Posts Tagged ‘Stafford Loan’

College Aid Opportunities to the Rescue

May 6, 2010

Parents often find the first bill from their child’s college a real eye-opener.  When they do the math, they realize their current cash flow and financial aid insufficient.  Where can parents and students alike turn to make up the difference?  Here are six college aid options to consider.

Where can parents and students turn to when their cash flow and financial aid are insufficient? Some options include Stafford Loans and PLUS, among other options.Federal Government Stafford Loans

You can apply to borrow money for your school until May of the current school year.  Undergraduates can borrow $2,625-$5,500 per year, while graduate students can borrow up to $18,500.  For the 2008-09 through 2011-12 school years, subsidized Stafford loan interest rates for undergraduate students drop to 6.0%, 5.6%, 4.5% and 3.4%, with a return to 6.8% in 2012-13.  Loans for graduate students throughout the same period remain at 6.8%.  The government will pay interest on the loan for students who can demonstrate need. Students who do not demonstrate need can defer interest payments until after graduation, but interest will be added to the principal balance.  If you must borrow from a bank, consider Sallie Mae, a bank affiliated with the Student Loan Marketing Association.

Parent Loans for Undergraduate Students (PLUS)

PLUS allows parents to borrow the total cost of tuition less the amount of financial aid the child is eligible to receive from the school, with a fixed interest rate capped at 8.5%.  Unlike the Stafford Loan, the interest on a PLUS cannot be deferred.

Deferred-payment

Although most colleges bill students twice a year, Academic Management Services offers a monthly payment plan to spread out the cost.

Home-equity loans

When applying for this type of loan, your bank will charge the prime lending rate plus one-and-one-half points.  The interest on the loan is fully tax-deductible.  Furthermore, the equity reduction in your home improves your chances of receiving more financial aid in the future.

Borrow against your pension

According to federal law, you can borrow against the assets in your tax-deferred pension, profit-sharing and 401 (k) plans if you need money for college.

Borrow from your IRA

Consider this your very last option if possible.  According to federal law, you can borrow funds against your IRA on the condition that you can replace the funds within 60 days.  If you cannot replace the funds within 60 days, you will be taxed on the amount withdrawn, but you won’t incur a 10% penalty because the funds went towards qualified higher education purposes such as tuition.

Families should become aware of the options they have at their disposal towards paying for the college education of their children with the understanding that they’re not alone.  The federal government provides loans with manageable interest rates and terms for students and parents alike.  Even if they don’t turn to the government for help, they have additional options.  Children should not be denied higher education opportunities just because of a perceived lack of funds or insufficient financial aid.  Families just have to know where to look.

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Francis M. Unson

Top Ten Financial Aid Application Mistakes

April 21, 2010

What do parents or guardians do to contribute to the headache of applying to financial aid?  Among the errors that this blog will discuss, parents do not exercise enough caution when filling out financial aid forms as well as not weigh their college options strategically when their children receive financial aid.  What other mistakes do they commit?

What do parents or guardians do to contribute to the headache of applying to financial aid? They do not exercise enough caution when filling out financial aid forms as well as not weigh their college options strategically when their children receive financial aid, among other mistakes.Rushing through the application process

If you think that applying for financial aid is on a first come, first served basis, think again.  The faster (and less careful) you apply for financial aid, the more likely you are to commit errors.  Remember: you have a deadline for submitting the financial aid forms, and the Department of Education has a deadline for informing you of your eligibility in the form of a Student Aid Report (SAR).  You do not want to submit your forms a second time with corrections and, therefore, waste even more time.

Underestimating your financial aid eligibility

You should not base your child’s college choices just on the colleges you can afford, lest your child is fine choosing among state schools or community colleges over their dream college.  Furthermore, do not base the financial aid your child may or may not receive based on the aid your child’s friends did NOT receive.  Their financial (in)eligibility is not tied to your child’s.

Overestimating your financial aid eligibility

On the other hand, assuming that your child is eligible for 100% tuition-covering aid is unrealistic and potentially very tragic for your child.  What would you tell your child who applied to expensive colleges, only to find out that they are eligible for much less aid or, worse yet, none at all?

In order for your child to have at least one affordable college choice that requires little or no financial aid, your child should apply for a state-supported college in your home state.  However, even if their dream college is not financially possible, let them apply to it, anyway, but with the clear understanding of the financial infeasibility of attending it.

Strategy: If your child’s high school limits the number of colleges to which your child can apply, have them apply to schools that seek similar grades/GPA and SAT/ACT scores.  If your child is accepted to these colleges, you can leverage the school with the most generous financial aid package against the school your child prefers, and they may counter with a more generous aid package still.

Thinking that all state schools are inexpensive

Given the rising cost of college over the years, the tuition of out-of-state public schools is almost on par with private schools.

Counting on relatives

Never rely on your relatives paying for your tuition.  They live their own lives and deal with unexpected expenses that the promised tuition must cover instead.  Therefore, even if a relative has agreed to pay for your child’s tuition, apply for financial aid, anyway.  In the worst case scenario, financial aid will cover tuition expenses, but in the best case scenario, the windfall can help you pay off  your financial aid debt sooner.

Not applying to expensive schools

Do not apply to colleges based on the cost of the school’s tuition alone.  Why?  Because need for financial aid is based on the difference between the school’s cost and what the family is expected to pay.

Example:
College A: $40,000 per year
College B: $20,000 per year

Based on the aid formula, let’s assume the family is expected to contribute $15,000 per year
Therefore, the family would be eligible for the following:
College A: $40,000 – $15,000 = $25,000 in aid
College B: $20,000 – $15,000 = $5,000 in aid

Conclusion: Financial aid packages may help lessen the overall cost of tuition as long as you can demonstrate financial need.

Taking out a personal loan

Personal loans through a bank maybe expensive in the long run.  Go to the financial aid office of the college your child attends for better, much more attractive financing arrangements.

Being afraid of debt

Your child does not have to pay off college loans in the early parts of their careers if you apply for a Perkins Loan or subsidized Stafford Loan.  These loans do not charge interest or require repayment of the principal until a few months after the child graduates, leaves school, or drops below half-time status.  Turn to these loans instead of, for example, a home-equity loan, which charges interest immediately.

Responding to a college’s offer too soon

Do not respond to a college that sends you a financial aid package first.  Instead, wait until the financial aid packages from all the schools your child was accepted to have arrived.  Your strongest leverage is a competitive package from a similar-caliber school.  That aid package could be used as a bargaining chip to get a better deal from your child’s first choice.

Waiting too long to think about financial aid

Your child’s senior year in high school is not the best time to think about making financial aid decisions.  Instead, begin planning your child’s financial aid eligibility when they are in 10th or 11th grade, starting with the effect of your income, assets, debts, expenses and retirement provisions.  Consult a financial aid/college money guidebook or, better yet, hire an independent aid consultant.  Keep in mind: the criteria for how state schools distribute aid is very different from those for private schools.

You want to give yourself a head start of a few years so that you can understand financial aid, including how to fill out a FAFSA application.  Yes, a few years.  During your child’s sophomore and junior years in high school when they are still wondering where they’d like to go to college and what to study, you can do your own homework based on their tentative choices for college.  By the time they do apply for college in their senior year, you will have already determined ahead of time how you would finance their college education.  By getting a head start on understanding financial aid and avoiding the most common financial aid mistakes parents make, you will help your child get the best financial aid package possible.

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Francis M. Unson