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It’s crunch time.
The college acceptance letters have rolled in, and your child has narrowed their college decision down to the finalists. Now comes the exciting part: figuring out how to pay for it all.
Here’s a quick rundown of all the pieces that make up the “paying for college” puzzle.
A federal grant is free financial aid (from the U.S. Department of Education) that is awarded to students and families based on their financial needs. Federal grants don’t have to be repaid, which is a huge help for students who qualify.
To qualify, you must submit the Free Application for Federal Student Aid (FAFSA) form. Your FAFSA is reviewed to determine the degree of your financial need. You’ll be notified of any grants your child received in your financial aid award letter. You’ll have to submit a FAFSA every year to apply for federal aid, including grants.
There are instances when you would have to repay a federal grant, like if your child withdraws from school for the year the grant was awarded. But by and large, federal grants are free financial aid to help you pay for college.
Just like grants, scholarships are free aid that doesn’t need to be repaid. However, scholarships are distributed based on merit or other factors, not financial need.
Merit-based scholarships are offered by a college based on prior academic performance — like your child’s Grade Point Average (GPA) or standardized test scores. This is determined when the school reviews your child’s college application.
Then there are private scholarships offered by various organizations. Some scholarships have very general qualifications that draw in a high volume of applicants; others have very specific qualifications with a much smaller pool of applicants. Certain private scholarships are available only to students who are eligible for a Federal Pell Grant (which requires a submitted FAFSA form). Here are some tips to help you and your student during your scholarship search.
The Federal Work-Study Program is another form of federal financial aid. The program provides part-time jobs to students that allow them to earn money to help pay for education expenses. If awarded, students will work at either an on-campus or off-campus job and make at least the federal minimum wage, up to the maximum amount the award allows for.
Students will receive payment from the school at least once a month. They must be paid directly, unless the student requests that funds go directly to their bank account or back to the school to cover education expenses.
The FAFSA application will determine whether your child qualifies for a work-study program.
Note: Jobs aren’t guaranteed; your child will need to search and apply for work-study positions on their own.
Now comes the costs you’ll pay on your own. That typically starts by tapping into your college savings, most notably a 529 college savings account.
You can make tax-free disbursements from your 529 — a state-sponsored savings plan for education costs — in order to cover qualified educational expenses. Those include tuition and fees, room and board, books, and other expenses. Remember that you don't have to make a 529 disbursement every year; some years you may have all costs covered through aid and other means. In that case, keep your savings in the 529 so it can earn a return until it’s time to start withdrawing.
Note: Some non-qualified disbursements could be taxed and charged a fee; therefore, familiarize yourself with your 529’s rules for withdrawing.
Want to pay more toward your child’s education but don’t have the savings to do so? Then contact the school’s financial aid or business office about setting up a payment plan while your child is enrolled. With a payment plan, you can make monthly payments to continue to chip away at, or even cover the entire remaining college cost. You’ll just pay a small administration fee.
Let’s say you still owe $15,000 for the first year after factoring in your free aid and savings. You don’t necessarily have to take out loans to cover the remaining expense; instead, you can make monthly payments during the academic year to cover all or a portion of that $15,000. For instance, you could contribute an extra $5,000 that year by making monthly payments of $500 for 10 months. Then you’d only have to get a loan for $10,000 (instead of $15,000) to cover the balance.
Once you’ve exhausted all sources of free aid, college savings, and payment plan options, take a look at the leftover cost. How much do you need to bridge the gap? It might be time to check out federal and private loan options.
For federal loans, the William D. Ford Federal Direct Loan Program offers fixed interest rate loans to students and parents. These loans are either subsidized or unsubsidized. With a subsidized loan, the federal government pays the interest accrued on the loan while your child is in school and during deferment (the six months after graduation). Subsidized loans are awarded based on financial need as outlined in your FAFSA. On the other hand, an unsubsidized loan means your child will have to pay all accrued interest.
Private student loans are also available, with options for students and parents. These loans are also unsubsidized, and come with either a fixed or variable interest rate.
In some instances, creditworthy applicants can get a better interest rate with a private loan than a federal loan. Some private lenders don’t charge application, origination, or disbursement fees. Others offer multi-year approval on loans, which means you apply once and only give a few details on your application when you come back in subsequent years.
Paying for college can be stressful and confusing. But if you do your research and get organized, you can make the best decision for you and your college-bound student. Loans are a helpful way to bridge any gaps, but as you can see, there are other ways to afford the cost. Regardless of what you choose to do, don’t forget to fill out a new FAFSA form before every academic year.
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