several examples of just how much an individual borrower can expect to save, adjusted for the amount borrowed, the interest rate charged, the length of the payback period and the borrower’s tax bracket, can be viewed on the world wide web at www.usagroup.com.

If a parent has borrowed money to cover the costs of attending college for eligible children, and has supplied more than half of the student’s support, then the parent may claim the student loan interest deduction. If a student wishes to repay his own loan by performing community service in lieu of cash payments, then he or she may be eligible for tax-free loan forgiveness which is part of certain lending programs run by the federal, state or local government, educational institutions or charitable organizations. The student should consult a tax adviser in order to determine whether he or she qualifies.

If you have questions regarding how deductibility of interest paid on student loans affects you, contact your tax adviser. LOSFA, in summarizing these issues, is not rendering legal or tax opinions.

LOSFA will conduct a special Lender Conference in conjunction with the Louisiana Association of Student Financial Aid Administrators (LASFAA) Spring Conference at Northwestern State University in Natchitoches. The workshop will be held concurrently with the LOSFA Boot Camp on Wednesday, March 25, in the Ballroom of the NSU Student Union from 1 p.m. until 4 p.m. Invitations, registration forms and agenda details will be mailed to lenders within the next two weeks.

The Louisiana Public Facilities Authority (LPFA), members of the Louisiana Association of Student Financial Aid Administrators (LASFAA) and the Louisiana Board of Regents will participate with LOSFA in an hour-long live informational financial aid television broadcast on Sunday, Feb. 22. The program will include a panel of financial aid experts who will answer questions called in by viewers. Tune in to the Louisiana Public Broadcasting statewide network beginning at 5 p.m. Tapes of the program will be available on request.

A second Trailblazer camp has been scheduled for this summer due to an anticipated increase in attendance spurred by the continuing high degree of interest in the TOPS program. The first camp, for students in the northern portion of Louisiana, will be held on the campus of Northwestern State University in Natchitoches July 19-21. The second camp is for students in the southern portion of the state and will be held at Southeastern Louisiana University in Hammond July 26-28. High school guidance counselors will receive 1998 Trailblazer nomination forms and informational materials by mail later this month.

Congratulations to Winona Kahao on her recent marriage to Mike Stone in Naples, Fla. Winona has resigned as director of LOSFA’s Scholarship/Grant Division and will be moving to Florida. John Bell is serving as acting director of Scholarship/Grant.

The U.S. Department of Education recently reminded all institutions that they must be Year 2000 Compliant with regard to processing Title IV Student Financial Assistance data no later than Jan. 1, 1999. Computer systems must be able to store, process and report date data in ways that differentiate between years prior to 2000 and the year 2000 and beyond. The issue is critical because many computer systems were not designed to accommodate a four-digit year. In many cases data is stored and processed using only the last two digits of the year. Noncompliance could result in serious processing errors and disruptions to student aid delivery and accountability. ED is strongly encouraging institutions to develop an aggressive strategy and action plan for addressing this issue. Questions regarding the year 2000 compliance requirement may be e-mailed to ED’s Program Systems Service staff at ope_y2k@ed.gov.

Our WhizKid customers will be able to request future releases of WhizKid on CD-ROM disks soon and enjoy quicker installation, fewer disks (WhizKid and all related software and documentation will fit on one CD-ROM disk) and easier storage and handling of the master disk. USA Group Guarantee Services will begin distribution of the new disks this spring with the release of WhizKid version 5.4. WhizKid customers who did not respond to the first survey or whose operating environment now permits the use of CD-ROM and who would like to receive CD-ROM disks will receive an order form soon. They may complete and fax the form to Electronic Services at (317) 578-6829. If they are running WhizKid on a LAN and cannot accept a CD, they are requested to contact Electronic Services at (800) 348-4606. WhizKid customers with questions may contact Deborah or Ken at (317) 578-6656.

STARTing Line, the official newsletter of LOSFA's START Saving Program, is now available. It contains the latest news about the START Saving Program and information useful to present and future enrollees. To be placed on the mailing list for this publication, write STARTing Line, P.O. Box 91271, Baton Rouge, LA 70821-9271; or call Customer Services at (800) 259-5626, Ext. 1012.

LOSFA offices will be closed Tuesday, Feb. 24, for the Mardi Gras holiday.

LOSFA and USA Group Training to Kick Off LASFAA Spring Conference

The Louisiana Office of Student Financial Assistance (LOSFA) and USA Group Guarantee Services are pleased to announce their upcoming joint student loan training workshop.

The workshop, part of the "Teamworks" series, will be held on Wednesday, March 25, 1998, in conjunction with the Louisiana Association of Student Financial Aid Administrators (LASFAA) Spring Conference at Northwestern State University in Natchitoches. The program will run from 8 a.m. until noon in the ballroom of the NSU Student Union. Workshop agenda and registration forms are included in the conference registration materials mailed by LASFAA. Registration for the workshop is, however, separate from conference registration. A continental breakfast will be provided.

During the workshops, trainers from both LOSFA and USA Group will cover key issues relating to the ever-changing world of financial aid.

The first session will be a policy and regulatory update highlighting new federal regulations as they relate to the FFELP program and any Common Manual updates. Issues to be discussed will include the most recent regulations governing parity issues between FFELP and FDLP; determining when a credit balance is a Title IV credit; the Emergency Student Loan Consolidation Act of 1997; delivery system changes; new electronic process requirements; and increased aggregate loan limits for former HEAL borrowers.

In the next session, Unsolved FFELP Mysteries, a facilitator will guide attendees through a series of FFELP related issues including pro-rata refunds, federal refunds, professional judgment, annual loan limits, defaulted loans, student bankruptcy and loan disbursements.

The third session will be devoted to financial aid related issues on the Web. Both Web novices and experienced Internet navigators will learn to effectively access the many available financial aid related resources.

The Repayment Challenge session will include a review of repayment options available to FFELP borrowers followed by an audience participation exercise in the repayment process. This session will help participants better understand repayment issues so that they can more effectively counsel student borrowers.

The two final sessions will be devoted to a WhizKid 5.4 Update from USA Group and a Procedural Update from LOSFA.

If you did not receive a registration form and would like to attend the program, please call LOSFA Customer Services at (800) 259-5626, Ext. 1012.

New Federal Regulations Define Financial Responsibility

New regulations defining financial responsibility for purposes of institutional participation in Title IV programs were published by the U.S. Department of Education in the Federal Register on Nov. 25, 1997, and will take effect on July 1, 1998. These regulations establish a new Subpart L of the General Provisions contained in 34 CFR 668.171 through 668.175.

These regulations differ significantly from financial responsibility rules originally proposed in the Notice of Proposed Rulemaking released Sept. 20, 1996. The final regulations do not establish new standards of financial responsibility for lender or guaranty agency third-party servicers. The standards contained in 34 CFR 668.15 continue to apply to those entities. Proposed ratio standards for public institutions were also removed from the final rules. Instead, these institutions will be considered to be financially responsible if they are backed by the full faith and credit of a state or an equivalent government unit.

The final regulations have established a ratio methodology which the Department will use to determine whether private non-profit and proprietary institutions may begin or continue to participate in Title IV programs. According to the preamble, the purpose of this approach is to "provide a more accurate and comprehensive measure of an institution’s financial condition," as well as to provide a method of assessment which is "fair, easily understood by institutions and efficiently administered by the Department."

Under current regulations, an institution must satisfy a minimum standard in each of three independent tests of financial responsibility. In contrast, under the new ratio methodology, the institution must meet only a single composite score standard. The composite score is calculated by following a four-step process detailed in the Federal Register. The ratio methodology incorporates factors which reflect an institution’s total financial resources and provides a score which ranges from a negative 1.0 to a positive 3.0. This method is considered to be more informative and is intended to be a more balanced approach to determining financial viability.

One provision of the new regulations contained in §668.175(e) allows for an alternative transition year for institutions that do not achieve the minimum composite score. An institution that meets all components of financial responsibility other than the new ratios may continue to participate under certain standards defined in §668.15 for one fiscal year, provided that it fails the composite score standard at the conclusion of a fiscal year that began during the period July 1, 1997, through June 30, 1998.

Institutions which fail to meet the standards may also be able to qualify to participate in Title IV programs under alternative standards and requirements outlined in §668.175(f) and (g).

Taxpayers May Be Eligible for Hope Scholarship Credit

Taxpayers enrolled in postsecondary education, or who have spouses or eligible dependents enrolled in postsecondary education, may be eligible to claim a nonrefundable Hope Scholarship Credit against their federal income taxes. The credit is good for up to $1,500 for qualified tuition and related expenses of each student in the taxpayer’s family. The credit may be claimed for payments made on or after Jan. 1, 1998, for academic periods beginning on or after Jan. 1, 1998. It is not available for any amount paid in 1997. In 2002 and thereafter, the dollar limitation on expenses for which the credit may be claimed and the modified adjusted gross income limitation will be indexed for inflation.

The taxpayer with modified adjusted gross income under $40,000 ($80,000 for married taxpayers filing jointly) may claim all of the first $1,000 of the taxpayer’s out-of-pocket expenses for each student’s qualified tuition and related expenses, plus half of the next $1,000. Fifteen hundred dollars is the maximum allowed per student eligible for the Hope Scholarship Credit.

If a taxpayer shows a modified adjusted gross income of $35,000 and pays more than $2,000 in qualified tuition and related expenses for a dependent, eligible child, then that taxpayer may claim a Hope Scholarship Credit of $1,500. Moreover, the taxpayer may claim a Hope Scholarship Credit for himself if he is an eligible student, or for a spouse, or for any number of dependent, eligible children. If a parent supplies more than half of each eligible child’s support for the taxable year, and if each eligible child is under age 19 or is a full-time student under age 24, then the parent may claim the dependency exemption for each unmarried child.

The amount the taxpayer may claim is graduated downward from the modified adjusted gross income of $40,000 to $50,000. For example, a taxpayer with a modified adjusted gross income of $45,000 may claim a maximum credit of $750 per eligible student including his spouse and himself. If the same taxpayer’s modified adjusted gross income is $35,000, the maximum credit amount for the student is $1,500. Taxpayers with modified adjusted gross income over $50,000 ($80,000-$100,000 for married taxpayers filing jointly) may not claim the Hope Scholarship Credit.

To be eligible for the Hope Scholarship Credit, a student must be enrolled at least half time for at least one academic period (semester, trimester, quarter) in one of the first two years of postsecondary education and be enrolled in a program leading to a degree, certificate or other recognized educational credential. The student must also have never been convicted for a federal or state felony offense involving possession or distribution of a controlled substance. The student must be enrolled in any accredited public, nonprofit or proprietary postsecondary institution.

Only tuition and fees are counted as "qualified tuition and related expenses." Amounts paid for courses involving sports, games or hobbies are not available for the credit unless part of the degree program. Charges for room and board, student activities, insurance, books, equipment, transportation and similar expenses are not counted as "qualified tuition and related expenses." Graduate-level degree work is not eligible for the Hope Scholarship Credit.

Instructions accompanying 1998 federal tax forms (for returns to be filed in 1999) will explain how to calculate and claim the credit.

Whoever — parent or child — claims a child as a dependent on a federal income tax return for any given year may claim the Hope Scholarship Credit for that child’s postsecondary expenses for that year. A parent and child may not both claim the credit for the same year, however. If a parent claims a child as a dependent, any qualified tuition or related expenses paid by the child during the year are treated as if the parent had paid them and are therefore included in calculating the parent’s Hope Scholarship Credit. If the child files his own tax return in a given year, he may not claim the credit for that year if his parent claims the child as a dependent. Married taxpayers may claim the credit only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.

The credit may be claimed in no more than two years for each student. Generally, it is not possible to claim the credit in advance of when the academic period begins. The credit is available only for payments of tuition and expenses that cover an academic period beginning in the same calendar year the payment is made. An exception, however, allows a parent or student to claim a credit for tuition and expenses made during the calendar year to cover an academic period that begins in January, February or March of the following taxable year. This exception does not apply to tuition paid in 1997 to cover academic periods beginning in 1998, because the Hope Scholarship Credit does not apply to expenses paid before Jan. 1, 1998.

If a student who is not claimed as a dependent on anyone’s federal income tax return pays tuition and expenses using a combination of, for instance, a Pell Grant, a loan, a gift from a family member and some personal savings, the student may take into account only out-of-pocket expenses in calculating the credit. Qualified tuition and related expenses paid with the student’s earnings, loans, gifts, inheritances or personal savings (including savings from a qualified state tuition program) are taken into account in calculating the credit amount.

Readers should consult their tax advisers for further information. Details on the Lifetime Learning Credit will be provided in a future Newsline issue.

Common Manual Policy Committee Update

The Common Claim Initiative (CCI) is moving forward at a brisk pace due in large part to the efforts of the CCI Work Group. This group of claims experts is drawn from the FFELP community and includes representatives of SLSA, EFC, CBA, NCHELP and several guarantors, including LOSFA staff members Gwen Johnson and Kathy Mascaro. The work group develops policy proposals to align the Common Manual with the provisions of the standard forms proposed by members of the FFELP community. The work group’s efforts provide the basis for the Policy Committee’s review and refinement of the policies that are then provided to the community for comment.

CCI consists of four separate but closely interrelated projects: Preclaim, Claim, Skip Tracing and Supplemental Claims. Each project is being addressed in sequence, and data elements and changes from earlier phases are translated into the affected fields in later phases of the project.

The Preclaim Request Form, instructions and related policy changes that were approved by the Governing Board on Sept.18 are now being developed further. Several members of the community provided comments that suggested operational efficiencies or enhanced data collection requirements in the preclaims process. These commentors have developed their comments into policy proposals for Policy Committee review. The Policy Committee is committed to addressing these proposals promptly and finalizing them with Governing Board approval at the earliest possible date.

The work group has completed its work on the second phase of the Common Claim Initiative, the Claim Form. Proposals to integrate the Claim Form into the Common Manual were approved by the Policy Committee and distributed to the financial aid community for comment. The Committee hopes to bring the Claim Form phase of the project to the Governing Board for its approval in the February 1998 meeting.

Currently, the work group has focused its attention on the standardized Skip Tracing review phase of the Common Claim Initiative. The overall objective of this phase will be to align guarantor requirements for the monitoring of skip tracing activities.

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The Emergency Student Loan Consolidation Act was signed into law by President Clinton Nov. 13 and became effective upon enactment. A work group within the Policy Committee, assisted by a volunteer expert from USAG, has drafted preliminary policy proposals to align the Common Manual with the terms of the Act.

The Department recently issued two regulatory packages: the Parity Regulations, published in the Federal Register on Nov. 28, 1997, and the Standards of Financial Responsibility, published in the Federal Register on Nov. 25, 1997. Both of these sets of new rules take effect on July 1, 1998. The Policy Committee has initiated review and analysis of these new rules to determine their impact on Common Manual policy. They anticipate development of new or revised policy proposals within a time frame that will assure submission to the Governing Board for approval by April 1998.

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In response to a number of proposals received by the Policy Committee regarding standardization of forms, systems and procedural issues, the Governing Board has reaffirmed the Policy Committee’s scope as being confined to the development of guarantor policies relating to the administration of the FFELP. Although the Governing Board agreed that the Policy Committee should not take a leadership role in the stewardship of forms, systems and procedural issues, it was agreed that the Committee may work with industry groups that are responsible for these activities. To that end, the Policy Committee and the NCHELP Program Operations Committee have collaborated on a process by which feedback would be elicited from the Policy Committee concerning forms being developed.

The Policy Committee’s review will be limited to a comparative analysis of the forms’ content with existing Common Manual policy. A written analysis will be provided to the Program Operations Committee that identifies conflicts and discrepancies. The Program Operations Committee has provided the Policy Committee with its timeline for standardized forms currently in development, so that the Committee can estimate when it would be called upon for a review. On Dec. 1, the Committee submitted its comments to the Program Operations Committee on four draft Loan Discharge Applications: Unauthorized Signature/Unauthorized Payment, False Certification (Disqualifying Status), False Certification of Ability to Benefit and School Closure.

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As new membership terms begin, LOSFA Policy Officer Kathy Mascaro continues her two-year term as a Policy Committee member.

Nomination forms are going out next month to high school guidance counselors to name their 1998 Trailblazer. Counselors who sent students to the 1997 Trailblazers Camp in Natchitoches may call on those students to help them choose their attendees this year. A Trailblazer can be an invaluable asset to a guidance counselor.

Trailblazers is a three-day camp for entering high school seniors to learn the ins and outs of student aid, scholarships, grants, loans and other aspects of financing a college education. Students return to their schools with information they can share with their guidance counselors as well as with student peers to assist in their search for financial aid. They distribute materials, help find financial aid for their classmates and, in some cases, manage workshops on financial aid.

Who is the perfect Trailblazer? Someone who is an energetic student leader — not necessarily that student with the highest g.p.a., but that student who can motivate classmates and help them make college an affordable reality.

More information on 1998’s Trailblazers camps in Natchitoches (July 19-21) and Hammond (July 26-28) will appear in the April Newsline.

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