Odds are your kid will graduate with student loans. More than two-thirds of college students do, with an average debt of $30,000. Here is your guide to maximizing the financial help you’ll get and minimizing your family’s debt.
- Gaze into your financial aid future. When your kid is in ninth grade, it’s time to use the government’s online FAFSA4caster tool to get a ballpark estimate of how much federal financial aid you’ll receive—and what you’ll likely have to pay out of your own pocket, known as your Expected Family Contribution (EFC). A word of warning: In all likelihood, you’ll end up paying thousands more than the EFC number. That’s because some of the financial aid you receive will be in the form of loans—which you’ll have to pay back with interest. Still, the FAFSA4caster is a useful place to start.
- Ace your base. The next big step comes the summer before your kid enters 10th grade. Bear with me, because this gets tricky! January of your child’s sophomore year of high school through Dec. 31 of junior year is known as your family’s “base year.”
The amount you earn during this period (plus assets you have, like investments or savings) will determine how much financial aid you’ll receive in the first year of college. The more you earn and have, the less help you’ll get. But there are financial actions you can take before the base year that will help you qualify for more aid. (Warning: They might seem to fly in the face of everything you’ve ever been taught about money. Just trust me here.)
- Drain your savings. For real. The goal here is to appear less flush with cash. That doesn’t mean going on a spending spree. It might be a good time to pay down debts, though. You can feel good about this because paying off a credit card with 14% interest is like getting a 14% rate of return on your investment, guaranteed. Start paying off your highest-rate debt first—probably that credit card—and work your way down.
- Say no to a windfall. For the time being, anyway. A big infusion of cash will send a signal to the government that you need less aid for your kid’s college than you actually do. So, if you’re expecting a bonus or a gift, try to get it before the base year begins. (If you push the windfall till later, it will work against you when you apply for sophomore-year aid.)
- Take your kid’s birthday money. This’ll be popular, right? Explain it to your child like so: The financial aid formula expects students to put 20% of assets in their name toward college. It expects parents to kick in only up to 5.6% of their assets. That’s why it’s wise to transfer birthday cash and the like from your kid’s name to yours. Note that if your kid is pulling in an income over $6,570 after taxes, she’ll also be expected to contribute 50% of that amount to college costs. If your kid is saving money earned from a job, and you can get by without using it for school, your best bet is to get her to open a Roth IRA with a stock index fund or ETF at a low-cost investment company. As long as it remains in the account, IRA money is sheltered; your child is generally not expected to tap it for college.
- Make the most of college savings plans. A 529 plan is a special account that allows you to save for your kid’s college education without paying federal tax on the earnings, provided that you use the money to pay for school. Plans are offered by nearly every state, but you can choose one from another state if you don’t like the local options. (There may be additional tax benefits for staying in-state, though.) To find the right one for you, do some research on savingforcollege.com. There are a few other basics to know. First of all, 529 balances are not sheltered like retirement accounts. The money in 529s is factored in with your assets when you apply for financial aid. Here’s a nice little bonus, though: Whether the 529 is in your name with your kid named as the beneficiary or it’s in your kid’s name outright, 529s are counted as a parental asset, and you’ll be expected to contribute up to 5.6%. (That’s better than the 20% your kid has to contribute from his bank savings.)
One alternative type of 529 offered in a handful of states is called a “prepaid tuition plan.” This allows you to lock in tuition at a certain school or group of schools. When your kid attends college in the future, you’ll pay the locked-in amount (or close) instead of the tuition at the time.
- See beyond the sticker price. By around junior year of high school, your kid might present you with a list of colleges she’s taken a shine to—and the prices may be enough to shock you. The truth is most people don’t pay the sticker price. It’s time now to check out the net price calculators on the website of each school. They’ll spit out a more accurate cost estimate based on your family finances. One more thing: Don’t write off elite colleges because you think they’re out of reach moneywise. Many of these schools can afford to be extremely generous with aid money. Two online resources—bestcolleges.com and usnews.com/education—are good places to find such schools.
- Hand in your form on October 1. During the fall of your kid’s senior year, fill out the Free Application for Federal Student Aid (FAFSA). This is essential for receiving federal and state grants (money you don’t have to pay back) and low-interest federal student loans. Completing the FAFSA is also the key to locking in grants from colleges (based on your financial need) as well as merit-based scholarships. So fill it out! Too many families skip the FAFSA and lose out on free money. Some states give out financial aid on a first-come, first-served basis, so it’s important to complete the form as soon as it’s released on Oct. 1. The tax info you need comes from your base year, so you’ll already have it. You can even import that info into the FAFSA form directly from the IRS at fafsa.ed.gov by using the IRS Data Retrieval Tool.
- Heads-up for extra forms. Some schools require additional financial aid forms, most often the CSS/Financial Aid Profile, which asks for more in-depth financial information and is used primarily by a few hundred of the country’s most selective colleges.
- Borrow smart. Under current law, there are three common kinds of college loans:
- Federal student loans: Also known as Direct Loans or Staffords, they tend to offer the lowest interest rates. For example, federal student loans issued during the 2019–20 academic year charge a fixed interest rate of 4.53%. Private lenders can charge up to three times that. Depending on how many years your kid takes to get an undergraduate degree, there is a cumulative borrowing limit of $31,000. The government demands repayment starting six months after your kid leaves school. Unlike private loans, federal loans offer flexible ways to repay. For example, when your kid is just starting his career, he can reduce his monthly payments to suit his income. Briefly, there are two kinds of federal student loans. Unsubsidized loans begin charging interest when you take out the loans. Subsidized loans don’t charge any interest while your kid is in school at least half-time and during the six-month grace period following graduation. Subsidized loans go only to families who qualify, but anyone can take out an unsubsidized loan. Within that $31,000 cumulative borrowing limit, up to $23,000 can be subsidized loans.
- Federal Parent PLUS loans: When a student’s financial aid and family savings don’t cover all the costs, some parents take these out. You can borrow as much as it costs your kid to attend the school, minus any financial aid she receives. With a fixed interest rate of 7.08% for 2019–20 and less flexible repayment options, these government loans should be considered as a last resort. Too many parents are taking on heavy debt to put their kids through college right when they need to think about covering their own expenses in their older years.
- Loans from banks: Often known as private loans, they can be taken out by either students or their parents. I strongly recommend steering clear of these. They often carry the highest interest rates and give you few repayment options.
- Find free money. Getting grant and scholarship money that you don’t have to pay back is the biggest jackpot of all. Remember that you’ll need to fill out the FAFSA to be eligible for most grants and scholarships, which can come from the government, your school, or other organizations.
- Grants: Most of these are based on your family’s financial need. Federal Pell Grants go to low-income students. The maximum amount for a Pell is $6,195 in 2019–20.
In addition, selective private colleges often offer significant grant money to high-achieving students whose families would normally not be able to afford the full cost of the school.
Some states give out financial aid on a first-come, first-served basis, so it’s important to complete the form as soon as it’s released on Oct. 1.
- Scholarships: Colleges attract students who have special merits—athletics, academics, or other skills and affiliations—with scholarship dollars. Scholarships may also be offered by state university programs, or by special-interest organizations. Don’t pay for scholarship searches, which tend to be scammy. Your kid can do the research himself on sites such as StudentScholarshipSearch.com, Fastweb.com, the College Board’s scholarship search engine at Big Future, and the U.S. Department of Labor’s CareerOneStop scholarship search. If you’re a military family, consult StudentAid.gov for special benefits. One thing to bear in mind if your kid does get a scholarship from an organization other than his college: Schools will often replace aid money they’ve offered with the new scholarship money. But it’s still a win for your family. Many colleges allow you to replace loans with outside scholarships—and dollars given beat dollars borrowed.
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