As we begin another school year, many of your clients (and maybe you as parents) are either dealing with student aid or getting ready to decide where your children will go to college. Plus, several Presidential candidates have also been vocal about their plans to help students pay for higher education, so I want to discuss college aid and how to navigate the maze of paying for it. Audio Insights subscribers may remember that I talked about this back in May, but it never hurts to review.
I have included a link to a Wall Street Journal article about playing the financial aid game. You can read that at your leisure, but it is a good article to keep in your archives. I’ve also included links to some other resources you and your clients may find helpful.
Playing the Financial Aid Game – Wall Street Journal
There are a number of schools out there that have massive endowments worth millions of dollars and they are at an advantage because they can offer students pretty much a free ride. For example, Princeton; if you make less than $60,000, your student goes for free. At Stanford, if parents make less than $125,000, tuition is free. Other universities with large endowments have followed suit and you are going to see more and more colleges offer free or discounted tuition for lower income students. So an education at the University of Pennsylvania (where my wife and I went) could be cheaper than an education at a state school like Penn State. But it’s not going to be for all schools – just for the top schools or those with large endowments.
Before applying for a loan, know the full amount that it is going to take to go to college. Tuition is only part of the cost. Factor in meal plans, cost of living on or off campus, books, travel to and from home, computers and supplies, and spending money for activities. All of that factors in.
Consider the type of loan. A subsidized Federal Direct Loan (formerly known as Stafford Loans) is by far the best because the interest does not accrue while the student is in school and repayment starts six months after the student graduates. Here are the CFPB loan definitions for quick reference:
- Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school.
- Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students, but in this case, the student does not have to demonstrate financial need to be eligible for the loan.
- Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid.
- Direct Consolidation Loans allow you to combine all of your eligible federal student loans into a single loan with a single loan servicer.
Private loans can get very expensive. Interest rates for Stafford Loans are around 6-8%. Private loans are up around 12%. That means, after the students graduate, they (or the co-signer) need to focus on getting that paid off. Just like credit cards, loans with the highest interest rates should be paid off first.
Somewhere around 30% of student loan holders are in some type of default or forbearance, but remember that in forbearance, interest continues to accrue. So students need to keep in mind that student loans can be a loadstone that they wear around there neck for a decade or more and can affect their ability to buy a home or borrow additional money, or effect life decisions like getting married or starting a family.
Compare Aid Packages
Students may not get the same package from year to year. Some colleges – and I’ve heard this more for law schools – will get you in with an attractive package of grants or lower tuition, but then not offer it for the following years because they know you are not going to leave after the first year.
- School Comparison Worksheet – Consumer Financial Protection Bureau
- Everything You Need to Know About Loan Consolodation and Student Loan Forgiveness - Empathize
I hope my little review helps. If you have resources or articles that you have found particularly helpful feel free to share them.
Source: Brett Danko, LLC