Financing Your Child’s Future – The College Edition

It may seem like yesterday when you brought your newborn home from the hospital.  Now, they are starting their senior year of high school.  After a summer of college visits, they are preparing to submit their college applications.  The college process is different than when you or your parents attended, and the older generation was able to work part-time and pay their way through college.  Tuition has inflated 840% since 1983, with public tuition, fees, and room/board in the 2021-2022 school year averaging $22,690 annually ($51,960 for private). Many families struggle to cover the tuition, room and board, and extra costs.

How will you pay for it all? The next steps are to apply for the FAFSA, determine your child’s financial aid package, and then apply for private loans.

Start With the FAFSA

The Free Application for Federal Student Aid, also known as FAFSA, is an application for any student interested in receiving federal financial aid. This form assesses a student’s financial need and provides funding options based on those needs. It is available starting October 1^st of the year before they are considering education and must be submitted by June 30^th of the award year. For example, for a student who will start school in August of 2023, their FAFSA application will open October 1^st, 2022, and will be due by June 30^th, 2023. States and colleges may have their own deadlines as well.

The FAFSA takes three to five days to process once submitted online, and it takes a deep look into a family’s financial “filing cabinet.” If your child is applying as a dependent, both parent’s income and contribution from assets will be assessed, as well as any of your child’s income and assets. If your child applies as an independent, they will not require family information. The application process will determine how much the family/individual is expected to contribute through complicated formulas. You can learn more about the FAFSA in our previous blog, How To Ace The FAFSA. And Maximize College Financial Aid. (alleghenyfinancial.com).  To check the status of your FAFSA application, or to learn more, you can also visit the Federal Student Aid website here: FAFSA® Application | Federal Student Aid.

Understanding Your Expected Family Contribution

Once the FAFSA is completed, a Student Aid Report (SAR) is generated. This report details your child’s Expected Family Contribution (EFC), which is the estimated amount their family (or outside help) will be expected to supply. If your SAR does not list an EFC, your application may have been submitted incorrectly and will need to be corrected and refiled. The FAFSA needs to be completed each academic year to potentially qualify for federal financial aid. The difference between the EFC and the cost of college is the amount of financial aid the student may qualify for.

Typically, the rule is that the lower the EFC, the higher the financial need, and therefore, the greater the eligibility for federal aid. Students and families sometimes do not even apply for the FAFSA because they believe they make too much to receive any financial aid. All college-bound students should apply for the FAFSA, regardless of income or assets. Not only does it show the eligibility for federal financial aid, but it also allows colleges and universities to look at their own list of scholarships that the student may be eligible for.

Federal Student Loans

After scholarships or grants, there are many options for federal aid for students. Federal student aid can be a good, low-interest option for those who require more financial aid. Below is a table listing each type of federal aid options and their details:

Federal Loan Program	Program Details	Annual Award 2021-2022 (Subject to change)	Interest & Payments 2021-2022 (Subject to Change)
Pell Grant	Who: Undergraduate and graduate students with financial need.	Up to $6,495 You can receive up to 12 terms or 6 years of funding	Not Applicable, except for certain events.
Direct Subsidized Loans	Who: Undergraduate Students with financial need. Student is not charged interest on the loan when in school at least half-time	$3,500 – $5,500	3.73% Six-Month Grace Period
Direct Unsubsidized Loans	Who: Undergraduate, graduate, and professional degree students; financial need is not required.   Student is responsible for interest during school	$5,500 – $20,500 minus any subsidized amounts received	3.73% (5.28% for graduate and professional students) Six-Month Grace Period
Direct PLUS Loans	Who: Graduate and professional degree students, and for parents borrowing money for a dependent undergraduate’s education. Students/parents must not have bad credit history (or meet certain eligibility requirements)	Up to the maximum amount of the cost of attendance minus any other financial aid the student receives	6.28% Grad PLUS: Six-Month Grace Period Parent PLUS: No Grace Period

Benefits of Federal Student Loans

A significant advantage to utilizing federal aid is the payment flexibility. Your child can contact their lender and create more flexible payment plans. It is also often that federal student loan interest rates are at a lower fixed or variable rate than private student loans. Depending on various requirements, there are federal student loan forgiveness programs available to specific individuals. Some programs allow for income-driven payment plans. Also, in hard times, the government may pause payments or stop interest accruing to help borrowers. By helping borrowers, they can potentially avoid economic collapse. A perfect example of this resulted from the Covid-19 pandemic. Due to the pandemic, the government enacted a student loan pause on all federal student loan payments due and eliminated interest accruing during the pause. This action has saved many U.S. families from defaulting on their student loans while out of work.

Private Student Loans

Depending on your child’s eligibility for federal aid, and any grants or scholarships they may receive, they may still owe more to the school. If this is the case, you will need to consider looking at private student loans. This money can come from banks, credit unions, or other lenders. Rather than owing money to the government, private lenders offer money to be borrowed, usually at higher fixed or variable rates. Private loans tend to have higher borrowing limits than federal loans. Interest accrues while your child is in college, and these loans tend to have less student loan repayment flexibility than their federal counterparts. Payments are due once college is over (either by graduating or dropping out). Some lenders may not offer loans if your child goes to school part-time. Private loan companies may require a co-signer if your child lacks a credit history. The co-signer is usually a parent or relative that agrees to be liable if the student does not pay off the loans in the future.

Unlike federal loans, your child will have to fill out an application for each private loan they would like to apply for. Private lenders do not have a fixed interest rate, they will look at specific details to what your private loan’s interest rate will be. Some of those details will include:

• Loan Amount
• Term Period
• Fixed versus Variable rates
• Credit History
• Cosigner Credit History
• School you are Attending

There are many different lenders available to students. Some are well known for having low interest rates. Others may have a benefit targeted to specific people, such as those in the medical field or a credit union for military veterans.

Tip! Be wary of application fees, origination/disbursement fees, etc. There are many competitive companies out there that do not have additional fees.

How to Reduce Your Student Loan Interest

Here are a few ideas to improve student loan interest rates and future payments:

• Sign up for autopay: Most federal and private student loan servicers offer a 0.25% interest rate deduction if borrowers use monthly autopay. The monthly payment is withdrawn directly from your bank account the same day every month.
• Pay interest during school: The more interest that is paid while your child is in school, the less time and money it will take after graduating to pay it off.
• Pick the shortest term that you can afford: By taking a shorter-term and paying more off right away, your child will save money by paying less interest in the long run.
• Establish Credit for Your Child: If you are a parent preparing for your child’s education in a few years, consider either adding them to your current credit card as an authorized user, or open a new credit card that allows an authorized user. You can build credit for them by paying for easy or small expenses, such as your morning coffee or your gas runs, and then paying it off every month. Then when the time comes for your child to look for lenders, they may receive a lower interest rate because they have credit.
• Work for programs that may be eligible for loan forgiveness: Government, non-profit, teaching, military, and other occupations may be eligible for loan forgiveness based on strict requirements.
• Refinancing/Consolidation may be for you: When your child graduates from college or leaves early and has been paying off their student loans, they may find lower interest rates by refinancing with another company. Like refinancing a mortgage, a student may discover new loans with either a lower interest rate, lower payment, lower period, or a combination of these. Today, some of the lowest student loan refinancing rates are available. However, be wary of refinancing government student loans. Refinancing a government loan may help pay the loan off faster and reduce the interest; it turns into a private loan, so benefits like loan forgiveness or the pausing payments will not be available.

How to Reduce Your Child’s Student Loan Debt

Here are a couple of ideas on how to prepare in advance for your student’s college:

• Invest for your child early: If you are thinking about saving for your child who still has time before they graduate, consider opening a 529, an UTMA/UGMA, or a Coverdell ESA. Talk with a financial advisor to determine which works best for you.
• Take advance placement (AP) courses in high school: Many high schools offer AP courses, which allow your child to receive college credits ahead of time that may transfer to the school they are applying for. Some of these classes will cost money, and GPA requirements may apply– contact your guidance counselor for more information.
• Consider community college: Your child can save money by completing their basic general education (Gen-Ed) courses at a community college. Be careful, though; confirm the college they will finish at will take the community college’s credits – some colleges are particular in what they will accept.
• Pick public over private: Public colleges/universities tend to be much less expensive than their private counterparts. While you want to focus on the college that gets your child the best education, they may find a public college offers an education on the same level. Often, public colleges have similar job placement rates.
• Select in-state versus out-of-state: Most colleges will make a student pay extra if they are not from that state. A student from Pennsylvania will likely pay out-of-state tuition for any college outside of the Commonwealth of PA.
• Participate in work-study or apply to be a resident assistant: Work-study students will be eligible to work specific jobs around campus. The money they receive for work will go directly to their tuition payment. Resident Assistants (RAs) monitor college dorms and sometimes help with activities in the halls. The student could have their room and board paid for, depending on the school’s policy.
• Apply for scholarships: There are many scholarships available. Even a small scholarship can help in the long run. You can find scholarships at your child’s high school, the colleges they are applying to, and in your communities. Are you part of your local rotary club? They may have one! If you check online, you will find many unusual scholarship opportunities. And your child can apply for scholarships as a sophomore, junior, and senior. Then in college, they can apply every year until they graduate.
• Qualify for Student Loan Forgiveness: In some instances, if you work for the government, or not-for-profit organizations, you may be eligible to have your student loans forgiven. Other programs may exist, like for students who become teachers. Learn more about student loan forgiveness on the Federal Student Aid website.

Final Thoughts

Preparing your child for the next chapter in their life can be overwhelming and intimidating. However, there are many resources available to help you with this next step. Reach out to your child’s guidance counselor for college information. Explore the FAFSA website. Have your child start applying for scholarships. Sign up for some loan websites and compare what your child may be eligible for. Work with a college admissions counselor to see what scholarships your child may qualify for. Colleges also have webinars/seminars on various types of financial aid. To be well prepared for college expenses, contact your financial advisor to put a well-thought-out plan into action.

Author:  Ariel Watson, Financial Planning Assistant | Allegheny Financial Group 

Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.

Sources:

College Planning Essentials | J.P. Morgan Asset Management (jpmorgan.com)

Federal Pell Grants | Federal Student Aid

Subsidized and Unsubsidized Loans | Federal Student Aid