If you or your child is college bound there are two big questions confronting you. The first is the “where” and the second is the “how” – or how you will pay for his or her higher education.
The best student loan debt is no student loan debt
While the best possible outcome would be for your child to graduate from college with neither of you having any debt, this has become increasingly difficult. According to the College Board, the average cost of tuition and fees to attend a state university is now $8893 for a resident. If your child wants to attend a state university as an out-of-state state student, the average cost of this is $22,203. And the average cost for attending a private school now averages $30,094. For that matter, nearly 20 million of us attend college every year and of that number, close to 12 million – or 60% – borrow annually to help cover costs. About one-quarter of all borrowers actually end up owing more than $28,000.
How to avoid borrowing the money
It is possible to avoid student loan debts. In fact, there are four popular ways to do this. These are scholarships, grants, work grants and work-study programs. Of these, the best are scholarships and grants because they are basically free money. However, they can be tough to get. There are some other options as follows but as you will see, they tend to be “special purpose.”
• Aid for serving in the military or for being the spouse or child of a veteran,
• An Education Award for community service with AmeriCorps,
• Educational and Training Vouchers for current and former foster care youth, and/or
• Scholarships and loan repayment through the Department of Health and Human Services’ Indian Health Service, National Institutes of Health, and National Health Service Corps.
Where to find scholarships and grants
The obvious place to turn for a grant or scholarship is your child’s school. But beyond this there are some other alternatives. Many corporations offer scholarships to the children of their employees. Nonprofit organizations such as the Elks, Lions, Masons, the Odd Fellows and the Sycamore Angels Rebekah Lodge also often have scholarships for the children of their members. And if you check with your state’s Department of Education, you may find that it has scholarships and grants available. For example where I live, there is the Boettcher Foundation Scholarship, which covers the cost of a Scholar’s tuition, fees and books for eight semesters/twelve quarters at approved four-year universities or colleges along with a $2,800 living stipend to help pay the cost of room and board.
If borrow you must
In the event that it’s just not possible for your child to find a scholarship, grant or work-study program, you may have no alternative but to get a student loan. Since 2007 there have been only three types of federal student loans available – Direct Loans, Perkins Loans and PLUS loans. Unfortunately, you would be able to qualify for only one of these – a PLUS loan, as it’s the only federal loan available to parents of students. The other two types of loans are only for students. Of course, this is where young people pile on debt by taking on one of these loans. However, your child may not be able to qualify for one of them – a Perkins Loan. The reason for this is because it’s based on need. In other words you must be able to demonstrate that you have a legitimate financial need to get the loan. In comparison, Direct Loans may or may not be need based.
Subsidized versus unsubsidized
Direct loans can be either subsidized or unsubsidized. The difference is that if the loan is subsidized your child will not be required to pay interest on the loan while he or she is in school at least halftime. Subsidized Direct Loans are need-based and Perkins loans are always subsidized. In comparison, Unsubsidized Direct Loans means that you or your child will be required to pay interest on the loan while in school.
It all depends on your FAFSA
On January 1 of every year, the federal government releases its annual Free Application for Federal Student Assistance or FAFSA. You’ll need to fill out this form unless you have the money to pay for your child’s education without any type of aid. If you will need financial aid, you will have to fill out and submit this form. You will need to submit it to the US Department of Education if you will be applying for a federal loan and to the school or schools of your child’s choice.
Why the FAFSA is crucial
The reason why this form is so important is because the schools your child has applied to will use it to determine your Expected Family Contribution or EFC. This is the amount you’re expected to contribute to the price of your child’s education based on a formula that takes into account your income and assets. The good news of the EFC is that it doesn’t change regardless of the school your child choses. In other words if your EFC were $10,000, it would be the same if he or she went to a land gant school or Yale.
Acceptance and award letters
Any college that accepts your school will mail you an acceptance letter and an award letter. The award letter is what will spell out the financial aid that your child will receive. It’s important to read this letter very carefully. There have been cases where families have got very excited when they saw that their child would receive $5000 or more in financial aid – only to discover that the “financial aid” was actually a loan.
Despite what a college or university might lead you to believe, if you want a federal loan you need only to fill out the FAFSA. However, if you’re looking for aid from the school itself you may also be required to fill out a CSS Financial Aid PROFILE or if your son or daughter is applying to a very top-level, private school, you may be required to fill out its own application for financial aid.
The tax advantages of paying for your child’s higher education
You should be pleased to learn that there are at least some tax benefits to paying for your child’s college. In fact, there are two tax credits available that would help offset the cost of your child’s tuition, fees, books, supplies, and equipment. They do this by reducing the amount of your income tax. They are:
• The American Opportunity Credit allows you to claim up to $2,500 per student per year for the first four years of school as your student works toward a degree or similar credential.
• The Lifetime Learning Credit allows you to claim up to $2,000 per student per year for any college or career school tuition and fees, as well as for books, supplies, and equipment that were required for the course and had to be purchased from the school.
In addition, if you take out student loans for your child, your spouse or yourself, you can take a tax deduction for the interest that you paid on it. This applies to all loans (not just federal student loans) that are used to pay for higher education expenses. The maximum deduction is capped at $2500 a year. And while that $2500 probably won’t pay for a year of your child’s college, it should certainly help.
Have a heart-to-heart talk
If your child has been admitted to several different schools, it’s important that you have a heart-to-heart talk about the schools and what they cost. We know that it’s hard to say “no” to your child because you want to give him or her everything you can – but a very expensive college might be outside the “everything you can” category While it used to be that graduating from a very prestigious university automatically resulted in a very lucrative job, this is no longer as true as it was just several years ago. For that matter, you might suggest that your child do what many young people are doing these days and that is attend a less expensive college for his or her first two years and then transfer to that more prestigious school. Or depending on your child’s career goals, it might make good sense for him or her to attend an inexpensive school while saving enough money to go to grad school at a very prestigious college.