April 18, 2016
It is that time of year. College acceptance letters have gone out, and parents and graduates are starting to take a hard look at schools, and an even harder look at their ability to pay for college. And it deserves a hard look! College tuition prices have risen nearly 500% since the mid 1980s, and crushing student loan debt has become a common experience for many college graduates. I am here today to help everyone out there ask the right questions and make the right moves to allow families to deal with college costs.
There are a lot of moving parts here, but the most important among them is filling out and submitting your Free Application for Federal Student Aid, or FAFSA, along with the relevant individual school or state applications. To find out when the deadlines are for your school or your state, you can go to fafsa.ed.gov.
Why is the FAFSA in particular so important? It ensures that you are able to receive federal student financial aid. Some of this aid can come in the form of grants, like Pell Grants, which are awarded based on need to undergraduate students for the most part. They are the most accessible source of free money for college. The FAFSA is also needed for any federally backed student loans, like Stafford or Perkins loans, or to qualify for the Federal Work-Study Program. I mention it because so many people miss out on federal aid. Nearly half of high school students do not fill out the FAFSA. Because of this, U.S. high school graduates leave nearly $3 billion in free federal grant money on the table each year. So the first step is filling out financial aid applications, especially the FAFSA.
The second big piece is determining what you can contribute as a family. Many people do not consider their finances until they have to, and as a result they are left reacting to financial demands rather than being proactive. Now is a good time for families to sit down and take a hard look at the numbers. What have you saved for college? What will you be able to contribute toward tuition or other costs? Will your child be able to work during school to cover some of the costs? Building a spreadsheet of the costs, and then working out a budget to have an idea of how far money goes will prepare you to make educated decisions about paying for college.
The next step is to compare the financial aid packages from each school when you receive them. These packages will include the grants that your child has received or is eligible for, what your expected family contribution is, and the remaining balance you will have to make up, before you include any scholarships or college savings. They will usually offer options of student loans to fill this gap. When you are comparing packages, there are three big things to remember. First, you have to read the fine print. You want to know whether the scholarships or grants through the school are renewable, and whether they are contingent on grades or other metrics. Second, you want to understand the gap that you have to bridge between tuition and what the package offers. And finally, you need to determine your ability to make up this gap, and set a threshold beyond which you are not willing to go.
Like all loans, student loans are a tool. In and of themselves, they are not bad. However, there are certainly some things that you have to keep in mind when considering student loans, and your ability to take them on without negative consequences. To do this, you have to be clear-eyed and think long-term. Work with your child to understand their ideal career path and earning potential after graduation. Research starting salaries for jobs related to their expected major. By doing this, you can begin to determine how much debt they will be able to manage. A good rule of thumb is to work to keep your child’s total student loan debt below 75% of their expected first year salary.
If you make sure you have applied for student aid, you know what you can reasonably contribute, you take advantage of scholarships and other non-aid options, and you are clear-eyed about your child’s ability to manage student debt, you are very likely to be successful in your efforts to pay for their college.
The information on this page is provided for educational purposes only and is not tax, legal, financial planning or investment advice. Neither the information nor any opinion expressed in this section constitutes an offer to buy or sell any securities or advisory products. The information provided is general and is not information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. You should not regard this information as a substitute for the exercise of your own judgment. Investing involves risk.