Student Loan Resources

Building Blocks of Paying for College (text version)

Total Cost of College Attendance

• The average tuition for a 4-year private school in 2006-07 was $22,218 and a four-year public school was $5,836.
• The average surcharge for an on-campus room and meal plan at a 4-year school in 2006-07 ranged from $6,960 to $8,149.
• The national average amount students spent on books and other supplies in 2006-07 was over $900.
• These expenses could include public transportation, gas, car insurance, maintenance, parking fees, and travel home for breaks and holidays. The average transportation costs for students in 2006-07 ranged from $722 to $1,224.
• The national average amount in an undergraduate student's budget for personal expenses in 2006-07 ranged from $1,277 to $2,048.
• Other expenses could include lab fees, athletic fees and equipment, club, sorority or fraternity dues, study abroad expenses, and emergencies.

* Source: The College Board Trends in College Pricing, 2006.

Covering The Costs of College

FINANCIAL AID

Student financial aid is money that helps you pay for higher education. You can receive funds from both government and private sources, and financial assistance usually comes in the form of grants, scholarships or loans. Financial aid can encompass all kinds of financial products and services used to cover the overall cost of attending college, including loans that have to be repaid.

Grants
Both grants and scholarships are monetary awards the student does not have to repay. Grants are typically awarded based on financial need; scholarships are generally awarded based on any number of criteria, such as academic or athletic achievement.

• Pell Grant - This is a federally funded grant program for undergraduate students. Eligibility is based on financial need and the amount available to you depends on cost of attendance, expected family contribution and total amount of program funding allotted to your school. The maximum award was $4,050 for the 2006-2007 school year.
• Academic Competitiveness Grant (ACG) - This is a government funded program for freshman and sophomore undergraduate students who must be Pell Grant-eligible to qualify. It requires successful completion of a rigorous high school program and second year students must maintain a 3.0 or higher GPA. Maximum awards are currently $750 the first year and $1,300 the second year.

Instituitional Aid
Many schools offer their own grants and scholarships, often called "instituitional aid"; check with your school's financial aid office.

Scholarships
These are monetary awards that do not have to be repaid; they are generally awarded based on any number of criteria, including financial need, academic or athletic achievement, or public service. Scholarships often require an application that may include an essay, recommendations, or an interview process.

• Non-Profit Organizations - Social and professional organizations, both national and local (for example, your local Rotary Club), charities, and religious groups offer scholarships to college or college-bound students
• Employers - Many companies and organizations offer scholarships to children or dependents of their employees. Check with the Human Resources department of your employer (or your parents' employers).

Loans
Loans are part of financial aid packages that have to be repaid. Both students and their parents or guardians can take out loans to finance an education; there are many different types of education loan programs.

Federal Student Loans
These are student loans backed (or guaranteed) by the federal government. The federal government sets maximum rates, fees, and loan amounts.

Perkins Loans - This is a federal government loan program for students with exceptional financial need. Perkins Loans have a fixed interest rate of 5%, one of the lowest interest rates of federal loan programs. No interest accrues while the student is in school. The Perkins Loan is offered through a student's school. The amount of money available through the program varies by school as some schools may not have any Perkins Loan funds available.

Stafford/Ford Student Loans - Also known as the Federal Family Education Loan Program (FFELP) Stafford Loan, the Stafford Loan is a federally-backed loan provided through private lenders, such as banks, credit unions and savings & loan associations. Loan limits vary by school year and from undergraduate to graduate levels and can come in the form of subsidized or unsubsidized loans. Stafford Loans currently have a fixed interest rate of 6.8%. No interest is charged on Subsidized Stafford Loans during school, but the fixed interest rate does apply during repayment. Some schools participate in the Ford Federal Direct Student Loan Program (FDSLP) that provides loans with identical terms to the Stafford Loans. Instead of coming from a private lender, the proceeds come directly from the federal government. To receive a Direct Stafford/Ford Loan, a student must attend a participating Direct Lending school. About 1,000 schools nationwide currently participate in this program.

• Unsubsidized Stafford Loans - This is a type of federal loan where the borrower pays all of the interest on the loan, although the payments can be deferred until after graduation. With an Unsubsidized Stafford Loan, borrowers can defer the payments until after graduation. This adds the interest payments to the loan balance, increasing the size and cost of the loan.
• Subsidized Stafford Loans - This is a type of federal loan where the government pays the interest while in school. To receive a subsidized loan, a borrower must be able to demonstrate financial need. Most Subsidized Stafford Loans are awarded to students with family adjusted gross income (AGI) of under $50,000.

PLUS - Stands for "Parent Loans for Undergraduate Students." PLUS loans are low-interest federally backed loans that parents can take out on behalf of their undergraduate children to pay for educational costs. There is no financial need requirement and parents can borrow up to the full cost of education, less other financial aid received. Interest is not subsidized but some lenders allow parents to defer payment while the student is enrolled in school by capitalizing the interest. Payments can also be deferred if the parents are themselves enrolled in school.

Graduate PLUS - This is a federal loan program for students in graduate school and professional programs. There is no need requirement and students can borrow up to the full cost of education, less other financial aid received. The interest rate is fixed and interest is not subsidized.

Private Student Loans
These are non-governmental loans made by private lenders to an individual expressly for the purposes of paying for college expenses such as tuition, room and board and other associated costs. Sometimes private loans are called "alternative loans." Borrowers have a wide range of choice among lenders, from a local bank to large, national student loan companies.

Work-Study
This is a federally-funded program in which the federal government and the college provide funds for part-time employment on campus. Students earn at least the federal hourly minimum wage and the amount of the award can depend on when the student applies for the job, the level of financial need, and the availability of funds from the school. Graduate students might receive a salary instead of an hourly wage. Work-study jobs can be either on campus or off campus and may be related to the student's course of study. The amount a student can be paid, or number of hours worked, cannot exceed the Federal Work-Study award.

EXPECTED FAMILY CONTRIBUTION

This is the amount a family is expected to pay toward the Cost of Attendance for postsecondary education, determined by the federal government using a financial aid application (or the FAFSA). Generally, EFC is calculated using the family's adjusted gross income (AGI), untaxed income, assets, the student's income and assets, and a contribution from the family between 0% and 25%.

Savings
There are many ways to save for college, including a standard savings account, tax-protected programs like tuition savings plans or 529 plans, and other kinds of investments.

529 Plans
A 529 Plan is a college savings plan sponsored by a state or educational institution to encourage families to start saving early for college. Savings can be used for tuition, books, and fees at most accredited two and four-year colleges and universities, vocational-technical schools and eligible foreign institutions. U.S. residents of any state, who are 18 years old or older, may invest in any state's plan. State-sponsored 529 plans are named after the section of the federal tax code that allows them. All 50 states and the District of Columbia now have 529 plans available.

There are two types of 529 Plans: College Savings Plans and Prepaid Tuition Plans

College or Tuition Savings Plans - With a 529 Savings plan, parents open an account and choose an investment strategy which typically consists of mutual funds. Earnings accumulate tax free and withdrawals can be made tax free when it is time to pay for college expenses including tuition, books, room and board. Each savings program offers different investment choices. A popular type plan begins with some aggressive investments and grows more conservative as the potential college student grows up. Many savings plans offer a stable value or guaranteed option designed to protect the initial investment while providing for some growth, while others offer investments in certificates of deposit. Savings plans are considered an asset in the Expected Family Contribution.

Because many state programs are open to nonresidents, it makes sense to shop around for a plan that best meets your financial and educational needs. If your child decides not to go to college after you've opened a plan, you have three choices: hang on to the savings plan, transfer it to another family member, or cash out and pay a penalty. Some college savings plans charge you a one-time enrollment fee which ranges from $10 to $90, most are under $50.

Prepaid Tuition Plans - A prepaid tuition plan lets you purchase units of tuition for any state college or university at today's prices. Most plans allow anyone from any state to contribute to a 529 prepaid tuition plan. If you start a 529 account for your child in your home state, grandparents or friends can also contribute to it, even if they live across the country. Prepaid tuition plans impact financial-aid eligibility because they are considered a resource, like a scholarship. This means a student will see a dollar-for-dollar reduction in aid when using these plans.

Coverdell Savings Accounts
A Coverdell Savings Account (or ESA, formerly Education IRA) is an education savings plan set up and managed by a parent, family member or guardian for the benefit of a child. Contributions to a Coverdell Savings Account are limited to $2,000 per year. Money deposited in the account can grow tax-deferred until distributed, and the child will not owe tax on withdrawals used for qualified primary, secondary and/or higher education expenses. The account is controlled by you for the benefit of the child. When the child reaches age 18 you may continue to manage the account or transfer account management to the child.

Custodial Accounts
A custodial account is one that a parent or custodian opens in the name of a child. In this type of savings, a child is named the beneficiary and the parent is the custodian. The custodian controls the funds until the child reaches 18 years of age. Once this kind of account is established, the money belongs to the child. It is illegal for custodians to spend the child's money for their own purposes. These accounts are considered a student asset in the Expected Family Contribution.

U.S. Treasury Savings Bonds
Savings bonds are issued by the U.S. Treasury Department, and can be paid for through post-tax deductions from your paycheck. Savings bonds are registered securities, meaning that they are owned exclusively by the person or persons named on them. There are two types - Series EE and I - that are both 30 year bonds offering tax-deferred growth and partial or full exclusion from federal income tax when proceeds are used for tuition at an eligible post-secondary institution. Bond owners must be at least 24 years old when the bonds are purchased. If the bond owner is a parent and the proceeds are used for their children, the bond is considered to be a parental asset. If the proceeds are used for the parent's own education, it is considered a student asset.

Although these bonds are not as flexible as 529 plans or custodial accounts, they are generally more secure than other investment options. Since the interest rate on Series I bonds is indexed to inflation, there is a built-in element of inflation protection that most 529 plans do not have.

Parent Income/Assets
Parents are generally expected to contribute to the financing of a dependent student's post-secondary education, which is why the Free Application for Federal Student Aid (FAFSA) asks about parent income and assets and calculates these into the Expected Family Contribution. There are several common ways that parents supplement their contributions to the costs of college.

Home Equity
Many families use the equity - or value - in a property, like a house, to borrow against to pay for a college education. Often, this option is used when a family member does not qualify for government loans or grants. There are two primary kinds of home equity - a loan or a line of credit. Home Equity can also be a part of Unmet Need.

• Home Equity Loan - A home equity loan is a second mortgage on your property made in addition to your original loan. It allows you to borrow against the equity in your home that has grown with its increased value and/or as your original mortgage has been paid down. With a home equity loan, you receive a lump sum payment at closing and make one low fixed monthly payment for a fixed term. Unlike Federal PLUS loans, these loans have no deferment or forbearance privileges. If the borrower fails to make loan payments, the lender can take the house to recover its money. A Home Equity Loan can also be a part of Unmet Need.
• Home Equity Line of Credit - A HELOC is similar to a Home Equity Loan in that the loan amount is also determined by the equity you've built in your property. However, instead of receiving a lump sum at closing, you are given a credit line from which you can draw funds whenever you need to, up to your credit line limit. The interest rate on a home equity line of credit is adjustable, and generally tied to the prime interest rate. If the prime rate goes up, so does your interest rate. Again, if the borrower fails to make the loan payments, the lender can take the house to recover their money. A Home Equity Line of Credit can also be a part of Unmet Need.

Retirement Accounts
Usually, if an Individual Retirement Account (IRA) account holder takes money from an IRA before the age of 59 and 1/2, the earnings portion of the withdrawal is subject to a 10% penalty. This penalty is waived, however, if the withdrawal is used to pay qualified education expenses. Remember that, generally speaking, the earnings portion of the money withdrawn will still be subject to income tax. Withdrawals from retirement accounts can also be a part of Unmet Need.

Student Income
Many students need or want to find a part-time job, separate from a work-study job, to supplement their income while in college. Having a part-time job can provide a student with valuable experience, time management skills, and a social network outside of classes. A student's taxable income is included in the financial aid application. Student income can also be a part of Unmet Need.

Student Loans
Some loans are part of financial aid packages that have to be repaid by the borrower. Students should always maximize federally-backed loan programs first, including Stafford, Perkins, and PLUS loans. If that still leaves the student with expenses not covered, there are private (or alternative) student loans. Student loans can also be a part of Unmet Need.

Tuition Reimbursement
Many employers offer tuition reimbursement benefits. Typically, the employee needs to gain permission first, be enrolled in an approved or accredited program, and meet GPA or minimum grade requirements. Check with your employer if this is an option for you.

UNMET NEED OR GAP

Also called the "gap," Unmet Need is the difference between the combination of financial aid and the expected family contribution and the actual cost of attendance. While this may seem contradictory, often schools have budget constraints and cannot meet the needs of every applicant or incoming student, and many federally-supported loan programs have borrowing limits.

Student Income
Student income can also be a part of the Expected Family Contribution.

Student Loans
Student loans can also be a part of the Expected Family Contribution.

Home Equity
Home equity can also be a part of Expected Family Contribution.

Retirement Accounts
Withdrawals from retirement accounts can also be a part of the Expected Family Contribution.