This time of year, anxious high school seniors are keeping an eye on the mailbox to find out if they've been accepted into college. But then comes the part most parents dread: the bill.
The Saturday Early Show's financial advisor, Ray Martin, stopped by to give families some tips about financial aid for college.
Paying for College
Ray Martin says although the average college student graduates with at least $16,000 of debt, the education they receive is still very much a sound investment. It is estimated that a college graduate will earn around $1,000,000 more over the course of a career than someone without a degree. Financial aid is becoming a larger part of the equation to help pay the bills, but there is no universal aid plan throughout the university system. Each school offers it's own aid packages, so it is important for families to understand the different ways they can get money.
Different Kinds of Aid Programs
- Grants: Most of the free money handed out to students is in the form of grants, which are awarded on the basis of need. Last year, the federal government gave 4.8 million Pell grants worth an average of $2,400. And schools, mostly private colleges, dispense about $20 billion in aid, most of it need based. To apply for federal aid, families must fill out the Free Application for Federal Student Aid. Many private colleges also require the similar PROFILE. It's not necessarily too late to apply for the fall semester, since many schools set aside a little money for procrastinators.
- Scholarships: A growing number of states and schools offer merit scholarships. Typically, these programs require that students maintain a B average. Many service and community groups, corporations, and foundations also hand out checks to students who, say, win an essay contest. Martin says Web sites such as Fastweb.monster.com are good places to start searching for these opportunities.
- Loans: The subsidized Stafford federal loan is available only to students who qualify as needy. Others can apply for an unsubsidized Stafford, which, unlike its subsidized cousin, starts accruing interest charges right away. But it has a current low variable rate of about 4 percent. Students who need to borrow more than Stafford allows ($2,625 for freshmen, more for older students) should apply for a federally backed Perkins loan, which has a fixed rate of 5 percent. Parents with good credit can borrow from the federally insured PLUS program.
- Work-Study: Needy students are awarded federally funded jobs through their schools. The jobs, which are usually on campus, pay an average of $6.10 an hour and typically require 11 hours per week.
- Tax Relief: Tax credits and deductions can relieve part of the tuition bite by trimming a student's or parent's income tax bill. A caveat: The credits come with income limits.
Source: US News and World Report
To help solve the financial aid puzzle, Martins recommends looking closely at the offered to you.
He says it's important for people to realize that all of the aid plans available usually come with some strings attached.
Grants are the most guaranteed form of financial aid. The federal government and private institution distribute the need-based aid. But it can shift drastically if a family's financial situation changes, from a parent's raise or inheritance for example.
Even if a student is eligible for some grant money, schools can enhance the offer with a more complex plan to help lure them, including offers of merit scholarships, loans, and work study programs. Each of these financial incentives while flattering and helpful, pose potential risks both academically and financially.
Merit scholarships, for example, usually require the student to maintain at least a 3.0 grade point average. Many families are flattered by the fact that they are offered money for a student's scholastic achievement. But the fact is, most college freshman drop between 1/3 and 1 point off their high school average, which would void the scholarship. According to U.S. News and World Report, of 60 percent of Georgia college students lose their HOPE (merit) scholarship each year. A 2003 Harvard study found that students are twice as likely to accept a merit scholarship over a school that offers the same in need-based aid.
Grants and scholarships help reduce out of pocket costs, but alone they may not be enough to help make college affordable. To make up the difference, many people chose to take out loans. Although college graduates earn a considerable amount more over a lifetime, in the short run it's estimated that the average private school graduate leaves school owing $20,000, and the average public school graduate owing $16,000. For graduate students it's much worse.
Martin says work scholarships are the last form of aid offered by schools. These are federal loans that are paid back by the student working on campus. This can cause a serious conflict of interest for the student, as they try to earn back the money while keeping up good grades. With wages available up to $10 an hour at the most, students are left with a difficult decision. Work more hours to make payments on the loan at the expense of their grades, or work less and not working off the entire loan.
Martin says students can borrow money for college costs under federal financial aid programs. The two main programs are Stafford loans and Perkins loans.
Stafford loans can come subsidized, meaning they are awarded based on demonstrated financial needs, with no interest until you are no longer a student, or unsubsidized, meaning you don't have to meet any financial requirements, but interest is charged while the student is still in school. The Stafford loan limit is $2,650 for freshman year (higher for subsequent years) going up to $23,000 for a college career.
Perkins loans are low interest loans made to students to supplement their Stafford loans, offered only to students with demonstrated financial needs, with limits of $4,000 per year.
Federal PLUS Loans (Parent Loans for Undergrad Students) are awarded to parents with good
credit ratings. They can borrow up to the total out-of-pocket costs (costs of college less any aid and students loans) for dependents in college. Parents must repay these loans.
How Much Is Too Much Debt?
Martin says too much college debt can put pressure on students to work during school, compromising their time to study and get good grades, or even jeopardize graduation. Too much debt will also put pressure on graduates to take an unsuitable job opportunity (as opposed to the right job to begin their career) to be able to begin repayments. Too much debt, according to Martin, can even affect graduates ability to buy a car or save for a house.
Martin advises that total student loan payments do not exceed 8 percent of post graduate income, meaning if your income could be $25,000 per year in your first job, or $2,100 per month, then your student loan payments should not exceed about $175 per month. Economists warn that students who graduate with loans in excess of $30,000 could have a very difficult time making their loan payments. Martin says these are general rules, and will apply differently for students who graduate with advanced degrees in medicine, law and business.
Students should take on the bulk of the loans, says Martin, because they will have a lifetime of career earnings to repay. The older parents will have fewer years and will also need to prepare for retirement. That said, doing this does not preclude a parent from helping students to pay their loans for a limited time, or in full. In fact this gives parents to option to do this, which is a better position to be in than the parent taking on all the debt in their name.
Some parents also consider taking loans against their home or even from their retirement accounts to pay for their students college. Martin says it's best to avoid retirement plan loans because this money is for just that purpose, the parents retirement, and their are no loans of federal aid programs for that.
Tip For Limiting Debt
- Consider Community College For Two Years: Some students choose to attend a community college for 1 or 2 years, and then transfer to a 4-year school. Tuition costs are substantially lower at community colleges than at 4-year institutions.
- Consider In-State Colleges: A state college or university charges lower fees to state residents. Since public institutions are subsidized by state revenues, their tuition costs are lower than private schools' costs. The college selection process should include consideration of a state school. Although cost should be a consideration, students should not base their choice of a school only on cost.
- Get on a Three Year Plan: Some schools offer combined degree programs or 3-year programs that allow students to take all of the courses needed for graduation in 3 years, instead of 4, thereby eliminating 1 year's educational expenses.
- Seek Discount Programs: Some colleges and universities offer special discounts if more than one child from the same family is enrolled. Some colleges and universities offer discounts to enrolled students if they recruit another student. Some schools offer a tuition discount to student government leaders or to the editors of college newspapers or yearbooks.
Source: The College Board