“The more that you read, the more things you will know. The more that you learn, the more places you will go.” Dr. Seuss

You got into your college. How to pay for college?

At $1.56 trillion, student loan debt held by 44.7 million Americans is ranked number two behind mortgage debt within consumer debt according to the Federal Reserve.

A college education does lead to higher income, job security and great opportunities in life but it may take until age 34 for the average bachelor’s degree recipient to fully recoup these costs. Student debt can put a damper on one’s ability to obtain wealth. It pays to plan to save as much as possible ahead of time and lessen the burden ahead of time, supplementing with more attractive federal loans, scholarships, grants and work study programs before tapping higher cost private loans.

Here are my five recommendations:

  1. Plan for your child’s college as early as feasibly possible. Get a jump with these six possible ways.

Six Ways To Save For College Early

2) Fill out the FAFSA (The Free Application for Federal Student Aid) application. Don’t think of it as an option.

3)Reduce your  Expected Family Contribution (EFC)

4) Get as much as you can from federal loans for students before private loans. They are not all need-based. On the other hand, parents may want to consider private loans if they are borrowing above their contribution through their income and savings.

5) Go for work study, grants and scholarship money. Scholarships are merit-based.

If you do not get the award you had hoped, there is an appeals process for you to follow below.

I want to share my personal story about going to college to perhaps provide you with a different perspective.

I went to a four year public college (City University New York or CUNY) at age 15.5 years in the Bronx. My parents did not want me to go away to college given my age but truth be told we just couldn’t afford it. I was young, foolish and too immature for it to matter much to me as to where I went. I was going to go to college to make my parents proud as the first born to attend college. My textbooks were more expensive than the tuition. I lived at home. I later earned an MBA, also attending a public college at night while working on Wall Street where I earned a seven figure compensation. I subsequently went back to school and earned a law degree. Do I regret my college experience? No, I don’t, though I would have liked the college dorm experience. I certainly benefited from not having loans to pay for. I want my children to go to a good college and have a great college experience. Though we have 529 plans for each child, I expect we will need student loans.

There are many questions families need to consider when choosing the college and funding sources for college tuition, room and board:

Four year in-state and out-of-state public colleges and private colleges, two year community colleges. If you were selecting on the basis of costs only, clearly in-state four year and two year colleges are your least expensive options, benefiting from that state’s taxpayers. Average tuition, fees, room and board in 2018-2019 for four year in-state college were $21,370 and for two year in-district state college were $12,320. Average four year out-of-state public colleges were $37,430. Average four year private schools top the list at $48,510.

Keep in mind these are average published prices and are not reflective of respective college reciprocal programs offered between certain states. Also, if your child’s major is not offered at your in-state public college, you may able to go to an out-of-state college at a similar price if they offer that program. While it may be overwhelming, and you are almost at the finish line, do your research.

The composition of paying for college in annual year 2017-2018, amounting to a total of $26,458 by the typical family based on the Sallie Mae’s survey of families was as follows:

Parents and students share most of cost for college through own sources and borrowing.

Parent income and savings were the largest source at 34% of the total, student income and savings at 13% with relatives contributing an additional close to 2% for almost half of the needs for college or 49%.

Importantly, when parents are contributing their savings, it should be largely savings associated with college savings plans, and not from emergency fund savings or money needed for their own lives. It may seem obvious but parents have used their own retirement savings for their children’s college education only to regret it later on.

53% of families borrowed to help pay for their undergraduate’s education, with students much more likely to borrow than parents. In 32% of the families, only the student borrowed; in 14% only the parent borrowed; and in 7% of families, both the student and parent borrowed.

Parental  borrowing contributed an additional 10% while students contributed 14%, borrowing more than their parents, on average.

With parents, students, and relatives sharing responsibilities through their own sources and borrowing for college amounting to 72% of the costs, grants and scholarships (discussed below)  provide the remaining 28%.

Should I complete the FAFSA? Yes, end of story.

If you are borrowing, federal loans are far more attractive but have loan limits by year with the freshman year maximum loan the lowest at $5,500 rising to $12,500. These amounts are set by the government but the colleges calculate the amount per individual student based on the college’s cost of attendance so it is possible your child will get less than the limit.

FAFSA  needs to be filled out for each academic year. Make sure you file on time, if not early  as some states award on a “first come, first served” basis. Check your state’s practice as they differ.

FAFSA determines whether you are eligible for need-based federal financial aid for college and may help you with getting scholarships, grants and work study programs for your student.

It is always a pain to fill out applications but if the goal is to get more affordable federal loans to supplement your income and savings contribution, go for it. Their website gives you the average time it should take to fill out the application but that doesn’t take into account the extraordinary amount time it takes to compile the supporting records and paperwork. No doubt you have to be super organized.

In a Sallie Mae survey regarding how college is paid for, 75% of families, largely middle-income based, completed the FAFSA application, with lower filing rates for both higher income and lower families. The biggest reason given by those families that did not complete the application was “believe they won’t qualify.”

In filling out the FAFSA application, the government expects you to divulge your financial situation. They look at a family’s taxed and untaxed income from two previous years, assets, benefits like unemployment, social security, bonuses,  severance payments,  family size and what other family members are attending college in that academic year to calculate Expected Family Contribution (EFC). Regarding assets, check which assets may not need to be included such as your primary family home, including an active farm that is part of the family home; a business that you control; pensions/ retirement funds; cash value of your insurance; and personal property such as your cars.

There are legal ways to lower your expected family contribution.

Among some of the strategies you can use to reduce your EFC:

Don’t do anything rash like trash your savings but don’t increase your earnings either. Instead you can put money into your retirement savings account to the maximum levels. Retirement savings should be a parents’s priority.

Household size matters so if you have a dependent family relative living with you but a move is being considered, a delay may be worthwhile. Better to have more dependents. If your great aunt Matilda has been staying with you, let her stay!

Paying down some high-interest rate debt associated with credit cards is worthwhile and may help your credit card score at the same time. You may need to take a private loan in addition to federal loans.

There are several federally sponsored loan programs including:

Stafford Loans are among the most common, desirable and low cost loans offered directly to students, rather than to parents, ranging from $5,500 to $12,500 per year, gradually rising after the first year.

Students borrowed proportionately more federal loans (72% of borrowing) versus private loans (28%).

There are the Direct Subsidized Loans and Direct Unsubsidized Loans. The US Department of Education is the lender and to whom you make payments to. These loans are also available to graduate and professional degree students but at higher interest rates than for undergraduate degree programs. Your FICO score won’t count against you for these loans as everyone approved for these loans get the same rate. There are 4% origination fees on the loan amount. The loan terms are generally fixed and have a 10 year maturity.

The Direct Subsidized Loans are need-based loans to students who demonstrate the need for financial help to cover higher education costs. You must be in school at least half-time. For loans disbursed on or after July 1, 2018 and before July 1, 2019, the interest rate is fixed at 5.04%. The loan rate during the previous year was 4.45%. The government pays your interest while you are in school and the loan repayment is more flexible, beginning after you complete school. If you can satisfy the  needs threshold requirement, this is clearly a desirable option.

The Unsubsidized Loans are different as they are not need-based but you, not the government are paying the interest cost which accrues immediately though repayment is deferred until after you graduate like the subsidized loans These loans have the same caps on loan amounts and the interest rate is currently 5.05% (4.45% in the previous year) according the Federal Aid website. This is also a very desirable loan.

Direct PLUS (Parent Loans for Undergraduate Students) Loans are directed at parents, not at students and are not financially need-based. Parents’ proportion of federal loans at 62% were higher than private loans. The maximum amount of the loan is not capped at a specific amount but instead is tied to the cost of attendance minus any other financial aid the student receives via the Stafford loans. These loans are set at a higher rate of 7.6% and are designed to supplement what other sources of funds the students were able to obtain. These amounts are subject to a 4% origination fees of the loan amount. The rates for this option for parents is not very attractive. While there may be some flexibility with federal loans discussed below, if you have a good credit score you might want to look at private loans for yourselves, not your children.

Federal loan programs have Income Driven Repayments (IDR) features which students and/or parents have to apply for, however, the student cannot use this if  they are in default on all of their loans and it cannot be used for PLUS Loans by parents if that is the only loan the family has. The one problem with applying for any repayments change is you may be extending the time of your repayments beyond the typical ten years which may lower your amounts but burden you longer.

Federal loan programs for students and parents, under certain conditions may provide for forgive, cancellation or discharge of loans. Separately, if parents work for the federal government or a not-for-profit entity, there may be eligibility for loan forgiveness through the Public Service Loan Forgiveness if at least 10 years of payment have been made.

Federal Grant and scholarship programs account for funding  28% of the needs of the average family in 2017- 2018. This is money for college and does not have to be paid back. Almost all of federal grant programs are needed based. See the list of grants here.

The federal scholarship programs are merit-based, received from school, outside organizations, or businesses. Information as to how to apply can be found here. Sallie Mae’s survey of 2017-2018, showed higher dollar contributions of $4,598 for those families making more than $100,000. Another place to look for scholarship opportunities is on fastweb.

In addition to the “free aid” you can get through the federal government, there are federal work study programs which pay at least the federal minimum wage and are on-off campus. These programs are need-based so check out their website here.

You can look at state programs for additional loans, grants, and scholarship opportunities which can potentially supplement what you are getting through the federal programs. Take a look at the different programs by state for possible loan/grant/scholarship opportunities here. You can look for merit-based scholarships by college, if your college is on this list. Some colleges have supportive loan programs for those families that are need-based as the 25 colleges, including Harvard, on this list.

Right to appeal should be exercised.

It is always a good idea to challenge your initial financial offer via an appeals process or a professional judgment process, especially if there are circumstances that occurred after the submission of your financial aid application.

Among the special circumstances are such as the sudden illness of a parent or another dependent in the home, job loss, unexpected medical illness or your primary home was destroyed via force majeure or act of God.

Call or write a letter to the financial aid office at the college you intend to go to.

You will need documentation.

The student financial aid administrators have discretion to make decisions regarding your special circumstances codified by  law here.

You may be undergoing significant stress as you are faced with these circumstances but it could substantially help you financially.

It may seem like a daunting task to figure out how to pay for college and all the related costs, but keep your eye on the long term benefits that your child is going to get by taking advantage of a valuable lifelong education that can be leveraged for a career of their choice. This is the beginning of their journey away from home.

Have you begun your exploration of college for your children? While it is a stressful time, it can certainly be another chance to learn from your child about their preferences and readiness for adulthood.

Commenting here would be helpful for those who could learn from you in the future. Do you have a story you would like to share? We would like to hear from you!




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