Families may execute a variety of strategies to address college expenses which often includes financial aid in some form. The ability to save consistently over time can change significantly due to unforeseen life events, and student financial aid can cover some of those costs. Sometimes applying for financial aid becomes necessary to help iron out higher than anticipated tuition expenses. Some students are eligible for scholarships tailored to a distinct career field. Regardless of the basis, college financial aid continues to be among the most widely-used tools in paying for higher education.
College expenses: a quick breakdown
According to recent data, college costs have continuously risen in recent years. The College Board’s annual report, published in October 2016, noted the following averages of published tuition and room and board costs in 2016:
- Private 4-year college: $45,370
- Public, 4-year, out-of-state college: $35,370
- Public, 4-year, in-state college: $20,090
- For-profit college: $16,000
- Two-year community college, $11,580
Common forms of financial aid
Federal loans/FAFSA: The Free Application for Federal Student Aid (FAFSA) is one of the most popular methods to obtain aid and is used by over 13 million students. FAFSAs are used to issue financial aid in the forms of federal student loans, state student loans, school financial aid and grants. The application requires a considerable amount of information available to determine eligibility including social security numbers for the student(s) and their parents; W-2 forms and federal tax returns for the most current year; bank statements; and all information regarding assets and investments.
Investments held by families are taken into consideration on the FAFSA form, including but not limited to real estate (not including primary residence), trust funds, and stocks and bonds. However, cash values of whole life insurance policies and annuities, retirement accounts, and the value of family-owned businesses (if more than 50% of the business is owned and controlled by the family and there are less than 100 employees) are exempt from factoring into investments that will ultimately determine how much aid is available to a student.
In filling out a FAFSA, sooner is often better. Since FAFSAs search for financial aid available at the state level as well as colleges, it’s critical to check upon and remember deadlines as they vary greatly depending on each state and the student’s school of choice. It’s also important to understand that a FAFSA must be filled out each year of attendance so it’s helpful to keep pertinent information handy in order to make subsequent applications easier and faster to complete.
Private loans: Not all families opt for federal loans through FAFSA. A number of private forms of aid are available, provided by banks and credit unions. There are a number of distinctions to keep in mind when considering a private loan. With a private student loan, the credit score of the borrower has a significant impact on the amount of the loan as well as the interest rate.
Private student loans often mandate regular payments while the student is in attendance, unlike a federal student loan where payments don’t typically begin until after graduation or ending of attendance. A private student loan sometimes requires a cosigner, which allows for a student to begin favorably building his or her credit if payments are made regularly and ultimately in full. Upon death of the borrower, federal student loans are automatically canceled and the debt is discharged by the government, whereas private student loans may not offer this same liability protection.
Scholarships and grants: Although more difficult to obtain than a loan, scholarships and grants can serve as an advantage. Since scholarships and grants are not repaid by the recipient, they can drive down the overall cost of higher education. With scholarship or grants, there are several eligibility benchmarks such as grades, income levels and specific qualifications based on the organization providing the funds.
A recent report from Sallie Mae, examining information obtained between March and April 2016 from 799 parents of undergraduates, notes that “families paid less out of pocket for college in academic year 2015-16 than in 2014-15 as scholarships and grants covered a greater share of the cost.” The report added that “scholarships and grants funded 34 percent of college costs, up from 30 percent in 2014-15, and represented the largest proportion of any resource used to pay for college in the past five years.” However, only a small percentage of those families were able to pay for college expenses through grants and scholarships alone.
Developing a solid financial aid strategy
Households tend to have vastly different conditions that dictate specific college needs. A good, extensive dialogue with your financial planner, lender, and/or banking institution may help in making sound financial decisions related to college planning and the financial aid that works best for your unique situation. A federal student loan may be the best option for some families, but it may not meet everyone’s needs. Likewise, a private loan may serve as an acceptable foundation for some, but the circumstances associated with such a loan may be troublesome. Families taking the time to establish specific needs and financial capabilities may be in a good position to arrange sound decisions that achieve peace of mind.