When thinking about paying for college, parents often worry most about what they don’t know. College financial aid is a complicated topic, with an alphabet soup of acronyms and jargon. They fear making a mistake that will ruin their child’s future. Despite the complexity, there are only a few things that most families must do to secure their child’s future.
1. Start saving for college as soon as possible. Every dollar you save is about a dollar less you’ll have to borrow. It’s never too late to start saving, because it is literally cheaper to save than to borrow. Every dollar you borrow will cost about two dollars by the time you repay the debt.
2. Start searching for scholarships as soon as possible. Every dollar you win is about a dollar less you’ll have to borrow. There are many scholarships with deadlines in the fall of the senior year in high school, and several that can be won in younger grades, even in elementary school. Search for scholarships for free at web sites like www.studentscholarshipsearch.com and www.fastweb.com. Answer all of the optional questions for about twice as many matches.
Apply for every scholarship for which you are eligible. Winning a scholarship depends as much on luck as it does on skill. By applying to more scholarships, you increase your chances of winning one. Students often dislike applying for scholarships that involve lower award amounts (e.g., under $1,000) or writing essays. But these are easier to win because they are less competitive, the amounts add up, and they add lines to your resume that can help you win bigger awards. It also gets easier after your first half-dozen scholarship applications, since you will be able to reuse your essays, tailoring them to each new scholarship sponsor.
Beware of scholarship scams. If you have to pay money to get money, it’s probably a scam. Never invest more than a postage stamp to get information about scholarships or to apply for scholarships.
3. File the Free Application for Federal Student Aid (FAFSA) every year, even if you think you won’t qualify for financial aid. The FAFSA is used to apply for financial aid from the federal and state governments and all but about 250 mostly private colleges. It is also a prerequisite for low-cost federal education loans, which you can borrow even if you are wealthy. File the FAFSA as soon as possible after January 1. Several states are on a first-come, first-served basis, awarding state grants until the money runs out. (California’s deadline is in early March.) Do not wait until you are admitted or have filed your federal income tax returns.
It is ok to estimate income based on W-2 and 1099 statements and/or the last pay stub of the year. You will have an opportunity to correct any errors later. You can file the FAFSA for free at www.fafsa.ed.gov. Use the IRS data retrieval tool to update your FAFSA information a week or two after you file your federal income tax return. Call the US Department of Education’s federal student aid information center at 1-800-4-FED-AID (1-800-433-3243) with questions about federal student aid and filing the FAFSA.
4. Compare colleges based on the net price, the difference between the total cost of attendance (tuition, fees, room and board, books and supplies, etc.) and just grants (money that does not need to be repaid). This is the amount you’ll have to pay from savings, income and loans to cover college costs. It is a more accurate measure of the bottom line cost. But beware of two caveats: about half of colleges practice front-loading of grants, yielding a lower net price for freshmen than for upperclassmen, and a college’s outside scholarship policy dictates whether private scholarships are used to replace loans (yielding a lower net price) or the college’s own grants (no change). Relying on the net price will help you make a more informed decision about the tradeoffs between college affordability and other considerations, such as college quality and reputation.
5. Borrow as little as possible. You can economize on college costs by enrolling in a less expensive college, such as an in-state public college or a college with a generous “no loans” financial aid policy. But tuition represents only about half of college costs. Students can also save by buying used textbooks (or selling the textbooks back to the bookstore at the end of the term), living at home with their parents, minimizing trips home from school and economizing on everyday expenses. For example, students don’t like the cafeteria food and so tend to eat out a lot. But a $10 pizza a week will cost you about $2,000 over the course of a four-year college career. If you pay for that pizza with student loan money, it will cost you about $4,000 by the time you repay the debt. So live like a student while you’re in school, so you don’t have to live like a student after you graduate.
Keep your debt in sync with your income. A good rule of thumb is that total student loan debt at graduation should be less than your annual starting salary, and ideally a lot less. If total debt is less than annual income, you will be able to repay your loans in ten years or less. Otherwise you’ll struggle to make your monthly loan payments. Parents should borrow no more for all their children than they can afford to repay in ten years or by retirement, whichever comes first.
As an alternative to student loan debt, consider a tuition installment plan. These spread out the costs over 9-12 equal monthly installments. Tuition installment plans don’t charge interest, but do have up-front fees that are typically less than $100. They are a good way of avoiding long-term debt.
If you must borrow, borrow federal first. Federal student loans are cheaper, more available and have better repayment terms than private student loans. Federal student loans have low fixed rates, while private student loans tend to offer variable rates. Variable rates may initially have lower rates, but those interest rates have nowhere to go but up. Federal student loans also offer income-based repayment and public service loan forgiveness, while private student loans do not.
6. Don’t forget about the education tax benefits, such as the American Opportunity Tax Credit (AOTC), because these are claimed when you file your federal income tax return instead of when you pay the college bill. These tax credits give you up to $2,500 back based on amounts you paid for tuition and textbooks.
This post was provided by Mark Kantrowitz, the Senior Vice President and Publisher of Edvisors.com, who was a guest on College Smart Radio “Tackling the Runaway Costs of College” on October 5th, 2013. Listen to this broadcast on YouTube here.
Photo Credit: Edvisors