student financial aid

student loans

Shifting gears here, I’m going to go over the cruel and Future-Warren-Buffett-Wealth-Dream-Crusher that is – Student Loans. Getting deeper and deeper into debt is not something people want to do. However, with most college students, it has to be done. College education is getting more and more expensive nowadays. Many families cannot afford the $20,000-plus annual tuition charged by most large universities. This is where student loans come into play. Let’s first lay out your options…

There are two main types of student financial aid loans: federal and private. Federal student loans are provided directly by the government, generally have lower interest rates, and are awarded first to those who “need” the most. Federal loans also come in different categories: Perkins, Direct Subsidized and Unsubsidized, and Direct PLUS.

1. Perkins Loans carry 5% interest and are made to people with HIGH financial need. Those eligible for Perkins Loan funds can borrow a maximum of $5,500 per year of undergraduate study (4 years = $22,000).
2. Subsidized and unsubsidized direct loans are different in that a student has to demonstrate NEED to receive the subsidized loan, while anyone can receive the unsubsidized version of the loan. The other main difference is that subsidized loans do NOT increase interest while you are enrolled at least half time in school. Unsubsidized loans increased interest while in school and the borrower can pay back in school or after graduation. For both loans, the college is the deciding factor in how much money each student receives.
3. Direct PLUS loans are taken directly by the parents. Since parents generally have better credit than students, more money can be borrowed using this type of loan. ONLY DEPENDENT students can receive funds from a Direct PLUS loan.

Private loans, on the other hand, have HIGH interest rates, but you can borrow more money. Financial need is not a determining factor with private loans; however, the cost of attendance may not be exceeded. During my first year, I didn’t know about federal loans and I took out a $20,000 loan with a 20% APR. Now, that may not sound like much to many of you, however, one year out of school, I had already racked up an extra $1,000 in interest. My take home message on private loans: use them as a last resort.

joint signature
For many young adults, co-signing is just another term mom and dad use when they talk about finances. However, when college arrives, students will have trouble co-signing for a loan. Let me start by saying that federal loans do NOT require a cosigner. Private loans, on the other hand, require a cosigner. For example, Timmy, who has no credit, goes to college, gets a $20,000 loan from a private lender, and needs a co-signer. Well, when mom or dad signs that loan, he keeps your credit report until the loan is paid off. With $20,000 in debt on their credit, this could limit their ability to obtain future loans for themselves. Student loans are typically not paid off until years and years AFTER graduation, so this loan could stay with them for a long time. This is another reason why I strongly suggest federal loans over private loans.

Financial Aid Eligibility
ALL students who wish to receive federal financial aid must complete the FAFSA. FAFSA stands for Free Application for Student Aid. What this does is determine the financial “need” of each borrower to give appropriate amounts of money… and no, you can’t lie. The government distributes money only when it is necessary. Without knowing the need of the borrower, they cannot determine how much money to lend to that student. The FAFSA takes into account family income, wealth, cost of attendance, location, and many other financial factors. Generally, students with wealthy parents receive less financial aid. Plain and simple. After a student completes the FAFSA, it is processed and then an EFC is issued. The EFC stands for Estimated Family Contribution, that is, how much mom and dad are willing to pay. Now, this is not how much money THEY are willing to pay, this is how much money the government thinks they should pay out of pocket. To determine how much money a student can receive, the university subtracts the COA from the EFC which is equal to their DEBT. For example, if a college’s COA is approximately $10,500 per semester and a family’s EFC is $4,500 per semester, the loan amount per semester would be approximately $6,000. If Mom and Dad don’t plan on paying the $4,500, the difference can be made up with a Parent PLUS Loan or a Private Student Loan. The government and its selfishness…

Financial Aid Refunds
Yes, something good can come out of student loans and that is: REFUNDS! Refunds occur when the amount borrowed by the government exceeds your tuition for a particular semester. For example, if a student is eligible for $10,000 per semester, but only needs $6,000 for tuition, the refund will be $4,000. This $4,000 is normally deposited directly into the student’s or parent’s bank account. The refund is supposed to be used for books, room, food, etc. What college student is going to buy books before beer? It’s not every day you get a ton of money outright, unless of course you’re a stripper.

I think this pretty much sums up the process of creating debt. In general, student loans aren’t too bad if you’re going to have a way to pay them off after school. I don’t want to sound harsh, but if you plan to become a citrus farmer and take out $40,000 in loans, I doubt you can afford it.

His take-home message for the day: Borrow wisely, spend simply.

FWC