Employer Education Assistance

We received a notice today that additional taxes will be withheld for the next three months, approximately $300/mo. 

My husband's employer has provided a great deal of education assistance this year, but the amount they've contributed has exceeded the federal tax-free limit of $5250. Any amount over that is subject to tax, and so they are going to estimate the tax and then split it equally between the remaining 2009 paychecks. 

We're already pretty tight financially right now, especially since we're having the $275/mo extra withheld to cover self-employment taxes, the $500/mo increase in minimum credit card payments (effective since August), and the auto insurance renewals ($500 in Oct & another $400 in Nov)... losing an extra $300 would be really tough! 

We'd possibly have to dig in to the emergency fund to cover the shortage for the time being. We'll have to adjust our withholdings, perhaps by stopping the extra withholdings on the self-employment money, and then just take care of it when we go to file our taxes in the spring. 

It's a juggling act. We need money to pay our bills now, and we should be in a better financial position in the spring, but the economy is still rather precarious - so who knows if we'll even still have our jobs then. But at the same time, I don't want to withhold too little now and end up having to pay penalty & interest when we file our taxes.  

I think we'll be able to get most of it back when we do our tax returns, so I really need to find out more information on the tax implications of employer-provided education assistance. I'm hoping that we can claim a tax deduction for some of the tuition and fees that the employer paid (only the amount in excess of $5250, so just what we're getting taxed on). 

Student Loans

Last night I spoke to my sister, who recently enrolled as a full-time undergrad student. She was able to secure a very small grant to help cover expenses, but also had to take out additional student loans. She debated for awhile how much to take out - enough to cover tuition & fees only, all education-related expenses (textbooks, etc.), or enough to cover some of her living expenses as well (she's off-campus, so it would include rent, utilities, food, and vehicle expenses). She ended up taking out the maximum allowable loan, to make sure that she'll be able to cover her bills.

I'm sort of conflicted on this. I don't have a problem with student loans, so long as the amount is reasonable and you anticipate being able to pay it off. I took out about $29,000 in loans for my undergraduate degree. On a 20-year repayment plan, my monthly payments are $200/mo right now, and will drop to $160/mo in three more years (if I paid according to the schedule). I was pretty lucky in that the interest rates on federal loans was significantly lower than they are now (about half!). It doesn't seem like much, but when the total loan amount is more than a new car, and it's over 10 or 20 years, that's huge!

I looked up the maximum amounts in federal student loans that she'll be eligible to take over the next few years, and based on those numbers I'm guessing that she'll end up taking out about $35,000 to $40,000 by the time she graduates. Based on a loan amount of $35k, on a 20-year repayment plan, she'll owe $250/mo in minimum monthly payments... and on a 10-yr plan, it'll be $382/mo.

If she graduates, gets a job in the field, and continues to work for several years, it's totally worth while... she'll make up that amount in higher wages within a few years. But if she can't find a job, or decides to do something else instead, that's a lot of money to owe.

It sucks to have to take out loans that are almost double the tuition bill, just to cover living expenses and basic necessities, but it's almost a requirement. You can't really make it through school as a full-time student when you have to work full-time in addition... and you need a place to live & food to eat. I don't want to encourage her to take out more in loans than she truly needs, because it's so easy to break into the piggy bank and use it for "fun" stuff (been there, done that!) - but I definitely understand what it's like to have to project out 5 mo's worth of expenses & anticipated income and then guess at how much in loans you'll need to cover the deficit.

College Costs

I've decided to quit grad school, for a variety of personal reasons. I feel a bit disappointed, but I think it's the best decision overall. Financially, not having to worry about two of us in college at the same time will be a huge relief. 

I had set aside $2000 for fall tuition, which would have been due mid-August. I've already paid $1100 of that straight to one of the credit cards, and plan to add the remaining $900 to this month's payment. 

For some reason, I hadn't thought about budgeting for tuition hikes (the fiscal year for most public universities changes on July 1st, with tuition increases being finalized at some point during the summer). The actual percent increase was just announced, and would have amounted to $120 extra for the upcoming term. Mid-year tuition increases are also possible, so the December tuition bill may have been even more. 

I knew I'd have to buy books, but I didn't budget that in either. Afterall, it's a nominal amount (at least, compared to the cost of tuition!)... and I figured I could pick up a used book online. Turns out that textbooks and course materials would have been about $150. 

I'd also have to increase the amount that I budget for gas, to cover the additional expense for commuting to class. At current gas prices (about $2.50/gal), that would be an increase of $60/mo. Plus the "cost" of wear & tear on my vehicle, of additional maintenance (oil changes, tires, etc). And our food budget would have to increase, because I won't have time to shop for all the best deals, and we'll undoubtedly end up buying more convenience foods or eating out. 

3-paycheck month

Like many others, I get paid on a biweekly basis - every other Friday. My paycheck tends to vary quite a bit, based on how many hours I work, so I estimate what I'll make and then set the upcoming month's budget accordingly.

Since there are 52 weeks in a year (so 26 pay periods), but only 12 months (with the typical month having only 2 pay periods), twice a year I get a third paycheck. This year, the third check happens to be in July, so that'll be a nice chunk of extra money.

I'd really love to take that extra money and go on a vacation, or use it to help pay down credit card debt, but I've got a $2000 college tuition bill that will be due in August... the extra check won't cover the tuition, but it will make a substantial dent.

Initially I'd looked into getting student loans to pay for tuition, but the interest rate on federal Direct graduate student loans sucks. It's at 6.8%, and is fixed at that for a few more years (it used to be that student loan interest rates would reset every July 1st, but the feds changed that a few years ago). Since the interest rates on my credit card balances are generally lower than that (averaging around 6%, thanks to many low-APR balance transfer offers over the past few years), it doesn't make sense to take out student loans just so that the credit cards can be paid off a few months sooner (when in the end, I'd end up paying slightly more in accumulated interest, plus origination fees for the loan).