Don't be stupid while trying to get smart. For recent high school grads, it's important to understand exactly what you're getting into as you prepare to commit to paying for college. Anyone who's bright enough to get into college should be able to calculate the interest rates and long-term financial consequences of how they'll have to pay for it. Here's the down-and-dirty on what you need to know.
FAFSA: Federal Assault on Family Savings Accounts?
The vast majority of U.S. citizens who are eligible for federal financial aid apply. Eligible students include those with a high school diploma or GED who have been accepted into a degree program and have a valid Social Security number. No doubt you know about the Free Application for Student Aid (FAFSA), but did you know that key strategies in how you position the parents' assets on that form can make a difference of thousands of dollars in aid? Consulting an expert is a great idea since there are tens of thousands of dollars potentially on the line. Many offer free consultations and live events where you can ask questions at local libraries and school events. Feel free to contact my staff and me and we can recommend trusted resources.
Federal aid freebies are known as grants and do not have to be repaid. The most well known is the Pell Grant, which is awarded to low income undergraduate students who demonstrate financial need. The amount can be a maximum of $5,550, with $3,800 being the average awarded per student nationwide. Did you know that at one time, the Pell grant used to cover more than 100% of a student's tuition? It's true, but with rising costs, Pell Grants now only cover about 42% of tuition (see the following infographic and try not to sigh).
Of course, there are other federal grants that may apply to you. Here are a few:
- The Federal Supplemental Education Opportunity Grant (FSEOG) awards anywhere from $100 to $4,000 on a first-come, first-served basis to undergraduates who have exceptional need.
- The TEACH Grant is awarded specifically to aspiring teachers.
- The Iraq and Afghanistan Service Grant is awarded to students who have lost a parent or guardian as the result of military service.
Freebies are great, but even with grants, it's likely your financial aid package will still need to include some type of loan.
This is where you want to really focus to ensure you don't sabotage yourself with debt you can't manage at the beginning of your adult life.
Mister, can you loan a dime?
Some students are fortunate enough to have family, friends, or employers who loan them money for tuition interest-free. If that's you, remember to pay it back with integrity and gratitude. If it's not, federal student loans are available to help cover tuition as well as those other pesky expenses like housing costs and food plans (ya' gotta' eat, am I right?). These loans tend to provide certain benefits, including fixed interest rates with semi-flexible repayment options.
It's handy that instead of requiring you to begin making payments immediately, federal loans allow you to start repayment six months following your college graduation. Of course, interest still accrues during this time, and be aware that most people find that those six months fly by pretty quickly.
Loans from your uncle . . . Sam, that is
Stafford Loans or Direct Stafford Loans comprise the lion's share of student borrowing today. The main differences between these subsidized and unsubsidized loans are based on financial eligibility and interest payments.
- For subsidized loans, students have to demonstrate financial need to qualify, and then the loan's interest is paid for by the U.S. Department of Education. This lasts for the following three periods: during an undergraduate's program of study; throughout the six-month grace period following graduation; and during loan deferment (postponement of loan payment due to financial difficulty). Subsidized loans are still challenging for millions of people to repay, but at least Uncle Sam offers a hand.
- Unsubsidized loans do not require a student to demonstrate financial need, so all interest accumulated must be paid by the student. Think about this: all interest accrued during enrollment in school, plus the amount added during the six-month grace period, gets added to the principal balance of the loan if not paid in that time (as well as a period of loan deferment, if applicable).
- Both loans allow students to borrow anywhere from $5,500 to $12,500, but the maximum amount permitted is determined by the university. (Hint: check with your target schools in advance to determine who's offering the best situation for you.)
- The fixed interest rate for these two Stafford Loans will be 4.29% for the 2015-2016 year starting this July, and about 1% in loan fees will be subtracted from each loan payout. (Hint: do the math on what you need to borrow.)
Direct Plus Loans are another type of loan to understand. These are for parents of dependent undergraduates attending college at least part-time and they allow them to borrow any remaining money their child needs in order to attend college. Many professional financial advisors I know caution that there are much more efficient ways to fund tuition and recommend steering clear of these loans if possible, for what it's worth.
Perkins Loans are only for students who demonstrate exceptional financial need. Perkins Loans allow undergraduates to borrow up to $5,500 with a fixed interest rate of 5% (and no loan fees). Again, don't be so busy trying to fund tuition that you don't calculate the full costs when adding a full 5% to what is already a hefty investment.
Next week in Part II: more ways to cut your college costs, including AP credit, learning how to borrow smart, and considering colleges in other countries.