Student Loans Are Not Financial Aid
December 28, 2015The Free Application for Federal Student Aid (FAFSA) opens after January 1 for the 2016-2017 school year. Parents and students all over America will begin the difficult, agonizing process of figuring out how to fund an increasingly expensive American college education. In honor of the start of the financial aid season, I’d like to point out the obvious: student loans are NOT financial aid. They are a financing mechanism. Those are two different things.
What is financial aid? Aid is money directly applied to reduce the tuition and related costs of a college education that does not have to be paid back if the conditions of receiving the aid are met. For those families with a zero or low expected family contribution (EFC) as determined by the FAFSA formula, they may be eligible for federal student aid in the form of a Pell Grant of up to $5,775. For those Pell-eligible students, their university may also determine that they are eligible for a Federal Supplemental Educational Opportunity Grant of $100-$4000. There is also a federal work study program where the student can earn money to cover books and incidental expenses.
Some colleges and universities offer additional direct aid, either needs-based or merit aid (scholarships). Keep in mind that non-federal aid, especially merit-based aid, often requires that the student maintain a certain grade point average (GPA) in order to be eligible. In general, the lower the family’s EFC, the more likely the student is to be eligible for direct, needs-based financial aid.
However, direct aid is often not enough to cover the full cost of tuition, housing and expenses, and the student and/or parents are offered the choice of borrowing the difference. Most university financial aid departments describe student loans as financial aid, but yet a loan is something that has to be repaid by the borrower. Even studentaid.ed.gov, the federal website on student loans, describes federally-backed student loans as something to, “help cover the cost of higher education.” It would be more accurate to say, “finance the costs of college or career school.”
Under certain circumstances, Federal Direct Student Loan interest may be subsidized, meaning that interest accrued on the loan is paid while the student is in school. There are also federally backed PLUS loans for parents with good credit. In addition, a parent or student may seek a private loan through a bank to meet financing requirements.
In almost all cases, the borrower must repay the loan plus interest. There are certain exceptions such as loan forgiveness for students who enter public service. Student loans stick with the borrower forever and generally cannot be discharged in bankruptcy. According to a U.S. News and World Report study, 68.8% of students who graduated in 2014 have student loan debt, with an average balance of $28,077.
Let’s call that for what it is – financing. That’s not aid. So what can students and parents do to maximize their eligibility for aid, as opposed to just financing?
Start the financial aid application process early. Create your FAFSA ID and begin assembling a file as soon as financial aid season opens, even if you have to start with your estimated tax figures. You can go back in and update when you’ve filed your tax return. Earlier is better, especially for applying for merit-based aid and scholarships. Your target school may have internal deadlines that are sooner than federal deadlines.
Run some numbers, and discuss them with your student. You can forecast your expected family contribution and even run a net price calculation for a particular college. Make sure your student fully understands the costs of college and what borrowing will mean for your child’s financial future.
Cast a wide net. Financial aid officers say that the most merit aid goes to students who will be in the top 25% of their class in terms of grades and test scores. Your student may get a much better financial aid package, with more aid and less loans, from a good school where they are a strong recruit. It’s normal for a student to fall in love with their top school, but if their second choice gives them a much better deal, that is well worth considering. Check out these tips for maximizing merit aid.
Research alternatives for paying for college. It pays to do your homework. Websites like Fastweb.com and ScholarshipExperts.com are helpful online tools. Check out your school’s guidance department, your local library, and community organizations for additional resources.
Most importantly, judge a financial aid package offered to your student by the amount of actual aid, not including student loans. Let’s stop calling student loans “financial aid.” After all, would you rather get a gift or a loan?