The realities surrounding higher education and its financing have been changing at an alarming pace. According to the US Department of Labor, about 90 percent of the fastest-growing jobs of the future will require some post-secondary education or training. This comes at a time of unprecedented costs—the average tuition rate has nearly doubled over the last decade. A number of financial aid opportunities exist, but parents and students entering college have to work through a complex application process and thoroughly research options to ensure they’re maximizing the benefits of federal aid and choosing the most suitable financing for their particular circumstances.
“Planning is of the utmost importance,” says Daniel Sistarenik, the director of financial aid for the State University of New York at New Paltz. “The knowledge parents and students need to gain is rather substantial. It’s not like going out and buying a vehicle—this is an investment in the student’s future.” He says that planning should start in the early high school years, when most families begin to get an idea of how much a college education will cost. Both the direct costs of education (the tuition, fees, room and board) and the indirect costs (books, supplies, transportation, and personal expenses) should be considered. Sistarenik recommends that families use the FAFSA4caster, an online tool that was introduced in 2007 to give an early prediction of a student’s eligibility for federal aid. The program is able to reveal what type of federal aid the student is qualified to receive (including grants, loans, and work study) and also gives an estimation of the award amount for each category based on the type of school the student plans to apply to. When it’s time to fill out the real form to apply for federal financial aid, the Free Application for Federal Student Aid (FAFSA), having completed the FAFSA4caster will help expedite the process.
After students have applied to schools and received acceptance letters, Sistarenik says college financial aid offices send out letters that estimate how much aid a student would receive if attending that school. In this phase he cautions parents and students to carefully read and question award letters. Often, especially with more costly private schools, he says institutional awards will be offered with conditions—for example, the money given may only apply during the first year of attendance or upon maintenance of a certain grade point average.
Students will want to take advantage of whatever “free” money they can, in the form of grants or scholarships. “We don’t encourage borrowing unless absolutely necessary,” Sistarenik says. He recommends applying for as many scholarship opportunities as possible, utilizing free award databases like FastWeb.com. FastWeb users create a profile based on their education and career objectives, hobbies, background, and more to be matched up with the most applicable scholarship opportunities. The government also offers money that doesn’t have to be paid back, most commonly in the form of Pell Grants, which are based on need and awarded to students who are enrolled in classes earning at least six credits.
Making sense of all the financing options is one of the most complex parts of the college process. After publishing his first book with coauthor Joann P. Digennaro, The Prentice Hall Guide to Scholarships and Fellowships for Math and Science Students (1993) on student financial aid and including his e-mail address for readers who had additional questions, Mark Kantrowitz was astonished by the number of questions he received. In 1994 he founded FinAid.com, and started proactively answering questions online and compiling an extensive resource of financial aid information out of Cranberry Township, Pennsylvania. Since the site’s inception, Kantrowitz says it’s helped more than 50 million people figure out how to pay for college.
His criterion for choosing a student loan is simple—generally, it’s what’s cheapest when it comes to interest rates and fees. “Given that cost is a dominating factor in education, minimizing cost is a key consideration,” Kantrowitz says, but adds to also be aware of secondary factors like customer service.
When families receive their aid report back after filing the FAFSA, it will detail which federal loans the student is eligible for. Among these will be the Perkins loan, the subsidized and unsubsidized versions of the Stafford loan, and the Parent Loan for Undergraduate Students (PLUS).
The Perkins loan is the most beneficial federal loan a student can receive, according to Kantrowitz. It’s awarded to students that demonstrate exceptional financial need and is subsidized, so the government pays the interest during the in-school period and during deferment after graduation. It has a 5 percent interest rate with no fees and is administered by a revolving fund at the school. The Perkins loan also has one of the longest deferment periods—nine months—and is paid back over a span of up to 10 years.
The next best federal loan to receive is the Stafford loan, which has a six-month grace period and alternative repayment terms. The subsidized version is optimal—it’s based on need and offers interest paid by the government during the in-school period. With the unsubsidized Stafford loan, any student is eligible but they are responsible for all interest on the loan, though it can be deferred until after graduation. Unfortunately, Kantrowitz mentions, this increases the loan balance and makes it more expensive to pay back. If families can afford it, paying at least the interest during the school year will help offset costs.
Kantrowitz also says families of undergraduate students can take advantage of a current phased-in interest rate reduction that Congress passed. The peak interest rate for a federal loan is guaranteed to be 6.8 percent, but borrowers who sign a loan this year will pay only 6 percent; if they sign a loan next year, they will pay 5.6 percent; the next year, 4.5 percent; and finally, a last year at 3.4 percent before loan rates return to 6.8 percent. “These rates are fixed rates that are in effect for the life of the loan,” Kantrowitz says. “Each year the new loan obtained during that year will be at the successively lower interest rate. So if you get a loan this year, it’s at 6.0 for the life of the loan; if you get it next year, it’s at 5.6 percent for the life of the loan. As in everything Congress does, it has five years and then it reverts to the status quo because of federal budgetary constraints.” The interest rate reductions do not apply for graduate borrowers, who will continue to pay the 6.8 percent rate.
Stafford loan borrowers will incur two fees—a guarantee fee, which Kantrowitz says is now called a default fee, of 1 percent and an origination fee, which used to be 3 percent years ago and is now at 1 percent. “The origination fee is in the process of being phased out,” he says. “It’s at 1 percent this year; next year, it will be at 0.5 percent, and the next year it will be gone completely and that’s permanent.” Stafford borrowers this year will pay total fees of 2 percent.
Another option for financing is the PLUS, which is offered to the parents of dependent undergraduate students and is available to graduate and professional students to pay for their own educations. If parents choose this method of financing their child’s education, they are ultimately held responsible for repayment, unlike other loans which hold the student responsible. PLUS loans provided by private lenders have a fixed interest rate of 8.5 percent; if funds are provided directly by the government, the rate is a fixed 7.9 percent. Fees are 4 percent and are deducted from each disbursement check. Deferment is available for graduate students who are in school, but repayment for other scenarios begins just 60 days after the final disbursement is made.
Kantrowitz says to do the most with what federal, grant, or scholarship money is available. The other means of funding an education are not highly recommended, such as home equity loans, credit cards, and private alternative loans. Of these options, families often turn to private loans to cover the gap between available funds and federal loans and the rest of the education costs.
“Private alternative student loans are on the whole more expensive than federal loans, but less than credit cards,” Kantrowitz says. “The private alternative loans are variable-rate loans, while the federal are fixed-rate loans. With a variable-rate loan, it’s not just the interest rate now that’s of concern, but the interest rate for the life of the loan.” He says that right now the typical interest rate on a private loan is a combination of a variable-rate index and fixed-rate margin, the margin depending on the applicant’s credit score—the better a credit score, the lower the margin. With the private student loans, Kantrowitz says that margins have been increasing while the indexes have been at lower and lower levels. “Lenders have been increasing margins, but the interest rate has been slightly increasing because the index is lower,” he says. “And obviously, these can be 20 to 25 year instruments, so the interest rate over the life of the loan will be higher than it is now because we are in an unusually low interest rate period.”
If the borrower is looking to repay the entire loan within two to three years, the private loan rates are lower than PLUS loans right now and it makes sense, Kantrowitz says. “But if they are intending to hold on for the life of the loan term, which is usually 20 to 25 years, then the rates are going to be on average much more expensive than a PLUS loan and therefore they shouldn’t prefer private loans over federal.” Some instances may necessitate looking into alternative private loans—a student who is progressing at an unsatisfactory academic level may be ineligible for the PLUS loan, or community college students may not have the option for a PLUS loan because the school has a high student loan default rate and opted out to ensure other types of federal aid remain available.
When aid is offered and it comes time to choose a lender, Kantrowitz says to talk to the financial aid department at the college the student intends on attending because it’s the first place students turn to when they encounter a problem with a loan or lender. He also recommends going with a large lender so the student can be sure they’ll be in business when it comes time to repay. And in spite of the recent bias investigation of preferred college lender lists by the New York State Attorney General, Kantrowitz says with the exclusion of just a few, many schools have always had the student’s best interest in mind when compiling these lists. “The preferred lenders are a good starting point,” he says. “They shouldn’t be the only lenders you look at, but they can be a good source of lenders that have at least been vetted by the school.”
Kantrowitz says the hardest part of the aid process is the complexity. “There are lots of choices and lots of details,” he says. “It’s very hard to get a handle on this, especially in a short period of time. The only way to handle it is to face it head on and learn the intricacies of financial aid.”
If parents are still having trouble wrapping their heads around the options, they can turn to local businesses for help. The life planners and financial advisors at Third Eye Associates in Red Hook incorporate preparing for college costs during their holistic approach to managing and planning finances.
“The first thing is to find out what the current financial needs of the parents are and how are they dealing with that,” says Susan Simon, the vice president of Third Eye Associates and a registered financial consultant and life planner. “What are the future financial needs for them? Because although it’s very important to plan for a child’s education, I feel it shouldn’t be at the cost of planning of your own future.”
Simon says the advisors at Third Eye Associates are available early on in the process to help parents plan and save, or, later, to help them decipher the FAFSA. They can recommend a combination of savings vehicles for parents to help them attain their goals for their children’s education, helping families steer through the options, like the various 529 college savings programs. New York’s 529 plan offers low initial investment amounts (as low as $25), low fees, and advantages like tax-deferred savings and exemption from federal income tax on withdrawal earnings when they’re used for higher education expenses. Simon also recommends looking into a Coverdell Education Savings Account, which allows parents to save for education while enjoying tax advantages and also has the ability to put the money toward K-12 private schooling instead, if necessary. Ulster County Savings Bank provides detailed information on these options at the college planning section of their website.
Other local banks also dedicate advisors to helping parents prepare for education expenses. M&T Bank has an education division within its investment department and parents can schedule to meet with a financial consultant to help set up financing goals. The bank’s website offers an education calculator that can give parents an idea of how their current investment strategy will measure up when it’s time to pay tuition.
The most important step in the financial aid process is one of understanding—so make sure that any questions are answered by a professional or research the options and information online. There are loan forgiveness programs, tax advantages, repayment methods, and more that may never be known otherwise.
FinAid
www.finaid.org
FastWeb
www.fastweb.com
FAFSA4caster
www.federalstudentaid.ed.gov
SUNY New Paltz
1 Hawk Drive
New Paltz, NY 12561
(845) 257-SUNY
www.newpaltz.edu
Third Eye Associates
38 Spring Lake Road
Red Hook, New York 12571
(845) 752-2216
www.thirdeyeassoc.com
Ulster County Savings Bank
(866) 440-0391
www.ulstersavings.com
M&T Bank
(800) 724-2440
www.mandtbank.com
This article appears in October 2008.
