Your College Financial Aid Decisions Have Long-Term Life Considerations

One goal that is nearly universal in American families today is the wish for their children go to college and acquire a degree- thereby ensuring their prosperity and future financial security in a highly competitive marketplace.  The cost of a college education, however, has doubled over the past decade while the disposable income for the average family has remained flat to negative over the same period.  A funding “gap” has resulted that has been filled by various public and private student loan programs. 

For today’s college graduates, two out of three leave the halls of academia with an average loan balance of nearly $23,000.  Recent studies report that student loan balances now exceed $1 trillion, a figure greater than for all credit card debt in the country. 

This subject matter is broad and complicated, from early loan origination to direct loan consolidation and final payback.  No single article can do this topic justice, but here are a few key points that can get you started in building your awareness:

• Before:  Financial planning begins before applying to a select group of colleges or universities.  You must project your total costs, and then determine how best to pay for them.  If there is a “gap”, you will need financial aid or to work part-time to achieve your objectives.  Before looking at the loan arena, it is highly recommended that you search for “free” alternatives – grants and scholarships.  Check for eligibility and requirements.  These funds do not need to be paid back;
• During:  Grants and scholarships will not cover 100% of your costs.  Every college has a financial aid office that is responsible for providing counseling, assisting with the paperwork, and eventually awarding aid.  Loans can come from a variety of entities, but all must be paid back with interest in most cases.  Federal loans (“Perkins”, “Stafford”, or “Direct PLUS”) should be your first area of focus.  Eligibility will depend on financial need, the difference between your costs for attendance and your family’s expected contribution.  Your family’s ability to pay is determined by using a government formula with the financial information that you provide on your application.  Your costs are also set by a government law that includes “tuition and fees, on-campus room and board (or a reasonable allowance for off-campus students), and allowances for books, supplies, transportation, loan fees, and, if applicable, dependent care.”  There are a few “unsubsidized” federal loans that do not depend on financial need.  Review these before looking for private alternatives.  Private sources generally charge higher interest rates and have more unfavorable terms.  Eligibility will depend on credit scores, your enrollment status, age, and other factors.  Review all fees, check the small print, and comparison shop;
• After:  Your first step is to find a job.  There is traditionally a “grace period” before your loan payments begin, but you need to prepare a budget that allows for general living expenses and cash left over for your monthly payments.  There are companies that will help you here and that will make direct loan consolidation for all of your loans to minimize your monthly payment obligations.  Private and public loans, however, cannot be consolidated together.  Federal loan consolidation programs can also extend the term of your loan up to ten to thirty years, but you will pay more interest.  Avoid lenders with prepayment penalties, and comparison shop.

In order to manage finances effectively from the start, every college student needs to understand the complex world of financial aid and its requirements before, during, and after attending the college of their choice.