Understanding how you are going to pay for college is complicated. It is complicated for students, and it is complicated for parents.
The many different forms of loans, grants, and scholarships, can be daunting at times; the confusion and misunderstanding related to educational planning can be a real burden. As a financial planner it is important to have a complete understanding of a family’s options: how to maximize benefits and how to minimize the total cost of education per child.
Where to begin? Naturally, understanding a client’s beliefs and goals, as well as gathering actual educational costs is a good start. Once a good image of what these costs actually look like is established, you move on to the Free Application for Federal Student Aid, or FAFSA.
The FAFSA is the beginning of the financial aid process. The FAFSA is a form that can be prepared annually by current and prospective college students, and this form will determine eligibility for student financial aid.
To be clear, this form is not for a single specific federal aid program, but a gateway to them all.
Within the FAFSA the Expected Family Contribution is calculated. This formula is used to determine how much a family should contribute to their child’s education. It takes into account things like income, assets, retirement funds, and even unusual expenses, such as medical costs and things like that. This will help the government figure out what type of aid a student qualifies for.
What are all the different types of financial aid programs?
The most common form of financial aid is the Stafford Loan. This is financial aid provided by the US Department of Education; Stafford Loans are student loans. A student needs to start paying these back six months after they leave school, or fall below part-time status.
There are unsubsidized Stafford loans and subsidized Stafford loans. Subsidized Stafford loans are given on what’s called a need basis, meaning the expected family contribution, for whatever reason, is low. The interest in this situation does not start until the student is out of school. Unsubsidized Stafford loans do not have this feature, and the interest begins the moment the student receives the funds.
Another route that can be taken for education payments are Parent Loans for Undergraduate Students (PLUS). This program is designed for parents who can afford to make a loan payment, but may have not saved anything for their children’s education. They are loans given to the parents that are used to pay for their children’s education.
There are also the Federal Perkins Loans; similar to subsidized Stafford loans they are on a need basis. These loans carry a fixed interest rate of 5% for the duration of the ten-year repayment period. These loans are subsidized by the Federal Government and have a nine-month grace period. These Perkins Loans are eligible for Federal Loan Cancellation for individuals choosing to work in a number of different public service occupations.
Yet another form of financial aid is the Pell Grant. A Pell Grant is funds the U.S. Federal Government provides to students with financial needs, who have not earned a bachelor’s degree. Pell Grants are not loans.
These are just a few of the many different forms of financial aid that may be available to current or future students. As a financial planner it is important to understand how an individual is able to apply and/or qualify for these benefits.