Part 2 of an in-depth 3-part series. Read Part 1 and Part 3.
In part one of this series, we discussed the many types of gift aid, or free money, available to your child based on their financial need. More than likely, unless you demonstrate exceptional need, you will have to take out some form of student loan. Here, I will discuss the smorgasbord of options you can choose from when making this important decision along with the benefits and drawbacks of each type of loan.
This type of financial aid has made quite a stir in the media over the past few years, and rightly so, as it accounts for $1.4 trillion in debt spread out among approximately 44 million borrowers. In fact, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from the previous year. In an ideal world, you would be able to avoid taking out any student loans to pay for your child’s postsecondary education, but the reality is that most parents will end up taking out some form of loan. Not all loans are the same, however. They come in all shapes and sizes with varying amounts of interest and borrowing limits. Here is a breakdown of the most common student loans.
Federal Perkins Loan
This is strictly a need-based subsidized loan, meaning the interest on the loan is covered by the government while your child is enrolled in college. With a low fixed interest rate of 5%, these rank among the best type of loan you can borrow should you qualify. As of the 2016-2017 academic year, the loan limits for undergraduates are $5,500 per year with a lifetime maximum loan of $27,500. Not all schools participate in the Perkins Loan Provider, so you should check with your school’s financial aid office in advance to see if they do. These loans are distributed directly by the school for students with exceptional need. What constitutes as exceptional need, you may ask? Typically, this means that you will either have an EFC of $0 or your family’s adjusted gross income is less than $25,000. Like all federal loans, this type of aid requires the completion of the Federal Application for Federal Student Aid (FAFSA).
Federal Direct Subsidized Loan
Formerly known as the Stafford Subsidized Loan, the Federal Direct Subsidized Loan is a very common type aid. Like the Federal Perkins Loan, the interest is covered by the federal government while your child is enrolled in school at least part-time. The interest rate is exceptionally low for the 2017-18 academic year, with a fixed rate of 4.45% for undergraduate students, even better than the Federal Perkins Loan. The maximum amount awarded each year increases as your child advances through college and is broken down as follows:
Any changes to the threshold amount offered will take effect on July 1st of any given year.
Federal Direct Unsubsidized Loan
Formerly known as the Stafford Unsubsidized Loan, this type of federal student loan is non-need based. This is the most common type of federal loan awarded and accounts for nearly $436.1 billion of total student debt. The fixed interest rate, 4.45%, is the same as the interest rate for the Federal Direct Subsidized loan. Unlike its subsidized counterpart, however, this loan will accrue interest while your child is enrolled in college, so therefore it is in your best interest to 1) encourage him or her to graduate within four years, and 2) begin making payments as soon as possible to hamper the amortization process. The maximum amount awarded per year changes as your child progresses through college in the following manner:
The total cumulative federal loan amount that can be offered for the duration of your child’s four-year enrollment is $27,000 for dependent undergraduate students.
Federal Direct Parent PLUS Loan
If you have exhausted the limit of federal, state, and institutional grants and scholarships along with all available federal aid, you may consider taking out a Parent PLUS Loan as a last resort. At a whopping 7%, these loans come with the highest interest rate and are not subsidized. As a parent, you must qualify to take out this loan type, meaning a bad credit score might have a negative impact on your eligibility. Before taking out whatever amount you think you’ll need to cover your child’s cost of education, it’s best to consider alternative private loan sources offered by local and national banks and credit cards. Or, better yet, if you have already taken out loans or plan to take out PLUS loans, consider applying for a loan consolidation that can lower your interest rates and monthly payments. With fixed rates starting as low as 3.350%, Sofi has helped to refinance the most student debt in the U.S.
Federal Work-Study Program
In addition to gift aid and student loans, approximately 3,400 schools offer work-study programs to help defray the cost of tuition depending on your child’s level of financial need. If you should see the Federal Work-Study Program (FWS) listed on your child’s award letter, you should definitely encourage them to accept the offer. Students may be employed by the college institution itself or a federal, state, or local public agency. The position is usually negotiable, so it’s a good idea to speak with the school’s Student Employment Office to arrange a job that is more career-oriented.
Working on-campus can set your child up to gain practical experience in their career prospects while networking with others. A few examples of on-campus jobs include lab assistants, teacher’s assistants, student technology assistants, and student ambassador positions. Another benefit of the FWS is that, unlike other low-wage part-time jobs, the hours your child will work will be organized around their class schedule and academic obligations, preventing the possibility of scheduling conflicts. Also unlike other off-campus part-time jobs, the funds earned from the work-study program do not count against your child when they apply for financial aid the following year, effectively lowering their portion of the EFC. This could add up to hundreds or even thousands of additional offered financial aid for subsequent years.
In order to qualify for the federal Work-Study program, certain requirements must be upheld, including:
Completing a FAFSA
Enrolling for at least 6 credit hours per semester
Maintaining at least a 2.0 GPA
Working a maximum of 20 hours per week
Despite the obvious benefits associated with the Federal Work-Study Program, there is a huge disconnect between award offers and student employment. In fact, according to a report published by The National Association of Student Financial Aid Administrators (NASFAA), approximately half of students offered FWS awards go on to take the positions. Not taking advantage of work-study is one of the biggest college financial mistakes that you can make.
So, which Financial Aid Is the Best?
Phew! As you can see, there are a lot of potential sources of financial aid that you will see listed on your award letter. It’s no wonder that so many people struggle to wade through the sheer volume of options. So, which financial aid should you accept? The immediate answer is the free money. As for student loans, the fact of the matter is, there is no one best solution for everyone. The amount of aid in the form of loans you decide to take will depend on your financial stability, your EFC, and your credit score.
Just because your calculated EFC says you should be able to afford the monthly payments based on your income, it doesn’t take into consideration other consumer debt such as your mortgage and car loans. Ultimately, if you have a better grasp as to where you stand financially, you’ll be better equipped to make an informed decision regarding the type of aid you choose to accept.
In part three of this series, I’ll discuss the deception tactics many financial aid offices use in their award letters in order to make their offers more appealing and how you can decipher the letter in a glance.