College tuition ranks among housing and medical expenses as having the highest lifetime costs for many Americans. Making matters worse, planning for college involves a daunting landscape of savings plans, loans, scholarships, and trying to build the foundation for your children’s future. If you would like to help your child pay for college, we recommend saving for costs ahead of time. We’ve already reviewed flexible options for college savings like 529 Plans, Coverdell ESAs and UTMAs. This article covers the financing options you have to supplement those savings when it comes time to actually pay for college.
We encourage both parents and students to evaluate college costs when picking which university or program to attend. The best way to make college attainable is to take advantage of in-state tuition or scholarships. But what do you do if college is around the corner and tuition seems out of reach? It’s time to consider student loans and the options your child’s college financial aid package might include.
You may have heard of the Free Application for Federal Student Aid, commonly known as the FAFSA. You and your student need to complete the FAFSA to determine your eligibility and Expected Family Contribution (EFC) for federal and private loans. Your EFC helps determine how much federal and private financial aid your student will be offered. It doesn’t necessarily equate to the amount you have to pay out of pocket. The FAFSA and your EFC consider parental and student income and assets for determining loan guidelines.
The government releases the FAFSA each year on October 1 and keeps it available until June 30 of the following year (U.S. Department of Education, n.d.-a). However, it’s important to remember that many sources of financial aid are limited. We recommend submitting the FAFSA to your college, state or other aid source as early as possible to ensure your student’s consideration for the most support.
Some schools also use the CSS Financial Aid Profile to determine financial aid. Depending on your college, completing the CSS may be required for institutional grant and scholarship awards. Every dollar counts, so be sure to check if your school requires the CSS even if you completed the FAFSA.
After your college reviews your FAFSA and/or CSS, you’ll receive a financial aid package that outlines the support you’re eligible to receive. A Merriman advisor can review your student’s financial aid package to help you consider all the options.
There are many ways to pay for college including private, state and home equity loans, but most students receive the best rates from federal student loans, which we recommend. Federal loans provide relatively low interest rates and flexible repayment options for students with varying levels of need. Federal loans also make up the bulk of student financial aid packages, so we’ll focus on those. Most students and their families will have access to Direct Subsidized Loans, Direct Unsubsidized Loans and PLUS Loans. Perkins Loans might also be available for students with the greatest financial need.
Your student takes out a Direct Subsidized Loan or Direct Unsubsidized Loan and it’s their responsibility to repay it. Students often need a combination of the two due to borrowing limits on each type. Borrowing limits depend on your student’s year of study (first, second or third year and above), dependency status (from your FAFSA) and the type of loan (subsidized, unsubsidized or PLUS loans). Loan terms also vary by degree level. Undergraduate students can currently borrow Direct Loans at 5.05% annual interest, but graduate and professional students pay a higher rate of 6.6%. Graduate and professional students are also only eligible for Direct Unsubsidized Loans at this time (U.S. Department of Education, n.d.-b).
Parent PLUS Loans are available to parents to help cover additional costs beyond their student’s financial aid package. Grad PLUS Loans also help graduate and professional students cover additional costs beyond their Direct Unsubsidized Loan borrowing limits. PLUS Loans have higher interest rates than Direct Subsidized Loans or Direct Unsubsidized Loans and are currently available at 7.6% interest (U.S. Department of Education, n.d.-b). Federal loan rates and borrowing limits can change each year, so check studentaid.ed.gov for the latest information.
We can help you develop a plan to provide for your family’s education. Student loans can be a major burden to students after graduation and early in their careers. With proper planning, you and your student can avoid pitfalls and focus on the excitement of heading off to college. Stay tuned in to the Merriman blog for more info on college planning, finances and what’s important to you to live your life fully.
U.S. Department of Education. (n.d.-a). What are the deadlines for filling out the FAFSA? Retrieved February 12, 2019, from https://studentaid.ed.gov/sa/1920/help/deadlines
U.S. Department of Education. (n.d.-b). Interest Rates and Fees. Retrieved February 12, 2019, from https://studentaid.ed.gov/sa/types/loans/interest-rates