College Funding

Step 2: Understanding Financial Aid Part 1

Understanding Financial Aid 1
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Understanding Financial Aid (Part 1):

There are formulas to determine what you could potentially qualify for in financial aid.  Let’s go over those formulas as well as the types of financial aid that you might be able to receive.

There are two different types of financial aid.

  1. Gift aid which comes in the forms of scholarships or grants.  These are both items you’ll never need to pay back.
  2. Self-help which comes in the form of student loans and work study.

There are three different types of gift aid; merit-based, need-based, and there's also private scholarships.

Merit-based scholarships are used to be able to attract a student to come to a university.  If your student's GPA and standardized test scores well above the average student that they're accepting to the university, often times they'll give you a merit-based scholarship to attract the student to come and it's usually renewable every single year so long as the student keeps up their GPA.

Need-based scholarships and grants are given based upon a parent's resources to pay for college relative to the actual cost of attendance.  Financial aid offices use an Expected Family Contribution number to determine a family’s need at a university which we'll go into later in our videos.

Private scholarships are scholarships that students will apply to by submitting an application and probably an essay to either for a profit or non-profit organization.  These are an apply-but-don't-rely type of situation and just so you know they actually could take away some of your need-based financial aid if you qualify for some of these private scholarships because they assume you have additional resources to pay for college.

Tip: Here are some tips to be able to help maximize your student's chances of winning these actual scholarships.

First: Profile your student.  Are they over 6"2'?  They actually have scholarships for students like that.

Second: You’ll want to check with the high school counselor at the high school that your student is attending to find out if there's a database scholarships specifically for students that are attending the high school.

Third: You’ll want to go some local databases.  For example, here in San Diego, sdfoundation.org, actually has a number of different scholarships for local San Diego students here.

Fourth: You’ll want to look into national databases

Fifth: Check the validity of the scholarship and see how many students apply for this scholarship annually.  Unfortunately, there are no guarantees that your child will win any scholarships whatsoever.  I really want to emphasize that all private scholarships should be treated on an apply-but-don't-rely type basis.

 

Part 2

Understanding Financial Aid 2
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Understanding Financial Aid pt. 2

Self-help:

What are the most common student loans that are offered?

    • Direct Loans – Subsidized & Unsubsidized
    • These loans are offered to every student who is attending an undergraduate program. However the subsidized loans are “need-based” meaning you must qualify for it. If you do not qualify for the subsidized loan then you can receive the amount of the subsidized loan in an unsubsidized version. As an example, you would get a maximum of $5500 in an unsubsidized loan as a freshman.
    • Here are the loan limits:

Freshman            Sophomore        Junior                    Senior  

Subsidized          $3500                    $4500                    $5500                    $6500

Unsubsidized    $2000                    $2000                    $2000                    $2000

  • Direct Subsidized Loan Terms:
    • Loan is under the student’s name only
    • Interest free while they’re in school
    • Then the payments and interest begin 6 months after graduation
    • The fixed interest rate will be whatever the current interest rate is set. (3.8% Fixed – 2013-14 school year) However, every year the government can change the interest rate if they choose.
  • Direct Unsubsidized Loan Terms:
    • Loan is under the student’s name only
    • An interest rate of 3.8% fixed will be charged to the student while they’re in school. However, no payments begin until 6 months after they graduate.
    • Our suggestion is if you take out this loan try to pay the interest on a monthly basis so that your loan balance doesn’t compound on you.
    • Perkins Loans Subsidized:
      • The Perkins loan is another government student loan. The Perkins loan is “need based” and the financial aid department will determine how much a student can qualify for. The maximum amount that a student can qualify for right now is $5500 per year.
    • Perkins Loan Terms:
      • Loan is under the student’s name only
      • Interest free while they’re in school
      • Then the payments along with the 5.0% fixed interest rate will begin 9 months after graduation.
    • Institutional Loans:
      • These are student loans that are offered by the university that the student will attend. The loan terms and limits can vary, but typically are more favorable than private loans. Please be certain that you check with the university regarding the loan terms before accepting these loans.
    • Private Loans:
      • These are any student loans that are not offered by the government or a university. A bank will offer these loans to a student and they’ll typically be relatively easy to obtain to pay the difference between the Cost of Attendance and what the university is offering in terms of financial aid to the student.
      • However, the terms and conditions along with the impact that it could have on a student and their co-signers is important to learn in advance. Many people hear stories about the vast amounts of student loans that students have taken out and it’s true. In the PAST, lenders used to offer undergraduate student loans to just about any student that applied for one, which is why you hear about students who are so far in debt today.
      • These loans today typically require a parent to co-sign for a student, meaning it will stay on your credit until the loan is paid off and could hinder your future ability to borrow due to a higher debt to income ratio. Then from there, most of these loans have variable interest rates and for the ones that are fixed. The loan rates are typically higher than the loan rate that the student can get through the government.  Be careful with these loans.
  • What parent loans are offered for their children’s education?
    • P.L.U.S. Loans
      • This stands for Parents Loan for Undergraduate Students. The government will provide the opportunity for a parent(s) to borrow from this loan the difference between the Cost of Attendance and the financial aid that was offered to the student. Be careful with this loan as well. Most people forget that if you take it out the first year, more than likely you’ll have to take it out for all years!
    • Parent PLUS Loan Terms:
      • 3-4 points to originate the loan, 6.41% fixed, 10 year term, and the government asks that you begin making payments on this loan 6 months after the loan is distributed to the university for your student. However now they will allow parents to defer the loan payments until after the student graduates.

 

Please be careful with these loans because if you think about it like this, I'm just going to give you example.  Let's say your student gets into a private school and it's a $50,000.  You're excited beyond belief and so as your child.  Then what happens is that the school says you get $10,000 for the financial aid and then you can take the difference and the parent plus loan out.  That's $40,000, right?  Well, you do the calculations and you look at the payment structures and you say oh it's about $450 per month.  It's a little bit more than that but it's about $450 per month for the sake of this example.  You say I can handle that.  Then the next year rolls around.  Your student gets $10,000 and then they say you can take in another $40,000 in a parent plus loan and then now you have another $450 payment on top of that.  Now, you got $900, then the third year, then the fourth year.

Be very, very careful with this because again this loan won't fall off your credit either until you pay it off.  So, please think about this in terms of the total cost of attendance.  Create a plan to help solve for all your student's years of education.

And the last type of financial aid that's offered out there is work study.  Students will be allocated a certain amount of money per year where they can go work within on campus or off campus employer that participates in this program and the government will actually subsidize their wages anywhere between 50% and 100%.  The maximum amount of work study money that I've seen a student receive is about $4,000 per year.  It's a great opportunity for students to get experience and a little bit of change in their pocket while they're in school.  Take advantage of it.  Mainly because, again, it's a great resume builder for your future.

So, what this is all mean?

Everybody wants to know.  So, do I qualify for financial aid or not?

Here is the formula for you to determine if you have a need and if you would qualify for need-based financial aid.

Cost of Attendance - Expected Family Contribution = Need

Next: We'll go over Expected Family Contribution!

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