More than half of all American college students or their families borrow part of the cost of their education.
When your child is ready for college, will you be ready to pay for it? That's the question you're probably going to face, even if you've been actively investing in a college fund since your son or daughter was small. Financial aid, in the form of scholarships and loans, may provide the extra funding you need. The loans may come from the school your child attends, the federal government, state governments, and private lenders.
To apply for federal aid, including Stafford and Perkins loans to students and Parents Loans for Undergraduate Students (PLUS), you must supply detailed information about your family's finances using the Free Application for Federal Student Aid, or FAFSA (
www.fafsa.ed.gov). You can complete it online or on paper. It's due after January 1 of the year for which you need the loan.
An analysis of the information you provide determines whether your child will qualify for a subsidized federally funded loan and sets the amount you're expected to contribute to the annual cost of his or her education. You get a copy of the report, and so does each of the colleges to which your child applies.
You may have to file a separate application for state-sponsored aid, and some colleges require individual financial aid applications in addition to the FAFSA. Check with the individual institutions and the US Department of Education (
www.ed.gov) for more information.
FACTORS THAT DETERMINE AID ELIGIBILITY:
- Family income
- Family's savings and investments (but not retirement accounts)
- Student's savings and investments
- Number of other students in the family also paying tuition
- Family expenses, both ordinary and unusual
FACTORS THAT INFLUENCE HOW MUCH IS AWARDED:
- Financial resources of the college or university
- Needs of other students
- Special interest in your child
STAFFORD LOANS
Stafford loans, which are an important component of many students' financial aid package, may be direct loans granted by the government or Federal Family Education Loans (FFELs) from private lenders whose loans are guaranteed by the government. Each college, university, and vocation or technical school determines which type will be available to its students.
If you're applying to a private lender, such as a bank or credit union, for a FFEL, it's smart to apply early. If you wait until the late spring or summer before the fall semester's bill is due, you could get caught short. It can take six weeks or more to get action on applications for government sponsored loan programs.
Stafford loans, whether Direct or granted through the FFEL program, may be either subsidized or unsubsidized. Students who qualify for a subsidized loan, based on family income, do not owe interest on their loans during the period they're enrolled at least half-time in course work. This reduces the long-term cost of borrowing. Students who don't qualify for a subsidized loan may be awarded an unsubsidized one. The difference is that interest on these loans begins to be charged as soon as the money is paid out. There's a choice between making interest-only payments or deferring those amounts. When it's deferred, the accrued interest is added to the principal before repayment begins. It may be tax deductible for the year it's paid, depending on the student's adjusted gross income.
With both subsidized and unsubsidized Stafford loans, repayment must begin six months after the borrower graduates or is no longer enrolled at least half time. A number of repayment plans are available and multiple loans can be consolidated into a single loan for repayment.
PERKINS LOANS
Perkins loans, which are granted by the college or university, are made based on financial need and the amount of money the school has available when your child applies. The interest rate is fixed and finance charges begin to accrue nine months after he or she graduates, leaves school, or is no longer enrolled at least half-time.
While Perkins loans can be an important source of borrowing, the program has historically been underfunded. This means qualified students may receive less than they might be eligible for.
PLUS LOANS
As a parent, you can borrow to cover the full cost of your child's higher education — as long as those costs have not been covered by other loans, grants, and scholarships — regardless of your financial need. You must have good credit to qualify or arrange for a cosigner, or endorser.You can arrange a PLUS either as a Direct Loan from the federal government or a FFEL through a private lender.
If you take a PLUS, you must begin to repay within 90 days after you receive the money or write a check against your PLUS line of credit. The interest may be deductible, based on your adjusted gross income, which isn't true of personal loans.
OTHER WAYS TO BORROW
If you need to borrow more than is available through the government or your child's college, you do have alternatives. You might consider a home equity loan if you own your home. The rates may be lower than on a PLUS and the interest may also be deductible. However, you put your home at risk if for any reason you are unable to make the payments that are due.
You might also consider borrowing against your employer-sponsored retirement plan or taking money out of your individual retirement account (IRA), though both have serious drawbacks. A better alternative may be for you and your child to share the responsibility for borrowing what's needed. If you're able, you can help repay your child's loans with a gift up to the annual tax-free amount.
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