Financial Aid Advice for Parents
For most parents, college costs are the single greatest threat to long-term financial security and a comfortable retirement. The challenge is daunting enough with one child in college, but with more than one, the cost "mountain" is even more formidable. As you work through the issue, your ongoing mantra should always be, "I can always borrow for college but I can never borrow for retirement." Smart use of financial aid, student loans, and parent PLUS Loans are essential ingredients for success.
Common Myths
These are some of the more common myths that create parental alarm.
There is no way I will qualify for financial aid.
This far from the truth in most cases. Two-thirds (66%) of students get financial aid, so most families will pay less than the college's "sticker price." Even families with incomes over $100,000 often qualify for financial aid, particularly in private colleges. But you need to complete the FAFSA (Free Application for Federal Student Aid) to get what is waiting for you.
Parents making large incomes should never bother to complete a FAFSA.
Not true. While it may be true you might not qualify for need-based aid, completing the FAFSA will allow you to borrow as much money as you need (through unsubsidized parent PLUS Loans) to help pay for college and to preserve your assets. Also, filing a FAFSA is often required for merit scholarships awarded by colleges.
Parents can make their students independent in order to qualify for more aid.
This was once reality, so wealthy parents often took advantage of the rule by dropping their college-bound kids as exemptions for two years and providing them with the minimum requirements of income and assets. Unless there are very unusual and compelling circumstances, this is no longer possible. Instead that "quick fix" must be replaced by careful, perceptive planning by parents.
Money-Saving Tips for Parents
Avoid liquidating important assets to pay for college.
Except for 529 plans, most assets (especially your retirement savings) should be left in your hands rather than in the coffers of any college. If you find that you can't pay for college out of your normal income stream and the college's financial aid isn't enough, consider unsubsidized Stafford Loans, parent PLUS Loans, and private student loans to help protect your long-term financial security.
When it comes to financial aid, the early bird gets the worm.
Financial aid is often distributed on a "first-come-first served" basis. File the FAFSA as soon as it's available and make corrections as needed after filing. Don't wait until your taxes are done. Use the previous year's tax returns and provide best guess answers, and submit the FAFSA ASAP to secure your place in line.
Whenever possible "bundle" your kids in college.
For families with two or more college-bound students who are close in age, consider having more than one student attend college at a time. Multiple tuition bills will significantly lower the expected family contribution, and potentially offset the cost of taking a year or two off IF the student puts the time to good use. Most colleges value meaningful post-high school experience when making admission decisions.
Have your students contribute financially to their college degree.
Remember, your students are the sole beneficiaries of a college education, so if you do need to borrow for college, have the student do the initial round of borrowing. Students who are expected to take out loans to pay for college, and who face the prospect of added debt with every year of post secondary education, tend to get in and get out in regulation time: four years. That sense of urgency will always translate into lower college costs.
FAQs
There are two main types of student loans for undergraduate students – federal loans and private loans. Federal loans are either federally funded or federally backed (or insured) student loans.
Federal Perkins Loans:
- Taken out in the student’s name
- Fixed 5% interest rate.
- Maximum award of $5,500 per undergraduate year.
- School-awarded.
- Very limited availability.
Federal Stafford Loans:
- Taken out in the student’s name.
- Are usually borrowed through private lenders.
- The student must be enrolled at least half-time.
- Interest rate is fixed at 6.8% for unsubsidized Stafford loans for undergraduate student; 4.5% for subsidized Stafford loans for undergraduate students only; 6.8% for both subsidized and unsubsidized Stafford loans for graduate students for the 2010-2011 academic year.
- Award limits are based on the student’s year in school and dependency status.
- Repayment normally starts six months after leaving school (or attending less than half-time).
- There are two types of Stafford Loans - subsidized (for which you must demonstrate financial need and the interest is paid by the federal government while you are in school) and unsubsidized (which is not based on need, but you are responsible for all the interest that accrues).
Federal PLUS Loans (Parent Loans for Undergraduate Students):
- The student must be a dependent, undergraduate.
- A credit check (an inquiry into credit history and credit rating) is required.
- You do not have to show financial need to qualify.
- Can borrow up to the total cost of attendance, minus any other aid you receive.
- The loan is not subsidized (the government pays no interest).
- Repayment normally starts 60 days after full disbursement of the loan. However, some lenders may enable borrowers to defer payments while the student is enrolled.
Private Loans:
- Taken out in the student’s name, usually with the parent as a co-signer, or in the parent’s name.
- Are borrowed through private entities, banks, credit unions or lending companies.
- Interest rates can vary.
- Can borrow up to the total cost of attendance, less other financial aid.
- Interest can be capitalized (added to the loan principal) more often, increasing the amount of money you ultimately are charged for borrowing.
- Approval and terms for private loans are based on credit history. If your rating is bad or non-existent, you might need a co-signer to qualify. Poor or minimal credit may also result in a higher interest rate on your loan.
Legal guardians may not borrow a PLUS loan. Private loans are an option for credit-worthy individuals or majority age willing to take on the financial responsibility of the loan.
The cost of attendance (COA) is a number (generally a yearly figure) that is designed to help summarize the various costs of attending a school that takes into account
- tuition and fees
- on-campus room and board (or an allowance for these amounts for off-campus students)
- allowances for books, supplies, transportation, loan fees, and if applicable, dependent care,
It also generally includes various miscellaneous and personal expenses including an allowance for a purchase or rental of a personal computer and can also include additional costs related to a disability.
Most schools publish the COA annually in brochures and online college search sites, so it may help to check with some of these resources. Additionally, if you have unusual circumstances which have higher costs, it might help to discuss these with the financial aid office.
Parents may be interested in the federal PLUS loan, the "Parent Loan for Undergraduate Students." PLUS is a federally-backed loan with a low fixed interest rate that parents can take out in amounts up to the cost of attendance, less other aid received. Parents may also access a Private Loan (no involvement of the federal government), either as a borrower or as a co-signer with the student borrower. Go to the Parent section to view those loan options.
No, the PLUS loan does not require completion of the FAFSA.
However, filing the FAFSA may allow for other aid sources (such as Stafford or Direct student loans) to be included in the financial aid package.
I'm the legal guardian of an undergraduate student. What type of student loan can I take out for her/him?
What is the cost of attendance (COA)?
What's a Parent PLUS loan?
Do I have to file the FAFSA before I apply for a PLUS loan?
There are two main types of student loans for undergraduate students – federal loans and private loans. Federal loans are either federally funded or federally backed (or insured) student loans.
Federal Perkins Loans:
- Taken out in the student’s name
- Fixed 5% interest rate.
- Maximum award of $5,500 per undergraduate year.
- School-awarded.
- Very limited availability.
Federal Stafford Loans:
- Taken out in the student’s name.
- Are usually borrowed through private lenders.
- The student must be enrolled at least half-time.
- Interest rate is fixed at 6.8% for unsubsidized Stafford loans for undergraduate student; 4.5% for subsidized Stafford loans for undergraduate students only; 6.8% for both subsidized and unsubsidized Stafford loans for graduate students for the 2010-2011 academic year.
- Award limits are based on the student’s year in school and dependency status.
- Repayment normally starts six months after leaving school (or attending less than half-time).
- There are two types of Stafford Loans - subsidized (for which you must demonstrate financial need and the interest is paid by the federal government while you are in school) and unsubsidized (which is not based on need, but you are responsible for all the interest that accrues).
Federal PLUS Loans (Parent Loans for Undergraduate Students):
- The student must be a dependent, undergraduate.
- A credit check (an inquiry into credit history and credit rating) is required.
- You do not have to show financial need to qualify.
- Can borrow up to the total cost of attendance, minus any other aid you receive.
- The loan is not subsidized (the government pays no interest).
- Repayment normally starts 60 days after full disbursement of the loan. However, some lenders may enable borrowers to defer payments while the student is enrolled.
Private Loans:
- Taken out in the student’s name, usually with the parent as a co-signer, or in the parent’s name.
- Are borrowed through private entities, banks, credit unions or lending companies.
- Interest rates can vary.
- Can borrow up to the total cost of attendance, less other financial aid.
- Interest can be capitalized (added to the loan principal) more often, increasing the amount of money you ultimately are charged for borrowing.
- Approval and terms for private loans are based on credit history. If your rating is bad or non-existent, you might need a co-signer to qualify. Poor or minimal credit may also result in a higher interest rate on your loan.
