Obtaining a college degree unlocks a world of opportunities for young adults. Many jobs will not even consider applicants if they do not have degrees, regardless of how skilled or knowledgeable they may be.
Paying for college, however, is becoming more difficult for students and their families every year. The cost of both private and public four-year universities has increased every year since 1975. For the 2015-2016 school year, private colleges cost $43,921 per year on average, while public colleges cost $19,548.
How should students deal with these enormous costs? There are many places to find funding, but each has its own costs and benefits. There are certain steps that those entering college should take in order to ensure that they have the least amount of crippling debt at graduation.
Step 1 – Fill out the FAFSA to find grants and scholarships
The first step that any student and his or her family should take is filling out the FAFSA. This form, which can be completed online or on paper, analyzes a family’s financial situation to determine eligibility for grants and federal student loans. Furthermore, when filling it out, applicants will be able to indicate which schools they want the results to go to.
After filling out the FAFSA, students and their families will receive the Student Aid Report, or SAR, that shows the results. The first thing the SAR shows is the Expected Family Contribution, also known as EFC. This is an indicator of how much money parents of a student entering college could realistically contribute to his or her costs.
Based on the EFC, schools that were listed in the application will send an aid offer or award letter that shows how much aid a student is eligible for. This includes federal and school specific need-based grants and merit-based scholarships, as well as federal student loans. Grants and scholarships are essentially free money that require no repayment, so these are the first forms of financial aid that students should accept. Federal student loans should not be accepted yet—they will come in later, if needed.
Step 2 – Seeking other scholarships
Before accepting any loans, students should seek out and apply to other scholarships. There are thousands of scholarships offered by government organizations, private companies, local groups, religious groups, and others. In addition, there are tons of resources and searches out there to help students find scholarships that they are eligible for.
Some of these scholarships are need-based while others are merit-based. Not all merit-based scholarships are dependent on academic performance, though. There are scholarships geared towards those who demonstrated excellent leadership, performed extensive community service, or have special talents—such as playing an instrument. In addition, there are scholarships based on other factors such as disabilities, intended career path, or even hair color.
The more scholarships a student applies for, the more likely he or she is to be selected for. Much of the information that applications require is similar, so many can be filled out quickly and without much hassle. Students should consider applying for many unique and local scholarships along with the popular nationwide scholarships. These smaller scholarships are much less competitive and give students the best chance at winning.
After knowing how much free money they are eligible for, students have a better idea of how much additional funding they will have to come up with.
Step 3 – Deciding family contribution
Though the EFC gives an estimate of how much parents or guardians could contribute to their children’s educations, it doesn’t mean that they will. Some parents may decide to cover the entire cost of their child’s education, while others may provide no help.
Parents and guardians should sit down and decide how much they are willing to contribute to their child’s schooling as well as looking at how much money is in any college savings accounts that they may have started. Parents may also consider taking out a federal Direct PLUS Loan. This loan is given directly to the parents, as opposed to the student, and they are responsible for repayment. There is a fixed interest rate of 6.84 percent on this loan.
No matter the decision, and reasons for the decision, parents should let the child know how much they are willing and able to contribute so he or she can decide what step to take next.
Step 4 – Accepting federal student loans
The next step is to accept federal student loans. These currently have fixed interest rates of 4.29 percent for undergraduates and will not change over the life of the loan. Though taking on debt isn’t the most desirable option, it is often necessary for many students.
There are two main types of undergraduate federal student loans: subsidized and unsubsidized. The government decides which type you are eligible for and the school decides how much you may take out.
Subsidized loans are offered to families with financial need. The Department of Education pays the interest on these loans while the student is enrolled in school at least half-time, for six months after graduation, and during periods of deferment. This saves a considerable amount of money for the borrower as no interest will accumulate and the principal balance will not grow.
Unsubsidized loans, on the other hand, are offered to everyone who fills out the FAFSA, as they are not dependent on financial need. Unlike subsidized loans, the government does not pay the interest on these loans at any point. This means that the interest will accrue during all periods and will be added to the principal if not paid. For borrowers with this type of loan, paying interest while in school could save them thousands over the life of the loan.
Step 5 – Taking out private student loans
The last step to finding funding for college, if necessary, is to apply for private student loans. About 1.4 million students turn to private student loans each year to fill the gap between financial aid and the cost of attendance.
Unlike federal student loans, only certain people will be approved for these, as private student loan eligibility is based on creditworthiness. Because of this, almost all private student loans are taken out with a cosigner—or someone who agrees to share the responsibility for repaying the loan. Many high school graduates have little to no credit and won’t be eligible by themselves.
The reason private student loans should be taken out last is because they typically have higher interest rates than federal student loans. While some rates may start as low as 2 percent, others may be as high as 12 percent. Furthermore, interest will almost always accrue while the borrower is in school, so making payments towards at least the accrued interest is a smart decision.
Most private student loan lenders provide both variable and fixed interest rates to their borrowers. Variable rates are typically around 1.5 percent lower than the fixed rates to start, but may fluctuate over time. These rates are tied to LIBOR, the average interbank interest rate at which certain banks in London lend to each other. Though these rates start lower, they are considered more risky. Fixed rates, alternatively, are guaranteed to stay the same over the life of loan.
Though private student loans may be the last stop to finding funding for college, they aren’t necessarily bad. If a borrower has a plan in place to pay them back and takes his or her education seriously then they can be valuable.
If you or your child is about to enter college, congratulations! This is a huge step in a young adult’s life and making it this far is impressive. Though college is expensive, and is getting more expensive every year, it should be seen as an investment if taken seriously. Make sure to apply seek out any free money before taking on debt, and if you do have to, make sure to know the ins and outs of your loans and come up with a strategy for repayment.