Tagged: loans

Making Sense Of Your Financial Aid Award Letters

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Financial aid award letters, overflowing with crucial financial information you’ll receive from the schools that have accepted you, are the subject of today’s post. The letters will be full of juicy details, allowing you to compare the true cost of attending the various colleges that you’re considering for your undergraduate adventures.  OK, perhaps I erred in describing the letters as being full of “juicy details”. I admit that it may well be more accurate to describe the financial aid award letters as being full of “confusing specifics”, “befuddling facts”, or “mystifying particulars.” Why is it all so complicated? How can you make sense of your financial aid award letters?

Confusing

 

Well, I want to share with you a gem of a YouTube video from U.S. News & World Report. I recommend that you watch the entire clip (click here to access it), but if you don’t have 15 minutes to spare at the moment, allow me to give you a quick rundown of the key points:

  • The basic components of a financial aid award letter are: 1) Grants and scholarships (the free money!) – know where they’re from and why they were awarded. 2) Work Study – this represents the most that a student can earn working on campus in a year. 3) Loans – look to see if they’re for the student or for the parents, and also be sure to understand their terms.
  • There are a number of important phrases that are commonly used in an award letter. Two examples are: 1) Cost of attendance – this is NOT the bill, but rather is an estimate of what the college thinks it will cost the student to attend for a given enrollment period. 2) Family contribution – this is also NOT a bill, but is how much parents could look to contribute to the overall cost.
  • Another thing that may be confusing is that some colleges package parent financing into the financial aid award – as a result, it may at first glance appear that the entire cost of attending is covered. However, upon closer inspection it may well be the case that it’s actually parent financing (sometimes called a Federal Direct Plus Loan).
  • Work study and loans help you to finance your undergraduate education, but they don’t change what you’re going to pay – they only have an impact on when you’re going to pay what you owe.
  • If you have more than one award letter and are trying to compare them, proceed with caution, as they may look very different from each other, making a side-by-side comparison challenging (i.e. apples to oranges). Here’s a useful tool for comparing aid awards at up to four different schools – click here!
  • You typically receive single year awards in these letters – for a family to predict what they’ll need to borrow over all four (or more) years, they should know what the criteria are for the renewal of scholarships and grants (if applicable).  Also, be sure to read the fine print for needs-based grants.
  • As ever, be sure to focus on the net price!

Sorting out the finances for college can seem confusing and overwhelming, but if you stay calm and arm yourself with the information you need to make the right monetary decisions given your personal situation, you’ll get through the process!

Not Alone With Loans

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Out of curiosity, I recently opened to the “Contents” page of the July 2015 (volume 44, number 6) issue of a magazine called Money – what awaited me there quickly convinced me that the magazine is aptly named!  There were articles about rising dividends, avoiding financial headaches, finding the best-value cell phone service, and advice on how to have an inherited stamp collection appraised.  What most struck me, however, was a piece entitled “Borrow Smart for College: Funding college with a loan? Follow these rules to stay safe.”  I flipped to the article and read on…

Loan

 

What greeted me on page 31 was a commentary directed at parents who are helping to fund their teenager’s undergraduate education through a loan of their own.  The article discusses the three most popular loan options (a federal PLUS loan, a private loan from a bank or credit union, and a home-equity line of credit) and considers the merits and potential pitfalls of each, especially given parents’ personal circumstances (e.g. credit history and the estimated amount of time needed to pay off the loan).  The article highlights are, I think, well worth sharing!

Federal Parent PLUS Loan

Pros

  • Straightforward application process.
  • Easier-to-meet credit requirements as compared to other loans.
  • 10 years is the standard repayment time, but you can take up to 30 years if needed.
  • In the case of financial hardship, you can qualify for breaks in repayment.

Cons

  • Higher interest rates than other loan options.
  • There is a loan origination fee (usually more than 4% of the value of the loan).

 

Private Loan

Pros

  • No origination fee.
  • If you have strong credit, you can get a lower rate than on a PLUS loan.
  • If your income is below $160,000 (for a married couple), you can deduct up to $2,500 in student loan interest when you file your taxes.

Cons

  • If your credit score isn’t very good, the rate on your loan may leave something to be desired!

 

Home-Equity Line of Credit

Pros

  • Borrowing against your home equity can help you to secure a lower rate on your loan.
  • Your interest paid is tax deductible (although if your income is high you may lose the interest deduction in your alternative minimum tax calculation).

Cons

  • The average rate you’ll pay is 4.75% BUT that’s a variable rate (not fixed) so if/when the Federal Reserve raises interest rates, this will impact your rate as well. Many lenders will allow you to convert what you still owe to a fixed loan (usually at a rate of around 6%).

 

In short, there are options out there for parents looking to help fund their teenager’s undergraduate education.  Keeping your personal circumstances in mind, do the research in order to determine which type of loan is the most appropriate for you!