Approximately two-thirds of today’s college students rely on loans to fund their education. By graduation day, these students will owe an average of $28,400 in student loans. Accruing some level of debt is unavoidable for most college students, but there are plenty of overlooked financing options savvy students can use to reduce the total costs of their education. In this guide, we identify and explore the categories of financial aid, with an emphasis on educating you on the options that deserve your utmost consideration. First, let’s start with the all-important FAFSA.
An Introduction to the FAFSA
All need-based financial aid, except scholarships and certain private grants, revolve around the Free Application for Federal Student Aid (FAFSA). This single federal application is also used by individual states to determine eligibility for resident students. Federal and state financial aid awards, of any kind, are contingent upon attendance at an accredited institution.
Accreditation refers to a voluntary system where schools and training programs submit information about their programs to accrediting organizations, such as the agencies listed here. These organizations then verify that the schools meet certain educational standards, which will qualify the school’s students for state and federal financial aid.
Something worth noting before delving further: since most awards are paid directly to the school, failure to attend classes will typically result in revoked aid. Students who have lost aid this way may be required to pay all of their tuition for a defined period of time or, at the least, an agreed upon cancellation fee. This is the first of many examples that demonstrates how important it is to fully understand and anticipate the terms of a loan, even in the face of extreme circumstances.
Most people qualify for at least some need-based financial aid. Financial aid assessments are based on the income and resources available to the parent or guardian of students under the age of 24. There are exceptions to the age requirement, including instances where both parents are deceased or the individual can demonstrate that they are emancipated. Grounds for a declaration of emancipation include but are not limited to:
- Military veterans
- Married persons
- Graduate or professional students
You can learn more about state-specific emancipation laws and circumstances through Cornell Law’s emancipation table.
Understanding Your Options
In order to get the maximum benefit of need-based financial aid, let’s first establish the three types of aid available: federal, state and private. We will then consider the cost of your education.
Federal aid is applied for automatically when you submit your FAFSA application. In most cases, this covers many, but not all, state aid programs. While state financial aid programs vary state to state, most have two award levels for state residents. It is common for states to make higher awards for students attending schools within their home state and lower awards for students enrolling out of state. It is also important to remember that while it is not technically a financial aid award, many state colleges and universities offer lower tuition rates for state residents.
Private college and universities often provide varying amounts of tuition assistance, and occasionally direct student aid. Certain private organizations will also offer some degree of financial aid, often in support of a particular field or community of people, such as a racial minority or people with a certain religious background. These awards are usually determined based on the student’s FAFSA application, and may or may not have different cutoff levels in terms of the total aid they award annually. The best practice is to check with your particular school’s financial aid office for information specific to that institution.
In general, student loans should become part of your financial aid package after you have exhausted your other available options. At their best, student loans are an expensive solution; at their worst, loans are millstones around the neck of borrowers for decades. But before you consider the possibility of loans, you need to come up with a rough estimate of major costs in a given program, ideally per semester.
Determine Your Needs
Tuition and Room & Board – Your school of choice should tell you upfront exactly how much each semester’s tuition and room and board will be. These expenses tend to be the weightiest. Most 4-year schools require freshmen to live on campus, but beyond the first year, students may want to estimate their annual room and board costs based on local rental rates.
Note: While the figure you settle on will certainly be inexact, it’s important to have an estimate. Projecting costs for the entirety of your program gives you the sobering scope of school debt to come, meaning you won’t be sideswiped when it is time to pay.
Books and Supplies – The cost of books and supplies will of course vary depending on the course and the professor’s particular textbook preferences. College board reports that the average textbook costs for 2013-2014 are as follows: $603 per semester at a public school and $626 per semester at a private school. Some majors – students in fine arts or architecture, for instance – may have higher supply costs because of the consumable nature of materials. While a portion of each semester’s investment in books can be recovered by selling used books, it’s best not to calculate this into your net expense.
Cost of Living – This general category, which should include expenses like groceries, clothing and entertainment, will vary wildly person to person. A simple goal is to establish an expenses-limit each semester and then track your total as you go. In some senses, cost of living is the real indicator of a student’s financial responsibility, as there is plenty of room for excess or thrift; every mature student must decide for themselves how they will manage their money.
Travel Expenses – Travel expenses for students living on-campus, or close to, will also vary. Students who are far from home will especially need to consider the seasonal costs for trips home, be they for the holidays or just a weekend away. Planning ahead and booking refundable trips early will, of course, keep travel costs down, but, more importantly, it will keep stress to a minimum.
Once you have added up all anticipated expenses, be they for a semester, a year, or the entirety of your program, you can then take that total and subtract from it your expected income during the same period, including any scholarships, grants or stipends you expect to receive. The difference will be your anticipated deficit – the remaining money you must consider addressing via loans.
While loans should certainly take care of many of the expenses mentioned above, unforeseen costs and, frankly, expensive tastes may require you to seek income beyond your financial aid. Such expenses can be dealt with through part-time jobs, work study – which is essentially financial aid – or even personal savings. Remember that your budget should not simply pit your loans and scholarships against your debts. As a student, you have the agency to raise your own funds and proactively deal with debt.
A Deeper Look at Your FAFSA
As we’ve said before, the world of financial aid revolves around FAFSA. Information on the federal financial aid application is used by most state and private aid providers to calculate how much aid an applicant qualifies for. In order to apply for federal financial aid through FAFSA, applicants must meet all of the following criteria:
- Be a citizen, permanent legal resident or eligible noncitizen
- Have a valid Social Security Number (students from certain U.S. Pacific territories are exempt)
- A valid high school diploma, GED certificate or completed homeschooling
- Enrollment in an eligible school or program that issues degrees or certificates
- Maintain satisfactory academic progress
- Must not owe a refund on a federal student grant or be in default on a federal student loan
- Males must register or already be registered with the Selective Service if you are not currently on active duty (students from certain U.S. Pacific territories are exempt)
- Applicants may not have a conviction for the sale or possession of illegal drugs for an offense that occurred when you were receiving federal student aid
FAFSA Application Deadlines
FAFSA applications are due on a rolling basis depending upon what semester or academic year you are applying for. Fall semester FAFSA applications are generally due the winter or spring before the coming fall semester. Since filing deadlines can differ from state to state and also depend upon which academic year or semester you are applying for, the best thing to do is consult the FAFSA Student Aid Deadline tool. Enter your state of residence and the school year you are applying for and the toll will return your deadline.
The FAFSA4Caster is a tool to keep in mind when going about your application for the first time. It walks you through a series of questions that will ultimately generate an estimate of your financial award. The tool works by furnishing subsequent questions based on your responses to previous questions.
Filing Your FAFSA Application
There are three basic ways to go about filing your FAFSA paperwork:
- Applying online via the FAFSA website
- Printing out a PDF application from the site and then mailing it
- Requesting a paper application be sent to you, done over the phone, and then mailing the completed application back
FAFSA recommends the online option, as it allows you to access features like the IRS Data Retrieval Tool, which automatically gathers relevant information from filed tax returns for students and parents and then autofills that information into the application. For those who would like to call and request their application, the number to dial is 1-800-4-FED-AID or 1-800-433-3243. The hearing impaired will need to dial 1-800-730-8913.
If you need assistance filling out your FAFSA application, there are a series of helpful videos available on YouTube that cover the entire process. Alternatively, you can contact your school’s financial aid office with specific questions regarding your school.
Navigating student loans can be a confusing ordeal, especially with so many programs using similar terminology to describe their products. At their core, there are two basic types of student loans: Federal and Private. Within each of these, there are different subtypes of loan products, each with advantages and disadvantages.
For starters, let’s look at the fundamental distinction between federal loans: subsidized and unsubsidized.
- Available to undergraduate students with demonstrated financial need
- The amount you are eligible to borrow is determined by your school, but the total may not be greater than your financial need, only counting school expenses
- The interest that accumulates on the loan while in-school is paid by the federal government – what’s known as the subsidy – so that when you graduate your initial debt is equal to the amount you borrowed
- Subsidized loans come with a grace period following graduation, roughly six months, during which interest accumulates but no payments are due
- These loans do not require you to demonstrate financial need, meaning they are available to students from any economic background
- Loans are available to both undergraduate and graduate students
- Each school determines how much a student can borrow, but loans accumulate interest from the moment the funds are disbursed
- You may elect to pay the interest as it accumulates while in school or it can capitalize (be added to the principal of the loan)
- These loans are intended to service different groups of borrowers: graduate students, professional degree students, and the parents of dependent undergraduates
- These loans are in the parent’s name and do not add to the personal debt of the student
- Loans are funded directly by the U.S. Department of Education and borrowers must have an acceptable credit history in order to qualify
- The amount you can borrow is determined by the school and cannot exceed the cost of attendance, less any other financial aid awards
- The current interest rate on Direct PLUS Loans is 6.41%, and there is an origination fee of 4.288% on loans disbursed after December 1, 2013
- These loans are intended to allow borrowers to consolidate multiple federal loans into a single loan, resulting in one monthly payment
- While the process of consolidation will simplify your monthly bookkeeping, it can also extend your repayment period, which could mean higher interest overall
- In order to qualify for a Direct Consolidation Loan ,you must have at least one Direct or FFEL program loan in either a grace period or in repayment
- The interest rate for these loans is based on the weighted average of the rates of the loans you are consolidating, rounded up to the nearest eighth of a percent
- This rate is fixed for the term of the loan
- This is a need-based loan available to both undergraduate and graduate students with exceptional financial need
- Eligibility is determined by your school’s financial aid department and is open to full and part-time students
- Perkins loans are funded by individual schools; undergraduate students may borrow up to $5,500 per year with a maximum of $27,500 for undergraduate study
- Professional and graduate students may borrow up to $8,000 per year, with a cap of $60,000, also including any undergraduate loans
- Loans currently carry an interest rate of 5%, and there are no fees associated with obtaining them
Understand Before You Borrow
In an effort to help students and families better manage student debt, the Department of Education requires borrowers to participate in Entrance Counseling. The program introduces parents and students to the terminology, process and rules pertaining to all types of federal loans. Entrance counseling must be completed before the first disbursement (payment) can be made to the institution. Entrance counseling can be completed in about 30 minutes on the Student Loans site, but be sure to consult with your school’s financial aid department first, as requirements will vary school to school.
Master Promissory Note – All federal loans require borrowers to sign a Master Promissory Note, a legal document that indicates the borrower will repay loan principal amounts, accrued interest and fees to the United State Department of Education. Generally speaking, a single MPN can be used for multiple loans, typically within a span of ten years time.
Federal Student Loan Repayment Options
Student loans are no different than car loans or mortgages in that you must repay them even if they require you to make sacrifices elsewhere. A misconception is that student borrowers do not have to repay student loans if they do not complete their education. Student loans must be repaid regardless of whether you graduate or not, and whether you get a job in your chosen field or not.
Grace Period – This refers to a predetermined amount of time between when you complete your education, or fall below the minimum number of credits required per semester, and when you have to begin repaying your loan. Not all federal student loans have a grace period – plus loans, for example, do not. Read your loan documents or check with your loan originator usually your school to determine what if any grace period you are entitled to.
There are some conditions that can cause a grace period to be changed:
Active Duty Military – Students called to active military duty for a period of more than 30 days before the end of their grace period are granted a full 6 month grace period upon their return from active duty.
Returning Students – This rule applies to borrowers who either stop taking classes or who fall below the required minimum for credits and return to half or full-time status before the end of their grace period. Such students will be given a new six month grace period when they stop attending school.
Loan Consolidation – If you elect to consolidate your loans before the end of your grace period, any remaining grace period will be forfeited and repayment will begin upon disbursement of your previous loans in about two months.
Deferment and Forbearance
There are certain circumstances that may allow for your student loan repayment to be temporarily halted or your repayment amount to be reduced. This refers to deferment or forbearance and their intent is to help you avoid default on your obligation.
Deferment – This is a period of time that the repayment of principal and interest on your loan is suspended. During a deferment, you will not have to make payments. Depending on the type of loan and your circumstances, you may also have interest deferred. Interest deferment is only available for subsidized loans, such as Federal Perkins Loans. Eligibility for deferment includes but is not limited to:
- Economic Hardship, including service in the Peace Corps
- Active Duty Military Service
Requests for a deferment must be made through your loan servicer, and even if you meet the eligibility requirements, deferment is not guaranteed.
Forbearance – Similar to deferment in that, when it is granted, payments are suspended or reduced for a period of up to 12 months. But unlike a deferment, interest continues to accrue regardless of what type of loan is involved. There are two types of forbearance that may be granted: discretionary and mandatory.
Discretionary Forbearance – This is granted at the discretion of the lender and may be granted for reasons such as financial hardship or illness.
Mandatory Forbearance – In cases where the borrower meets the eligibility requirements, the lender is required to grant forbearance. The reasons for mandatory forbearance include:
- Serving in a medical or dental internship or residency
- Your total owed each month is more than 20% of your monthly gross income
- You are serving in a national service corps, like AmeriCorps
- You qualify for partial repayment under the Department of Defense Student Loan Repayment Program
- You are a National Guard member and have been activated and are not otherwise eligible for a military deferment
Requests for forbearance must be made through your loan servicer and applies to all loan types. Interest will continue to accrue on outstanding balances while your forbearance is in effect.
Forgiveness – Discharge – Cancellation
It should go without saying that you are obligated to repay your loans, however, there are some circumstances where you may be absolved of your obligations. The following are reasons student loans may be forgiven or discharged:
Total and Permanent Disability
If you can prove to the Department of Education that you are totally and permanently disabled, you may receive a discharge of debt. Here are some ways to communicate disabilities to the DoE:
- A Department of Veteran’s Affairs document indicating you are unemployable due to a service-connected disability
- If you receive Social Security Disability Insurance (SSDI) or Supplemental Security Insurance (SSI) benefits, you can provide your SSA determination
- If you submit a physician’s certification that you are unable to work due to a medically verifiable physical or mental condition
Death Discharge – Student loan debt will be discharged if the student borrower is deceased, and, in the case of parent PLUS loans, if the student on whose behalf the loan was obtained dies.
Bankruptcy – Filing Chapter 7 or Chapter 13 bankruptcy does not automatically discharge student debt. Discharge may be granted if the bankruptcy court finds certain factors have been met .
Closed School Discharge – You may be entitled to a discharge of your student loan debt if the school you are enrolled in closes before you complete your program, resulting in your inability to complete your program at a comparable institution.
False Certification of Student Eligibility – If the school falsely certifies your eligibility for a loan, or if a school authorized a loan without your consent, you may be eligible to have the debt discharged.
Unpaid Refund Discharge – This discharge applies to loans that were not refunded by the school when a student withdraws from classes within established deadlines.
Teacher Loan Forgiveness – This applies to teachers who are also new borrowers (no debt originating before October 1, 1998) and have been working in a low-income school or agency for five consecutive years.
Public Service Forgiveness – If you are employed in certain public service professions and have made at least 120 payments on your direct loans, the outstanding balance may be forgiven.
Perkins Loan Cancellation and Discharge – Individuals working in certain types of public service and other select occupations may have a portion of their debt forgiven for each year of service.
Private and Personal Student Loans
Private loans differ from federal loans in that they are funded by private institutions like banks and non-governmental agencies, like SallieMae . Because private institutions are for-profit enterprises, their rates are generally higher and their terms are less friendly to borrowers. Consider private loans only after your federal options have been completely exhausted.
Private loans should be a student borrower’s last resort, primarily due to their higher costs. The increased cost of borrowing from private sources can manifest itself in two ways: higher interest rates and higher fees. Some private loans will offer what appear to be low or reasonable interest rates that mask fees that ultimately make the eventual total cost of the loan very steep.
Another significant difference between federal and private loans is the repayment schedule. Private loans almost always require some form of near-immediate repayment, usually in the form of interest-only payments that begin within a month or two of disbursement. The interest rates on private loans can vary greatly from borrower to borrower, even within the same lender, because they are tied to the student/borrower’s credit score.
Borrowers with the best credit can find private student loans with a rate tied to LIBOR +2%, although this can increase as credit scores decrease. An important consideration when it comes to private student loans is the loan term, which is generally shorter than federal student loans, resulting in higher monthly payments. Most private loans have a term from 5 to 15 years, with a few offering up to 20 years.
Grants, Scholarships, and Fellowships
Public funding for education often takes the form of grants or educational gifts. The term public in this context refers to the source of the funding: federal, state and sometimes municipal governments provide grants to help defer the cost of higher education. Private, on the other hand, refers to funding opportunities that are either wholly or partially funded by non-governmental parties; be they corporations, fraternal organizations, private organizations, non-profits or even individuals.
Need-based funding opportunities come from either public or private sources and are awarded based largely on the applicant’s financial need. Merit-based awards are usually, but not always, awarded by private sources. They reward applicants for meeting or exceeding preset standards, such as grades, test scores or community service.
Of course not all public and private funding will be available to every student, many loans are decidedly restrictive. This can mean municipal or county-based grants that are only available to applicants that reside in those particular areas. It can mean funding from an organization, like a fraternal lodge, that requires applicants or applicants’ parents to be members of the given society. Another form of restrictive funding occurs within specific institutions, who award students who pursue a particular field, such as accounting or physics.
These are a type of educational gift that generally come without strings, beyond attendance and maintaining passing grades. Grants are usually offered by federal or state governments and are almost always need-based. Some well known federal grant programs are:
- Pell – This is a federal grant program primarily for low-income undergraduates and a limited number of graduate students. Grant amounts vary up to a maximum of $5,730 per academic year. They are awarded based on the FAFSA application.
- FSEOG – Federal Supplemental Educational Opportunity Grants are a need-based grant for undergraduate students with awards ranging from $100 to $4,000 per year. FSEOG funds are available to students with the greatest need and are administered by each school.
- TEACH – As the name implies, these grants are for students who intend to become teachers and who plan to work in low income schools for a specified period of time after graduation. Awards vary, but cap out at $4,000 per year.
- Iraq and Afghanistan Service Grants – Grants for students whose parent or guardian was killed while performing military service in Iraq or Afghanistan, and who do not otherwise qualify for a federal Pell grant because their family contribution exceeds Pell’s limits.
Like grants, scholarships are awarded by organizations and individuals to students to help defer the cost of post secondary education. Where grants tend to be long term, sometimes recurring support, scholarships are typically a single amount awarded all at once.
Scholarships can be need-based, merit-based, or a combination of the two. Beyond the scholarships offered by the school you are attending, which is where you will usually find need-based awards, there are also awards given out by corporations, individuals (often memorial funds), nonprofits, and occupational societies, just to name a few. Each scholarship will have its own terms of eligibility, amount awarded and deadline.
Students should create a short list of scholarships they believe they can win, and then dedicate some time before or between semesters to perfect their applications.
Fellowships are almost always for graduate and postgraduate individuals. Fellowships work by providing a stipend or salary to participants while they work and continue their education. They are often given to doctoral students while they work on their dissertation in exchange for providing research assistance or teaching services for a college or university.
Visiting Fellows – This type of fellowship generally refers to a post doctoral person working at an institution on a temporary (visiting) basis, often for the purpose of conducting research or to gain highly specialized experience.
Resident Fellows – Sometimes referred to as resident scholars, these individuals are working on completing dissertations or postgraduate research, and require time and resources to complete their work.
Research Fellows – Doctoral or postdoctoral students who work under a more senior researcher, providing assistance in their ongoing research.
This is a form of federal financial aid that provides a specific amount of aid in exchange for work. These are federally subsidized part-time jobs that pay their benefit directly to students, rather than the school they are attending. These funds may be used by the student on any expenses, such as books and classroom materials or personal needs.
Photo Credit: Tax Credits