Just don't rely on student loans to pay for college.

Just don't rely on student loans to pay for college.

This post was included in the Carnival of Personal Finance #200 at Money Ning.

This is a guest post from MLR @ MyLifeROI. This is a 3 post series and each post is going live this morning on three different blogs: Bargaineering, Financial Highway, & Poorer Than You. I will be posting a wrap-up post to tie it all together and summarize each article.

  • Post #1: Savings Vehicles, Bargaineering
  • Post #2: Financial Aid, Financial Highway
  • Post #3: Reducing Costs, Poorer Than You
  • Post #4: Wrap up, My Life ROI

You are 22 years old. You have just spent the past four years paying tuition, room and board, books, food, utilities, transportation, etc. The worst part is that it is all getting more and more expensive beyond peoples’ expectations. Where does that leave you? In a mountain of debt upon graduation. For some of us that means letting our debt dictate a less than optimal career.

However, what are some ways that we could better prepare for our college education? And if it is too late for you, how can we better plan for our children’s education?

I will outline three ways: Savings Vehicles, Financial Aid, and Reducing Costs. Each section contains a sub-list of “to-do’s” that I advise you to look into!

Note: Private student loan activity is growing much faster than federal student loans in terms of volume according to FinAid

College is getting more and more expensive and borrowing has become easier and easier. A lot of people would argue that borrowing has become way too easy! A lot of times this “free” money is offered on very favorable terms so students and parents will make a decision to take on more than they need. Ever hear “I just cashed the check for the balance of my financial aid, wanna go to the bar tonight?”

I have… a lot, actually.

Or how about “Let’s get the nicer apartment… it’s only $300/month more and we have financial aid!” Unfortunately I have heard that one a lot, too! What happens when these people who have borrowed on very favorable terms in order to keep up a lifestyle fueled by credit graduate? They spend the next 10 years paying it all back with interest! Bet that pitcher of beer or marble counter tops don’t look so good now.

One trap that I warn you to not fall into is the assumption that higher priced colleges automatically mean more debt. That, for some reason, is a misinformed statement that seems to have been proliferated by some circles. “Oh my god, he went to Yale?! He must be in mountains of debt or have very rich parents!” PF bloggers sometimes denounce Ivy League schools for this reason! Often times, however, these higher priced colleges offer greater assistance packages.

With the financial stakes feeling so much higher, families should be sure to look beyond a college’s “sticker price” to the net price they could pay after scholarship aid. Not applying to schools with high sticker prices that offer significant financial aid could actually lead families to pay more for their children’s education, not less.

With Harvard’s new pricing structure, a family making $100,000 will pay about $10,000 for total charges (tuition, room and board, and fees). This compares to the average charges at public four-year colleges and universities in 2008-09 of $14,333…

You must fill out a FAFSA to be eligible for the following section. They have taken great strides to making it easier to fill out your FAFSA in the past few years. Do not opt out of filling it out due to confusion; ask a guidance counselor or college advisor for help if you need to!

What kind of federal assistance is available?

  • Federal Pell Grants [Info] – These are capped at $4,860 per year for the 2009-2010 school year. You do not need to pay these back since they are grants designed to promote low-income student attendance. These are usually awarded to those most in need with 90% of the grants being given to students from families that earn less than $40,000/year.
  • Federal Supplemental Educational Opportunity Grants [Info] – Much like the pell grant, this is for low-income families. Since they are also grants, they do not need to be paid back. The grant is between $100 and $4,000 a year depending on circumstances such as your need, what you are already getting in terms of financial aid, and when you submit your FAFSA.
  • Federal Perkins Loans [Info] – A Federal Perkins loan is fixed at a 5% interest rate for its ten year repayment period. The loan does not need to be repaid until 10 months after graduation (or if you leave school for any other reason) and only then does interest start to accrue. As an undergrad you can borrow $4,000/year for a maximum of $20,000. Grad students can borrow $6,000/year for a maximum of $40,000 (includes undergrad). Some jobs will actually forgive your FPL debt. Many teachers choose to teach in low income areas to reduce their FPL portion of their student debt. Consider it a salary bump 🙂
  • Stafford Loans (subsidized and unsubsidized) [Info] – These loans are typically issued at higher interest rates than FPLs (6.5%+). Subsidized Stafford Loans defer any interest from accruing until 6 months after you graduate at which point you must start paying off your loans, just like with a FPL. Unsubsidized Stafford Loans, however, do not defer interest from accruing while you are in school! You may choose to defer the payments but the interest will be added to your principal once you graduate. With the Unsubsidized Stafford Loans, the interest will get you. You should try to pay it off as you can while you are still in school. You may need to reduce your costs, but it is worth it.
  • Federal Work-Study Programs [Info] – FWS Programs, like the others, are need-based and provide part-time jobs for undergraduate and graduate students. The jobs are guaranteed to be at least the federal minimum wage and usually encourage people to find work within their major or interests. Based on your field pay could be higher. At my university some of the FWS jobs were closer to $15/hr for the more technical jobs. This can be a great way to get some experience and see if you are really interested in your future field. Also, the administrator of the FWS program is usually very flexible with your class schedule which is another good benefit versus working for a private company.

How is this decided?

Most financial assistance for college is need-based. What does this mean? Depending on the level of income and the amount of assets that you and your family own, you either may or may not qualify for financial aid. Do NOT be discouraged, though! This ceiling is higher than a lot of people expect. I have heard of many people deciding to not try and get financial aid because their parents make more than $80,000-120,000 per year. However, upon asking them more in-depth questions you may find out that they probably would in fact qualify! Do they have another sibling in college at the same time? Yes?! That helps! If your parents took the advice of Post #1, then hopefully they have put money aside for you which does not factor into the need based formula very heavily. What other factors may be considered in the formula for financial aid?

  • income and assets of the parents and student
  • family size
  • the number of children attending college
  • and certain other factors which this Brown.edu website goes over quite thoroughly

And in the end this formula spits out a value you may or may not have heard of: the expected family contribution.

Why is the expected family contribution important?

The amount of your financial aid that you are now eligible for is the cost of attending the college of your choice for one year minus the expected family contribution. That is the magic number that may throw you into debt. But not if you manage it correctly. Hopefully this post has gone over the different types of need-based financial aid to give you a good idea on what to look forward to when applying for FAFSA or putting a child through college.


Fill out your FAFSA early NO MATTER WHAT. Whether you think you qualify or not you should fill it out and submit it. The grants are absolutely free money and I cannot think of any reasons to not take them (any readers have any idea why you wouldn’t?!). The loans should be looked at carefully. If you definitely need a loan these are very attractive based on their interest rates and interest deferral options. One thing many people don’t know, though, is that student loans NEVER leave you. You cannot get rid of them with a bankruptcy. So be smart about your decision and only take what you need, a basic finance principle!

Photo Credit: p373


Laura Martinez
Laura Martinez