Financial Aid Basics Advice for Parents
Covering college costs isn’t easy, and parents who want to help their children do so, without losing their shirts in the process, are often encouraged to open a 529 Plan in the months that follow a child’s birth. These plans allow parents to squirrel away money for a child’s education, while receiving some intense tax benefits along the way. The Financial Research Corporation suggests that some 5.5 million American households have plans like this up and running, but that might mean that there are thousands of parents who haven’t yet planned for the high cost of education, and when their students are ready to enroll, these parents might not know how to begin to help.
Some parents choose not to help at all, or their students have scholarships or other forms of funds that allow them to pay for school without the help of their loving parents. The study “How America Pays for College 2013” suggests that parental contributions stand at only 27 percent. It seems many families choose to make their children find their own way in the world. But those who do want to help have several options available, but they must be certain to make good choices, so they don’t cause financial harm.
All parents of college-age students should expect to help with the Free Application for Federal Student Aid (FAFSA) on a yearly basis. This form, which is readily available both online and in the student aid office of most institutions of higher education, puts a child in the queue for a variety of federal benefits, including:
- Subsidized loans
- Need-based loans
- Unsubsidized loans
The application is long, and it can sometimes be a little confusing, but the information provided allows federal administrators to determine the financial health of the family, and provide students with the products they’ll need in order to pay for their education. Grants are, obviously, the ideal choice for most students, as they don’t come with any promise of repayment, but even loans that emerge from this system could be intensely beneficial, as they tend to come with low interest rates and flexible repayment schedules. Some federal loans are even eligible for balance forgiveness, if certain eligibility requirements are met.
Some parents blessed with high income levels believe that the FAFSA isn’t required for their children, since the money they have access to makes the need for financial aid a little less than likely. It’s a reasonable assumption, but parents who don’t help to fill out this form might be missing out on some very serious forms of aid. For example, a study highlighted by USA Today suggests that university officials are providing high amounts of financial aid to students with high test scores, even if they come from families that could pay for school. The university can use the aid as a lure to the student, ensuring that those test scores are included in the university’s statistics, so it’s a savvy move on behalf of the school. Those students who don’t have a FAFSA on file might still get this aid, but they also might not. Students with no FAFSA might also be passed by for merit scholarships handed out by the school. It’s best not to take a chance.
Parents who assist with a FAFSA are also starting the Parent PLUS Loan process, which can allow them to take out federal loans on behalf of their students. These loans tend to come with a slightly higher interest rate than those provided to students, and they are based on a check for adverse credit, but they also come with flexible repayment options and other benefits guaranteed by the U.S. Department of Education. Families that need to borrow money may find that federal sources are the most economical, and a FAFSA can make them a reality.
It’s important to remember, however, that financial aid is often distributed on a “first-come-first served” basis. The FAFSA should be filed as soon as it’s available, with needed corrections made after filing. Families shouldn’t wait until their taxes are done, but should consider using the previous year’s tax returns. Providing best-guess answers and submitting the FAFSA as soon as possible secures the student’s place in line.
Hoping for Independence
The FAFSA includes many questions regarding a family’s wealth, income and assets. The assumption is that the family will make at least some sort of contribution to the education of the child, and as a result, that information could separate those students who were in desperate need from other students who had no familial help to lean on when times were tough. In the past, parents were able to skirt those rules by dropping their college-bound kids as exemptions for two years and providing them with the minimum requirements of income and assets. Now, unless there are very unusual and compelling circumstances surrounding a student’s financial situation, this is no longer possible.
According to the website of the U.S. Department of Education, students are only considered independent of their parents if they’ve reached a specific age, or if they can prove that they’re a legal adult. An emancipation document, time in foster care, participation in the military or primary responsibility for a child could merit independent status, but many children just don’t have these attributes.
Lying on the form, or leaving boxes blank, is simply not acceptable. Parents must be as complete and honest with their children as they can as the forms are filled out.
Parents who don’t wish to provide this kind of financial information to governmental sources, or who find that their children simply don’t qualify for federal aid, may be tempted to liquidate their assets to pay for school. There are a number of ways that parents might go about this, but common choices involve selling private equity.
- Cash in retirement accounts
- Obtain a second mortgage on the home
- Sell family heirlooms
- Sell family-held stocks and bonds
In the short term, this can seem like an excellent strategy that keeps a family out of debt while a child is in school. But in the long term, this could be a devastating choice, as parents have other financial goals they simply must meet in the years ahead.
Experts quoted by TIME suggest that an average person working on a full-time basis must save the equivalent of 11 times his/her annual salary by age 65 in order to retire at a comfortable level. Parents who scrimp and save during their prime earning years without thinking about retirement, or those who cash out on their plans much too early, may find that they simply don’t have the funds that could allow them to retire. And, if a health problem strikes or a good job evaporates, that family may not be able to keep things together at all.
In general, it’s best to avoid liquidating important assets to pay for college. Most funds should be left in the hands of the family, rather than in the coffers of any college. Those who find that tuition costs exceed the ability to pay should consider unsubsidized Stafford Loans, parent PLUS Loans and private student loans to protect long-term financial security. There are always alternatives.
Choosing Parent PLUS
The federal PLUS Loan, as mentioned above, provides parents with the opportunity to take out a federal loan on behalf of their children, which might allow them to protect their assets while they contribute a meaningful amount to a child’s educational progress. These loans are beneficial, but they shouldn’t be the only options parents investigate, as they can be slightly hard to obtain. For example, legislative changes to the PLUS Loan program have tightened credit rules, and a story produced by NPR suggests that some families with students who attend historically black colleges have struggled to obtain the credit they need. As a result, some children haven’t been able to go to school at all, or they’re forced to choose less expensive options.
Exploring the other credit options available can help families to plan if a PLUS Loan doesn’t materialize. Private loans, for example, might allow parents to pull together funds for their children based on their long history with a local credit union. Even major banks might be willing to loan money to parents when the federal systems won’t. Looking at these options thoroughly can ensure that children aren’t left in the lurch if PLUS Loans just don’t work.
Making financial choices for one college student is tough, but trying to handle the gaps for multiple students who all need to attend school at or near the same time is enough to make any parent’s head spin. This hassle might contain a silver lining, however, as bundling students into the same school year could help a family qualify for more federal and school-based aid.
Families with one or more college-bound students cannot be expected to provide a significant amount of money to both students. They have more demands, and higher bills, and they might be able to see more aid as a result. Asking an older child to hold off on school for just one year, or attend a low-cost community college during that year, could allow the younger child time to prepare for college, and the family might see huge financial benefits as a result. Most colleges value meaningful post-high school experience when making admission decisions, so if one child takes a year or two off to wait for a sibling to enter college, it won’t necessarily cause harm, if the child does something positive and creative with that time.
While it’s ideal for parents to pick up the tab for a child’s education, there are some circumstances in which it’s best for the child to be at least partially responsible for paying the bills. For example, a study highlighted in an article on Forbes suggests that higher levels of parental contributions tend to result in lowered levels of child academic performance. Making a child pay for at least some portion of the schooling makes that child more likely to work hard and pay attention, researchers say, and that might allow the child to do a little better in school.
Allowing the child to go through the initial round of borrowing, using federal sources first and private sources later, is a reasonable approach. Parents should always be involved in the process, ensuring that the child is making good choices in loan products and spending that money wisely, and parents should be sure that their children understand the financial obligations of taking out a loan for education. Those who work with their children may find the perfect balance of parental help and child responsibility that translates into success for everyone involved.
We Can Help
Parents have a lot of questions, when it comes to financial aid, and it can be hard to know where to turn for help. Our site may provide that assistance. Our Scholarship Center can help your child to find any and all assistance programs that could help to pay for school, while our Student Loan Comparison Tool can allow you to compare a few loans available to you in the private marketplace, just in case the federal sources are a little less than ideal for your situation. If you need help, we’d like to provide it. Our site is free and confidential, so click to get started.