Financial Planning: Paying for College
March 16, 2011In last week’s blog entry I discussed some of the tax-free ways to save for education. If you are able to save enough to fully pay for a child’s education then I tip my cap to you because that is an impressive feat. Unfortunately, for most parents the amount they are able to save will only cover a portion (and in my case a small portion) of the full cost of education, so in this week’s blog entry I’ll focus on the next pillar of college planning known as (imagine the thunderous voice of Zeus as you read) FINANCIAL AID.
I personally believe that financial aid is widely misunderstood. I think sometimes people get the impression that financial aid is free money to help pay for college. It is true that financial aid does provide money to pay for college, and it is true that some of the money is free, namely grants and scholarships, but the fact of the matter is that most of the financial aid that students will be eligible to receive will come in the form of borrowing.
The type and amount of financial aid that will be available will depend on a number of factors, including parents income and assets, the number of students in the household, and the cost of the education, just to name a few. Sometimes it is difficult to plan around financial aid because, like a FICO score, no one’s really sure how they put all of this information together to come up with a financial aid package. The closest that I’ve come to being able to estimate how financial aid will fit into the college plan is to use the FAFSA4caster. This online application will help you estimate the amount of financial aid you may be eligible to receive.
Let’s review some of the different forms of financial aid:
Scholarships
Scholarships are a preferred form of financial aid because you don’t have to pay the money back. If your child is athletically or academically gifted, there is a good likelihood that schools will offer them some form of scholarship. Scholarships are also available based on affiliations, ethnicity, or field of study.
There are some things you can do to increase your chances of receiving a scholarship, but the number one thing is to simply apply. There is a lot of competition for larger scholarships, but many of the smaller ones go unclaimed simply because students did not apply. For a list of scholarships that may be available for your student, check with the guidance counselor at your child’s high school, the financial aid office at your child’s college, or go to www.scholarships.com.
Grants
Grants represent another form of free money. They are available at the federal, state, and institutional level, and are generally reserved for students who show the greatest financial need. Since grant programs have limited funding, it is best to apply for financial aid as early as possible (applications are generally accepted after January 1st for the following school year). Unlike scholarships, there’s not a lot you can do to increase your chances of qualifying for grants since it’s mostly based on the financial status of students and parents at the time of application.
Loans
Most financial aid is provided in the form of low-interest student and parent loans. The most common student loan is the Direct Stafford Loan. Stafford loans may be subsidized or unsubsidized. With a subsidized loan, the federal government pays the interest while the student attends college. Students may borrow up to certain amounts per school year, and loan repayments may be deferred until after graduation.
If the cost to attend college exceeds the amount a student receives in financial aid, parents may borrow the difference under the Direct PLUS Loan for Parents program. Parents must have good credit and must meet certain other criteria to qualify for loans under this program.
I will admit there are some things you could do to increase the amount of financial aid that is available for your student, but honestly I don’t think anyone would want to take a year off from work just to help their child receive a few more dollars in assistance. The way I see it, financial aid is like algebra—you either get it, or you don’t.
Click here to read part one.