Student Financial Aid
Shifting gears here, I will be going over the cruel and Future-Warren-Buffett-Wealth-Dream-Crusher that is – Student Loans. Digging yourself more and more into debt is not something that people ever want to do. With most college students however, it has to be done. College education is becoming increasingly more and more expensive nowadays. Many families cannot afford the $20,000+ a year tuition that most large universities charge. This is where student loans come into play. First lets layout your options…
Their are two main types of student financial aid loans: Federal and Private. Federal student loans are handed out directly from the government, generally have lower interest rates, and are given to those more “in-need” first. Federal loans come in different categories, as well: Perkins, Direct Subsidized & Unsubsidized, and Direct PLUS.
- Perkins Loans carry an interest of 5% and are given to those with HIGH financial need. Those that are able to receive Perkins loan funds can borrow a maximum of $5,500 per undergraduate year of study (4 years = $22,000).
- Direct Subsidized and Unsubsidized loans are different in the fact that a student has to demonstrate NEED to receive the subsidized loan, whereas anyone can receive the unsubsidized version of the loan. The other main difference is that subsidized loans DO NOT accrue interest while enrolled at least half-time in school. Unsubsidized loans accrue interest while in school which the borrower can pay off in-school or after graduation. For both of these loans, the university is the deciding factor as to how much money each student receives.
- Direct PLUS loans are taken our directly by the parents. Since the parents generally have better credit than the students, more money can be borrowed by utilizing this type of loan. ONLY DEPENDENT students are allowed to receive funds from a Direct PLUS loan.
Private loans on the other hand, carry HIGH interest rates but, more money can be borrowed. Financial need is not a determining factor with private loans however, your cost-of-attendance cannot be exceeded. During my freshman year, I did not know about federal loans and I took out a $20,000 loan with a 20% APR. Now, that may not sound like a lot to many of you however, one year into school, I had already accumulated an additional $1,000 in interest. My take home message about private loans – use them as a final resort.
For many young adults, cosigning is just another term that mom and dad throw around when talking about finances. When college comes around however, students will know hassle of for cosigning on a loan. Let me start of by saying, federal loans DO NOT require a cosigner. Private loans on the other hand, do require a cosigner. For example, no-credit Timmy goes off to college, takes out a $20,000 loan from a private lender, and needs a cosigner. Well, when mom or dad signs onto that loan, it sticks with their credit report until that loan is paid off. With a $20,000 debt on their credit, this could limit their ability to take out future loans for themselves. Student loans are not generally paid off until years and years AFTER graduation therefore, this loan could stick with them for a long time. This is another reason that I strongly suggest federal loans over private loans.
Financial Aid Eligibility
EVERY student wanting federal financial aid, has to fill out the FAFSA. FAFSA stands for Free Application for Student Aid. What this does is it determines each borrower’s financial “need” in order to give out appropriate amounts of money… and no, you cannot lie on it. The government hands out money on a need-only basis. Without them knowing a borrower’s need, they are not able to 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 who have wealthy parents, receive less financial aid. Plain and simple. After a student fills out the FAFSA, it gets processed, and then an EFC is given. The EFC stands for Estimated Family Contribution, in other words, how much mommy and daddy 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. In order to determine how much money a student may receive, the university subtracts the COA by the EFC which equals your D-E-B-T. For example, if the COA of a university is approximately $10,500 per semester and the EFC of a family is $4,500 per semester, the loan amount per semester will be roughly $6,000. If mom and dad do not plan on paying the $4,500, the difference can be made up by taking out a Parent PLUS loan or by a private student loan. The government and their selfishness…
Financial Aid Refunds
Yes, some good can come out of student loans and that is – REFUNDS! Refunds occur when the amount lent 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 comes out to 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, housing, food, etc. What college student is going to buy books before beer? It’s not everyday that you get a ton of money just handed right to you, unless of course you are a stripper.
I think this pretty much sums up the debt building process. All in all, student loans are not that bad if you are going to have a way to pay them back after school. Not to sound harsh but, if you are planning on becoming a citrus fruit farmer and take out $40,000 in loans, I doubt you will be able to pay them back.
Your take home message for the day: Borrow wisely, spend simply.