One of the central facts of financial life for millions of young Americans is student debt.
Indebtedness related to tuition at university is one of the major sources of long-term debt burden in the United States, ranking alongside costly medical bills as a potential source of monetary heartache for years to come; even high credit card balances don’t pose the same systemic risk.
For many students whose families lack financial resources to pay full cost of attendance, loans covering some expenses are nearly inevitable. But, with forethought and diligence, long-term debts can be minimized.
This is the beginning of an ongoing series intended to shine a light on college finance. We’ll give you the facts you need to make sure you won’t be dealing with abusive creditors the day after graduation.
Federal Financial Aid Should Always Be Your First Stop
Federal student aid comes in the form of grants and loans. Grants never need to be repaid; they are essentially a “gift” intended to defray some of the costs of education. Loans, on the other hand, must be repaid. To make things more complicated, student loans come in “subsidized” and “unsubsidized” forms. Subsidized loans do not accrue interest while the student is in school, or during deferments or grace periods; unsubsidized loans do.
Subsidized loan eligibility is based on need, according to the income of the student’s parents or guardians. In many cases of high demonstrated need, a large portion of tuition can be paid through subsidized loans. Though federal loans have favorable and flexible repayment schedules, they are obviously not preferable to grants; but federal loans are relatively easy to obtain compared to grants and scholarships, discussed below.
Students who hope to qualify for federal aid must submit a simple Free Application for Federal Student Aid each year, which is used to measure financial need. A student with need is likely to qualify for both subsidized and unsubsidized loans, but can elect not to accept unsubsidized funds, or accept a smaller amount than was offered.
There’s No Such Thing as a Free Lunch – But Grants and Scholarships Come Close
Grant and scholarship are closely related terms. A grant is any money that is provided as a “gift” to help the student pay the costs of college. In effect, all scholarship money comes in the form of a grant: but unlike federal aid, most scholarships are based on direct, academic competition (in other words, “scholarship”) rather than need.
Scholarships in varying amounts are administered by thousands of different private and public agencies, and many require essays or other types of entries to qualify. Scholarships of this kind are called merit-based, and though an individual school may offer several, for the most part it’s up to the student to find, apply, and win them. Though they are the most favorable financially, it’s usually unreasonable to expect them to pay for a very large portion of expenses over several years.
State Colleges are Often More Financially Favorable Than Private Ones
State colleges offer favorable tuition rates to state residents, often a savings of 30% or more compared to rates for out-of-state residents. State colleges may also offer a larger proportion of need-based aid. However, state colleges are subject to budget crunches that many established private institutions can weather more successfully, and this has a direct impact on aid from year to year. In sheer monetary terms, state colleges are usually much less expensive, and transferring from a state college to a more “prestigious” private university usually leads to more financial aid at the private institution.
Private Student Aid is Often a Raw Deal
The final major category of student aid is private funds from for-profit student lenders who work with banks to obtain funds on your behalf. For many, some private loans will be inevitable. However, do everything you can to budget and cut costs before going this route. Repayment terms for private loans vary and are often unfavorable. Interest rates can be exorbitant, leading to long-term debt. Some student lenders have been implicated in abusive and deceptive practices, such as paying university administrators to advocate for their loan products in financial aid offices. If you must use private aid, compare all of your options carefully, and consider getting help from an independent financial adviser.
In our next installment, UWSA will answer questions about student debt repayment. What are your options? What about debt consolidation? Even though aid does not need to be repaid until after graduation, preparing from day one can save thousands of dollars.