Saving Dollars & Making Sense of Student Loans

Obtaining a college degree could be one of the most important achievements of your life…don’t ruin it by becoming hopelessly in debt. Considering the staggering costs of higher education, it may prove difficult to stay out of the red. Whether you’re still paying off college or grad school-related debt, or about to sign on, it pays to educate yourself on the dollars and sense of financial aid management and repayment.

What is financial aid anyway?

Financial aid comes in many forms and from different sources, including the federal government, private institutions, endowments, and even your home state. Scholarships and grants are the most desirable (and competitive) types of aid because you don’t have to pay them back; the rest comes from savings, parents, part-time employment or, as a last resort, from loans.

Going back to school as an adult?

You’re a grown up, and you know what’s good for you, your career and your future. You also know a thing or two more about life than your average freshman, and have more responsibility. As such, going back to school is going to be more complicated – yet rife with opportunities and alternatives. Before you invest in another round of school, map out your life goals again to confirm that school is the way to go for you

 After that, be sure to…

Establish a family/friend support network
Look for programs designed for adult students
Consider part-time school, night classes, and distance learning
Sharpen your pencils…and delve in!

Paying for College: Study Up on Your Options

Whether you’ve just graduated from high school or you’re going back to college after years of employment, the road to a college degree will be full of challenges and opportunities.  Finances will be at the top of the “challenges” list so it’s important to devote sufficient time to making wise decisions.  But before you crunch a single number, it’s important to gauge your options. The truth of the matter is that relying too heavily on loans will land you in a big stinking pile of debt. And it stinks. Big time.

Before turning immediately to your loan options it’s important to look at ways to pay for college that don’t involve accruing debt: 

Merit: available from colleges and numerous private organizations.
Bright Futures: State scholarship programs.
Federal Grants: The two main federal grants are the Pell Grant and the Supplemental Educational Opportunity Grant (SEOG), both of which are only available to undergraduate students.
Work-study: A federal program that subsidizes jobs for both undergraduate and graduate students.
Working part time:  This also can provide excellent work experience to help you land that first job.
Parents/relatives:  Don’t forget grandparents and other relatives.
Attend a local community college for the first two years and then transfer to a public university.
Attend a public instead of a private university.  Many public universities have reputations of being as good or better than their private counterparts.
Consider on-line degrees, which are rapidly growing in number.
Military Aid: If you’ve done your service, you and your dependents are entitled to certain educational benefits.
Employer Tuition Reimbursement Programs: While this is a great option if you have it, make sure you understand all stipulations of the program. Certain strings might be attached, like promising a certain number of years to your company after you graduate or certifying that you're not retraining for a new career.

After accounting for the above options, you’ll have a better idea of whether you also need to borrow, and if so, how much. But you also should determine if the amount you need to borrow is affordable from a re-payment standpoint. This can be done by estimating your future income and other expenses and making sure the loan re-payment amounts will not take an unacceptable portion of your income. Try to limit the sum of all your student loans to ½ of your starting salary. This will keep your monthly payments in the range of 5-10% of your gross income…a manageable amount.

For example, if you expect to be a public school teacher with a starting salary of $30,000, your accumulated college loans should not exceed $15,000.

Conversely, if you expect to be a chemical engineer with a starting salary of $60,000 you could afford to borrow up to $30,000.

If you know you’ll need to take out student loans, the next step is to make sure you fully understand all of your options and what each will mean in terms of limits, interest and repayment.

Repayment Management

Once upon a time, paying back student loans was a cut and dry 10-year plan. It’s still an option, but not the only one. And thank the money gods for that! As the cost of higher education swells into the stratosphere, most of us cannot realistically keep up with that kind of monthly payment.
There is now an assortment of flexible repayment options (primarily for federal loans) to help you manage your student loan debt. Let’s break it down…

When the basics will do, choose…

…a standard repayment plan, meaning you’ll pay a fixed amount each month for a term of ten years.
…a graduated repayment plan, meaning that your payments will start out low in the early years, then gradually increase through the end of the term.
…an extended repayment plan, which stretches out the time you have to repay your loan, sometimes up to 30 years. But keep in mind that this will require you to pay significantly more interest over the life of the loan.

When you need more options…Get an…

Income-Based Repayment (IBR) plan: Here, your monthly loan payment will be based on your annual income. As your income fluctuates up or down, so do your payments.

Or a….

Loan consolidation: Though technically not a repayment option, this will allow you to combine several student loans into one consolidated loan with a lower interest rate.

When life gets seriously complicated, file for…

…a deferment wherein your lender grants you a temporary reprieve from repaying your student loan based on specific conditions, such as unemployment, temporary disability, military service, or a return to graduate school on a full-time basis.
…forbearance wherein your lender grants you permission to reduce or stop your loan payments for a certain period of time due to hardship.
…cancellation, which is not easy. Bankruptcy laws only allow your loan to be wiped off your financial slate due to something calamitous (like death or permanent total disability).
…altruistic programs: Federal loans may also be cancelled via participation in altruistic programs like teaching needy populations in certain geographic areas.

Now That You’ve Figured Out Repayment…Let’s Talk Management

A student loan is a major debt and it needs to be managed like one. To be successful at it (that is, pay it off as quickly and efficiently as possible) there are two important rules to follow:

1. Track it, because you own it. Add ‘student loan payoff’ to your list of goals and treat it accordingly by writing it into your budget and adjusting your payoff schedule, as needed. It’s also essential that you keep your records current and in one place.
2. Remember: You own it. Not the other way around. It’s even more essential to stay on top of what you can manage at any given time, and touch base with your lender when circumstances change.

That means…

…pulling the emergency cord (i.e., deferment or forbearance) when your situation dictates it.
…filling out the appropriate application and supporting documentation.
…following up to make sure that your application has been processed correctly.

The Silver Lining Payback

There is good news to report when it comes to paying back student loans.

You might be able to deduct some of the student loan interest you’ve paid over the course of the year from your annual federal income tax return. Come tax time, keep an eye out for the Form 1098-E to see if your loan payments qualify.

And guess what? You can exercise even more options in the form of financing alternatives.

Given all of your options, keep in mind that the one you choose will depend on your particular situation, and you should discuss these options with someone you trust or a financial adviser, like a CPA.

A-B-C, Loans for Me

So you've decided that your ticket to success is a college or graduate school degree. Good for you! You’ve also determined that you’ll need student loans in order to fund it. Before rushing into anything, take the time to familiarize yourself with all of the options available to you so that you make the best decision for your financial wellbeing.

I’ve determined that I need to get a student loan based on financial need….what do I do?

First of all, fill out your FAFSA as soon after January 1 as possible.  FAFSA stands for Free Application for Federal Student Aid. Basically, it’s how the federal government and individual colleges assess how and what funds are distributed to you, the prospective student.  It’s a crucial component of the loan application process.

Some of the financial data required by FAFSA comes from your (or your parent’s) federal income tax return. However, it’s ok (and probably better) to estimate those amounts instead of waiting for the tax returns to be finalized. Getting the FAFSA forms submitted as early as possible improves your chances of success.

What’s the difference between need-based aid and merit-based aid?

Need aid is based on what you can afford; merit aid is based on what you can do. The other key difference is:
Need-based packages are sourced from the federal government and individual colleges
Merit-based packages are available from individual colleges and universities; private and public companies; and associations and foundations

How is need-based aid determined?
It’s complicated. Basically, your income and assets are analyzed via two fancy-pants formulas:

Federal methodology, used in the FAFSA
Institutional methodology used in the PROFILE (or a college's own application)

The result is your expected family contribution, or EFC: what you’ll pay if you’re eligible for aid. The difference between the total estimated cost of attending the college and your EFC, determines the amount of the aid available.

What kind of need-based aid is out there?

It depends on the institution. In terms of federal aid, there are four types of loans, each with its own set of distinctions.

1. Unsubsidized Stafford Loan

Available to undergraduate and graduate students enrolled half-time or more
Fixed interest rates (effective 7/1/13 through 6/30/14)
Undergrad students:  3.86%
Grad/Professional students:  5.41%
Re-payment deferred until 6 months after graduation or loss of student eligibility.  Interest charges during the deferral period accumulate and are added to the loan amount as part of the principal.
Loan limits? Yes. There is an annual limit and an aggregate limit and the amounts vary depending on whether your parents qualify for a PLUS loan.

2. Subsidized Stafford Loan

Available to undergraduate and graduate students enrolled half-time or more
Fixed interest rates (effective 7/1/13 through 6/30/14)
Undergrad students:  3.86%
Grad/Professional students:  5.41%
Re-payment deferred until 6 months after graduation or loss of student eligibility.  Interest charges on the loan during the deferral period are paid for by the federal government.
Loan limits? Yes. There is an annual limit and an aggregate limit and the amounts vary depending on your year of school (freshman, sophomore, etc.) and on whether your parents qualify for a PLUS loan.

3. Perkins Loan

A low interest rate subsidized loan for students (undergrad, grad and professional) with exceptional need.
Available to students enrolled for any number of credits.
5% interest rate.
Re-payment deferred until 9 months after graduation or loss of eligibility. 
Loan limits? Yes. The loan amounts vary depending on your financial need. For undergraduate students the maximums are $5,500 per year and $27,500 total. For graduate students, the maximums are $8,000 per year and $60,000 total.

4. PLUS Loan

A federal loan for borrowers with a good credit history.
Available to parents and graduate students.
6.4% interest rate.
Re-payment can be deferred until after graduation or loss of eligibility but interest charges accrue during the deferral period and are added to the loan amount.
Loan limits? No. A PLUS loan can be used to pay for the entire cost of education, minus other financial aid. 

What about loans from private sources such as banks?

If you don’t qualify for federal loans or need to borrow more than the federal loan limits, look into private loans from commercial lenders.  Make sure to understand the interest rate (fixed or variable) and the re-payment terms and options (if any). 

Tax Breaks
Be sure you take advantage of all tax breaks associated with paying for college. For example, the interest portion of your loan re-payments may be able to be deducted up to $2,500 per year.  Also, there are several available during school…for example, you (or your parents) could also qualify for the American Opportunity Credit (HOPE Credit) or the Lifetime Learning Credit.

Now that, let’s take a look at managing the re-payment of student loans and alternative financing opportunities.