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A Consumer's Guide to Student Loans and Education Finance
Time is on Your Side with Early Planning
Education finance needs go
beyond the price of tuition, so students typically draw from multiple sources to make ends meet. In order to pay for housing, transportation, meals and sundry school fees, college students blend resources like scholarships, grants and loans. College savings plans are also gaining favor among forward-thinking student families preparing for the extraordinary costs of college.
In fact, for some families, schooling taxes budgets even
before kids reach college age. Private high school tuition rivals college costs, in many cases, so financial resources needed for education are not limited to those applied toward post-secondary programs.
Fortunately, financial help is accessible at all levels of education, from high school to post-graduate studies. The various forms of available aid encompass government-backed efforts, as well as those funded by private sector forces and other benefactors committed to accessible education. In order to make the most of education finance, it is essential to capture every available resource, from performance-based scholarships, to government grants. And when student loans are needed, low-interest varieties and consolidation options provide go-to reserves for students needing them most.
The cost of higher education rises with each passing year, so start early to save for your child’s education. If you are in the dark about college expenses, you may want to start by searching for information at the
College Affordability and Transparency Center. Here you can compare tuition, fees, school size, etc. at various institutions of higher learning and even estimate cost after scholarships and grants.
If your child is only a toddler now, you may feel you have plenty of time to save, but don’t make the mistake of procrastinating. Time flies and before you can blink, your child will be experiencing his first school bus ride, and then his first middle school dance, and then high school graduation! The more you can save now the better. Even saving $100 a month for 18 years at 6% will yield over $38,000.
College Prep Includes Savings Plans
Adequately financing education expenses doesn't happen overnight, so the most successful planners begin before needs are imminent. Setting cash aside early in a child's life increases reserves as they age, and gives money time to grow. There are several strategies available for parents looking ahead to budget for school, so each approach is tailor-made to individual family circumstances.
In its most basic form, saving for school places money in a secure place designated for education expenses. By keeping funds out of the regular household cash flow, savers are able to accumulate money earmarked for college or private school payments. But while simple savings accounts serve the function, there may be better ways to grow education reserves for future college costs.
Education savings plans, also known as college 529 plans, are formalized programs designed to increase families' ability to
pay for education. While the approach is similar to keeping a savings account flowing for school, 529 plans have tax benefits that help maximize investment income to be used for college. While a regular self-directed savings account uses post-tax resources to build college reserves, 529 participants are entitled to tax-free returns on the money they put aside for school. That means investment income can be fully applied to approved college costs like:
A Couple Savings Options with a 529 Plan
529 earnings qualify for use at accredited two-year and four-year colleges, for programs leading to degrees and certifications. The savings plans are administered in ways similar to 401K programs and IRAs and considered assets of parents using them to prepare for kids' college expenses. They furnish flexible solutions, because the beneficiary attached to each plan can be changed as needs shift. Education funds set aside for one child, for instance, can instead be used to fund another's education, should family plans change. One perceived drawback of 529 college savings plans, on the other hand, is lack of flexibility in the types of investments eligible for the programs.
All states sponsor at least one
529 Savings Plan for future college expenses. The funds can be used for qualified college expenses nationwide which includes tuition, room and board, books and fees. Each state determines how its plan is structured so check yours out for more details. There are two types of plans – Prepaid and Savings.
A Prepaid Plan allows you to buy units or contracts for future tuition at participating in- state public colleges. You are able to lock in today’s prices for tomorrow’s education. These plans are exempt from federal and state taxes. The pre-paid tuition plan is an excellent savings vehicle. Since tuition costs are rising faster than the annual rate of inflation, this plan would potentially earn more interest than a CD or bank savings account. The downside to the plan is that your child is not guaranteed acceptance into the school and not every state offers this option. Besides public state colleges, there are also now more than 270 private schools with Independent 529 Plans where you can prepay the tuition costs.
The Savings Plan is a more flexible way to save for college. There are no taxes on earnings or withdrawals as long as they are for qualified college expenses. The plans are administered by the state which provides several mutual fund options which are market driven. Some funds are aged based meaning they are more aggressive in the beginning and become more conservative as the child reaches college age. Most plans have low minimum contribution limits making it easy for anyone to open an account. Depending on the state, many have maximum contribution limits of up to $300,000. Two More Savings Vehicles to Consider
Coverdell Education Savings Account
Money in a Coverdell ESA grows tax deferred and withdrawals are tax free. The maximum annual donation is limited to $2000. Unlike the 529 Plan, money can be used not only for college expenses, but also for elementary and secondary school expenses. Money in the Coverdell account must be used by age 30 whereas there is no age limit for the 529 plan.
Custodial accounts are investments in the child’s name but under your control. When the child reaches 18 or 21 (depending on the state) he or she takes complete control. The earnings are not tax deferred and will be taxed to the child each year. One positive is that the money is not limited to educational expenses and can be used for anything. The account also has many more investment options compared to a 529 plan.
Grants Furnish Gift-Aid for School
Among the myriad available school financing resources, grants furnish a particularly appealing path to cover college costs. Unlike loans, money disbursed through grant programs does not require repayment. Instead, it is applied directly to school expenses like tuition, paring-down each recipient's total outstanding obligation.
Grants are issued by various benefactors committed to promoting educational access, including:
Because they provide funding designed to lift recipients into college programs, most grants are need-based. Grant eligibility generally requires demonstrable financial need, and some awards come with performance riders, requiring students to maintain particular standards in order to receive funds.
Grants for College from Federal Funds Based on Need
Federal Pell Grants – Among the most visible and far-reaching grant programs, Federal Pell Grants have helped lift countless students into college roles. They help low income families, are tax free and never have to be repaid. The gift-aid program furnishes funding for certain applicants pursuing undergraduate degrees. Awards vary in amount, based on legislation and individual financial need. During the 2015-16 school year, for example, Pell Grants are capped at $5775 per student. The amount each applicant receives is based on strict criteria related to:
Cost of Attending the Chosen School
Status as a Full or Part-Time Student
Full or Partial-Year Enrollment
Pell Grant awards are not influenced by other financial aid for which a student is eligible, but a 2012 stipulation limits the number of qualifying semesters to twelve per student. Applicants who lost a parent to military service may qualify for special Pell consideration, giving them access to maximum funding levels.
Like other forms of financial aid from the Federal Government, access to need-based Pell Grants starts with
a standardized application. The Free Application for Federal Student Aid, or FAFSA, is a document used to determine family income and need. Using information like family size, number of members in college and overall income, FAFSA calculations determine what each family is expected to contribute to education expenses. The Expected Family Contribution (EFC) provides the basis by which awards are determined, steering Pell assistance to those needing it most.
Though low-income families may receive higher awards than other applicants, the program is not exclusive to a particular income threshold. Instead, the EFC accounts for income and obligations, as well as the cost of covering school expenses. Tuition, housing, books, and other customary college costs are essentially subtracted from each applicant's EFC, which identifies a precise level of need for each student. Pell Grants are then issued, according to determinations made using standardized formulas.
Colleges also offer a work-study program through the
Federal Supplemental Educational Opportunity Grant. Students can receive up to $5,500 in exchange for working part-time.
When applying for financial aid, colleges look at income, child’s assets, parent’s non retirement assets and the number of children in the family. It’s best to keep assets in the parent’s name as opposed to the child’s. Colleges use a formula to determine financial need which uses 20% for the child’s assets and only 5.64% for the parent’s assets.
Institutional Gift-Aid – Although the Pell Grant program serves wide-ranging financing needs, it is not the only form of free money available to college students. Colleges and Universities, for example, administer their own need-based programs to help lift qualified students into degree programs. Many schools offering financial aid rely on the FAFSA for determining need, but some also require additional application materials.
A completed CSS Profile is required by some colleges before initiating in-house financial aid awards. The document serves functions similar to the FAFSA, compiling vital financial aid data used by administrators to determine need and grant awards. Hundreds of post-secondary schools use the College Scholarships Service Profile to augment mandatory FAFSA filings, so it is up to each student to inquire with campus officials for further information.
Scholarships Serve Stand-Out Students
While education grants represent need-based gift-aid, or free money steered toward financially disadvantaged students, another form of financial aid focuses on merit. Scholarships recognize outstanding students for their accomplishments in athletics, scholastics, and other areas. Though there may be a need component present, these merit-based awards typically look at performance, rather than strictly addressing shortfalls among disadvantaged students.
Scholarships are issued by wide-ranging benefactors, including civic organizations, state and federal entities, private sector companies, as well as colleges and universities. Like grants, scholarships do not require repayment, though performance metrics are sometimes attached, which can void eligibility.
While many grant programs utilize standard tools for qualifying applicants, like the FAFSA and CSS, scholarships often come from independent sources requiring dedicated applications. Deadlines and supporting documentation are unique to each scholarship program, so applicants must address particulars directly with the issuing agencies. Scholarships come from:
Corporations – Countless big-name private sector benefactors dedicate resources to help students cover college costs. Their scholarship programs address wide-ranging needs, sometimes focusing on particular areas of expertise. Technical companies might steer aid toward would-be engineers or other STEM field candidates, while hospitality providers likely offer support for hotel and restaurant management degree-seekers. Microsoft, for example, courts students enrolled in computer science, computer engineering and other technical programs, furnishing scholarship support for stand-out performers. Winners earn full tuition payments, as well as Microsoft internships during summer months.
Military – The U. S. Government provides education financing for members of the military, under established benefit programs. But children and spouses of both active duty service personnel and veterans are also eligible for military scholarships to help pay for school. Programs are widespread, sponsored by organization like the American Legion and Air Force Aid Society. Requirements vary, so military families are advised to investigate each opportunity applicable to their particular circumstances. Though awards are not always comprehensive, full-ride offers; each scholarship earned reduces a student's out-of-pocket education finance obligation.
Religious Organizations – Faith-based programs assist certain students with financial aid for college. Christians, for example, enjoy access to religious scholarships like the Young Christian Leaders program, which partners with a law firm to provide tens-of-thousands in annual support for college students. Other religious initiatives include opportunities advanced by the Islamic Society of North America and the Coalition of Hindi Youth.
Ethnic Advocacy Groups – Groups devoted to promoting ethnic causes are responsible for many scholarship opportunities. In order to advance education among certain student segments, minority organizations provide targeted financial aid for African Americans, Hispanics, and Asian college students. Qualifications vary, but start with inclusion in particular ethnic groups. The NAACP, for instance, administers scholarships made possible by donations. By submitting transcripts, letters of recommendation, enrollment confirmation and NAACP membership credentials, applicants are given opportunities to write essays in pursuit of scholarship funds.In addition to scholarships put forth by minority advocacy groups, under-represented students also have access to funding sponsored by outside entities committed to diversity in education. These awards are earmarked for particular ethnic groups and funded by diverse public and private benefactors. The United Negro College Fund, for instance, bolsters access for students at UNCF member schools, providing aid through targeted efforts like the American Hotel Foundation Scholarship and the Davis Scholarship for Women in STEM.
Individual Benefactors – Through alma mater schools and privately funded foundations, individuals committed to higher education provide direct support for high achieving students needing college cash. Memorial awards honoring family members and noted practitioners are commonly directed toward students with similar educational interests and those studying in particular programs held dear to donors funding the offers. In many cases, these are highly specific opportunities made available to promising candidates in particular fields. Some, however, furnish general funding for diverse applicants.
Government Agencies – In addition to need-based grants supplied by State and Federal Governments, public agencies also reward merit scholarships to deserving applicants. Opportunities vary by location, sometimes targeting particular vocations. Current shortages of qualified personnel to fill health care and education roles, for instance, provide openings for student nurses and teachers to land government-backed scholarships for degree programs within these specialties.One Government initiative, The Nurse Corps Scholarship program, reserves funding for undergraduate and graduate students pursuing nursing credentials. By working in designated facilities following graduation, participants earn scholarship dollars to erase tuition costs and other financial obligations tied to their schooling. This unique opportunity is contingent upon fulfilling these work commitments, or the money must be repaid.
Colleges and Universities – Schools administer their own financial aid programs, designed to increase affordability and attract talent. Some of the most visible school-sponsored awards are disbursed to star athletes induced to compete for particular schools. These awards are very competitive, often resulting in full-ride scholarships for the cream of the crop. Top-tier academics are also rewarded with institutional scholarships recognizing high scholastic achievement. Many of the scholarships offered originate from trusts and endowments set-up for private university aid, but public schools also put forth merit scholarships for attendees. Auburn University, for example, maintains a suite of scholarships
available to freshmen, as well as upper-class members.
The most successful scholarship-seekers adopt a catch-all approach, applying for every form of available aid. Personal attributes like race, gender, location, and career aspirations each open doors to unique opportunities. And since sources of scholarship money are diverse; religious organizations, parents' employers and civic groups should each be explored for college finance prospects.
Loans and Consolidation Support Education Finance
Although scholarships and grants provide free money for advanced education, student families typically require additional support. When gift-aid doesn't cover college expenses, student loans fill affordability gaps for families at all income levels. School loans are available from private banks and credit unions, but the most
reasonable terms and conditions are those attached to loans issued by government-backed programs.
There are two kinds of student loans – need based and non-need based.
Federal student loans have the lowest interest rates and most flexible repayment terms available, so they provide go-to options for college funding. Administered as part of the government's comprehensive financial aid program, loans are offered alongside grants and other resources, to help enrollees make ends meet. And though grace periods and deferments furnish flexible payment options, school loans ultimately come due and must be repaid like other borrowed funds.
William D. Ford Federal Direct Loan Program
Issued by the U. S. Department of Education, Direct Loans are used by countless attendees to manage education costs. Eligibility begins with filing a FAFSA report, which initiates each applicant's financial aid request. There are currently four forms of funding disbursed under the program:
Direct Subsidized Loan– Need-based funding is issued to undergraduate students attending accredited colleges and universities. Based on the actual cost of attending a particular school, the loans are not to exceed the outstanding level of need, once all other forms of financial aid have been applied. Under the expansive program, the Federal Government accounts for interest payments while participants are in school, during a six-month grace period following graduation, and during approved deferment.
Direct Unsubsidized Loans – Money is disbursed through this program without demonstrable financial need. Though repayment terms and interest rates are not as attractive as Direct Loan options, unsubsidized funds are made available to both undergraduates and graduate students. Like subsidized funding, loan sums don't exceed the actual cost of paying for school, but the terms of Unsubsidized Direct Loans require recipients to cover interest charges at all times balances are outstanding. Interest unpaid during attendance is capitalized, ultimately requiring repayment.
Direct Plus Loans – Designed for graduate and professional students, PLUS (Parent Loans for Undergraduate Students) loans mirror conventional, private lending options, which require solid credit to qualify. Borrowers must meet general eligibility standards and attend school at least half-time. Parents can apply for loans up to the cost of college and have 10 years to repay. They can choose to repay as soon as the money is disbursed or opt to pay after the student graduates.
Parents …one last word about savings… Never raid your retirement account for your child’s college expenses. You will never be able to make up for the loss. Students have other options as mentioned above to help bridge the gap between savings and college cost.
Direct Consolidation Loans – Attendees with multiple outstanding balances qualify for Direct Consolidation, which captures outstanding obligations under a single renegotiated loan. The process simplifies repayment and lowers interest rates for some participants. Each case is unique, so careful consideration must be given to consolidation alternatives, before committing to restructuring. In some cases, repayment periods are extended, leading to longer payback terms. On the other hand, consolidating may also reduce monthly payment amounts, boosting affordability for those struggling to keep pace with repayment.
In addition to the William D. Ford Program, the Federal Government backs funding disbursed through the
Perkins Loans Program. Reserved for the neediest attendees, Perkins funds are low interest loans issued by individual institutions at an interest rate of 5%. Awards are made according to cost of attendance and limited by the amount of money available at each college or university. Participation and funding levels vary, so timely application is required to capture the highest levels of assistance. Loan repayment and interest do not begin until after the student graduates.
Stafford Loans - subsidized & unsubsidized – Subsidized Stafford loans are need based and interest does not accrue until after the student graduates, whereas unsubsidized loans are not need based. Repayment does not begin until the student graduates, but interest accrues immediately. Plan Ahead & Prepare for the Future
Education finance draws from multiple sources of assistance, including grants, loans, college savings plans, and merit-based scholarships. For those needing help funding school choices, this suite of alternatives enables custom financing to cover college costs. Government sources furnish widespread assistance, but there are also financial aid opportunities available in the private sector. To make the most of existing programs, college families are encouraged to cast a wide net, accounting for each applicable resource.
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