Understanding Financial Aid

To understand, you first must know something about the history of financial aid. The first Federal financial aid program was the GI Bill in 1944. This was our Nation’s attempt to thank our Veterans with an education opportunity that would allow them to catch up with their peers whose life had not been interrupted by the ravages of war. It was also recognition that the nation’s workforce could not absorb millions of returned soldiers as the economy was retrofitted from the production of war materials to meeting domestic consumer needs.

It was the Soviet’s successful Sputnik launch into space that in 1958 focused national efforts of the need for and the value of postsecondary education. Congress agreed to offer low-cost loans to students, who majored in science and math academic programs, and even loan cancellation benefits to those students who became teachers.

In 1965, Congress passed the Higher Education Act (HEA) with significant student aid funding for needy students. Part of the 1965 HEA was implementation of a government/private sector partnership with a loan program aimed at students from middle-income families where banks would make the loans from their funds and the government would provide a loan guarantee against non-payment and provide a small subsidy to the banks for providing the student loans for eligible students. This public/private partnership, along with the borrower benefits and customer service that only competition in the marketplace supports, ended in 2009. Now all government student loans are issued without the assistance of banks and private lending institutions and are entirely funded and supported by the federal government.

Every 4-5 years, Congress reauthorizes the HE), making adjustments to eliminate or create new programs and review the needs-based test for awarding limited financial aid dollars. With today’s current financial problems with soaring federal budget deficits. Congress is applying pressure to schools to be accountable and to cut costs at the same time families continue to demand more government aid, in part, because the recession has reduced family incomes. Creating a perfect storm are the huge number of middle class families that have lost jobs, raided assets and even tapped into retirement accounts. The number of eligible students continues to climb and Congress must make difficult decisions.

Holly and Student at Milly's

Holly and Student at Milly’s

As a parent, it is pretty normal to believe that your child should qualify for financial aid. The fact is, they will! Every eligible student attending an eligible school full-time can qualify for some form of federal financial aid by completing the FAFSA – Free Application for Federal Financial Aid. The basic calculation in determining eligibility for financial aid is this:

Cost of Attendance (COA ) minus Expected Family Contribution (EFC) = Need (for financial aid)

Cost of Attendance is a figure determined annually by a school’s leadership and is posted in numerous publications, including the college’s web site. The COA is an estimate of the expenses a family is likely to incur for sending their child to that particular college. In addition to the cost of Tuition & Fees and Room & Board, it typically also includes an estimate for the cost of books, transportation and personal care expenses for that academic year. EFC is the financial aid acronym for Estimated Family Contribution. Beware – this is not the figure that you will be responsible for paying! The EFC is the end result of the FAFSA that Congress determines. You enter information electronically on the FAFSA and receive a Student Aid Report (SAR) that includes your EFC.

Look at this example below: COA is $40,000 MINUS EFC which is $1,000 and RESULTS in NEED that is $39,000.

In this scenario, your “need” is $39,000 and that is the figure the financial aid office uses as a guide in preparing your financial aid award. A financial aid award is likely to include institutional grants, as well as federal and state grants and a federal student loan. If there is difference between your NEED and the financial aid award it will be your responsibility to cover the GAP and there financial aid office will explain options to you. By law, a school cannot award you more financial aid than your “need”.

In another scenario where the COA is $13,000 and your EFC is $0, your NEED is $13,000. With federal and state grants coupled with a student loan, the school is likely to meet your total NEED.

So, what types of financial aid will be used by a school to meet your “need.” Basically, there are three elements: Grants & Scholarships, Loans, and other self-help. Typically, grants refer to the federal and state aid programs, but some schools, especially private colleges award their own grant aid. Federal and State grants are awarded to those students demonstrating federal “need”.

In other words, you must qualify using calculations determined by Congress and State Legislators or the schools themselves. Those funds target low-income families. A grant does not need to be repaid. However, they do come with specific academic and enrollment requirements. A scholarship is another form of financial that does not require the funds to ever be repaid. Institutional scholarship funds come from donors, including alumni. (Be sure to keep this in mind once you are in a position to give back to the school that helps you find your dreams!)

Scholarships can also come from your community (your high school counselor office should be a great resource). You can find scholarship searches on the Web. They take time but the pay off can be substantial! Check out iGrad for scholarship opportunities!

Student Loans today make up a significant portion of a financial aid award. It’s reality. Before I address the different types of loans, I encourage you to take a step back and take a deep breath. You have undoubtedly heard about the large amount of debt today’s college graduates are leaving school with. I have to blame that on all of us! Why do we ask an 18-year old to sign a loan promissory note without showing him on how that loan payment will impact his budget once they graduate?  Financial Literacy programs are offered on most college campuses or by outside organizations and other entities. In addition there is a Federal requirement that every student borrower completes both Entrance and Exit Counseling. These sessions are offered as an on-line tool by the Department of Education to educate the student borrower prior to the first disbursement of a Direct Student Loan. Institutions will direct their first-time student borrowers to the Entrance Counseling session. Prior to graduation, or leaving school, the institution will also direct the student borrower to an Exit counseling session to understand the responsibilities of repayment as well as information about various repayment, deferment and cancellation options. During the Exit Interview process, you will also learn about the National Student Loan Data System and review the details of your own borrowing. Too many students get in trouble by borrowing more than they need and neglecting to consider how much student loan repayments may eat into their salaries after they take that first job. Take full advantage of the many available financial literacy programs available to you during college. There are all kinds of strategies and ways to minimize borrowing so that after graduation your student loan debt is manageable.

There are Federal student loan programs and there are private loans, sometimes referred to as alternative loans. The best type of loan for educational financing is almost always a federal loan.  The William D. Ford Direct Loan Program offers students a fixed interest rate over a 10 year term. The fixed rate for 2012-13 has been set by Congress at 3.4% for subsidized and 6.8% for unsubsidized.  July 1, 2013, interest rate on both subsidized and unsubsidized Direct Loans are set to revert back to 6.8%. Advocate!

Repayment does not begin until after the student graduates, or drops below half-time attendance. There is also a grace period of six months following graduation before the first payment is due. This is to give the recent graduate time to get settled into living and working, and doing it within a budget they prepare for themselves.  (Note: The interest subsidy during the six-month grace period is eliminated for new Stafford Loans made on or after July 1, 2012, and before July 1, 2014. The repayment period still begins 6 months after the student is no longer enrolled at least half-time, but interest that accrues during those six months will be payable by the student rather than be subsidized by the federal government.)

To begin the walk down the financial aid path, when learning about loans, it is also important to understand the difference between subsidized and unsubsidized loans within the federal loan program. A subsidized loan means that the student will not be charged interest on that loan while enrolled at least half time. An unsubsidized loan means that the interest will accrue and be added to the principal amount of the loan. A student may have subsidized Direct Loans, unsubsidized Direct Loans or a combination of both subsidized and unsubsidized. The Direct Loan Program makes loan funds available to every student enrolled at least half time in an eligible course of study no matter their “need”. Congress sets the loan limits in the Direct Loan Program and the description of loan limits is a bit confusing. Basically, freshmen are eligible for $5500, sophomore eligibility is $6500 and juniors and seniors are eligible for $7500, respectively. Aggregate loan limits also apply so that a student cannot continue to go to school and borrow, borrow, borrow.

Direct Stafford Loan Limits

1Except those whose parents are unable to borrow a PLUS loan.
2These limits also apply to dependent students whose parents are unable to borrow a PLUS loan.
3The numbers in parentheses represent the maximum amount that may be subsidized.
4The aggregate amounts for graduate students include loans for undergraduate study.
From the US Government.

After completing the required entrance counseling and electronically signing a Master Promissory Note (a legal document good for 10 years of borrowing), the Department of Education electronically sends funds in two disbursements (Fall & Spring) directly to the student’s account at the school. At repayment, student borrowers repay the federal government through loan servicers. While repayment does not begin until after the grace period, smart student borrowers who have the financial ability will make interest-only payments while in school to prevent unsubsidized interest from snowballing!

Also part of the Federal Direct Loan Program is the PLUS Loan for Parents. This is a loan in the name of one parent with the student’s name on the Master Promissory Note. However, the legal liability for repaying this loan lies solely with the parent – not the student. The fixed interest rate is 7.9% and repayment is scheduled to begin within 60 days of the final disbursement (typically the second disbursement is in January). Congress has authorized the ability for a parent to request a deferment of repayment until after the student borrower graduates, or drops below half-time. Interest will continue to accrue however, unless the smart parent borrower requests to make interest-only payments while the student is in school.

Perkins is the other federal loan program. Funding comes from the government but is administered directly by the school. It is not an entitlement and the school is authorized to award Perkins fund s o to the neediest of their student population. This is a subsidized loan with a fixed interest rate of 5% over a term of 10 years. This program also has a generous loan forgiveness benefit for those student borrowers who enter the work force as a teacher in an eligible school and meet other eligibility requirements.

Private loans, sometimes referred to as alternative loans should be considered as a last resort. Students should first exhaust all other options from a diligent scholarship search to asking grandparents for help. Always fill out a FAFSA application; you never know how much Federal student aid you may qualify for. If a private loan is the only way to complete your education, know that there is no better investment that you can make than in your education.

Parents often ask about borrowing from a retirement account. If you ask Suze Orman, you will hear a resounding “NEVER”! Home equity loans may offer a lower interest rate but consider the amount you would be repaying over the life of that loan. You would also be putting your primary residence at risk. And if that isn’t enough to discourage you, although no parent wants to think about the horrific loss of your child or yourself, only the federal Direct PLUS Loan offers a death benefit. In the end, personal finances should best be discussed with your banker or financial advisor. Be sure to read the ANSWER: Funding a College Education.

Another form of financial aid is referred to as “self-help”.  Self Help includes financial aid as loans and work study. The Federal Work-Study Program is a very popular program offered at most colleges and universities. Federal Work Study is not an entitlement program and some schools have a limited dollar amount to award. Students w ho are awarded federal work study, must secure a work study job on campus and will be paid each week up to the dollar amount of their financial aid award for work study. It goes directly to the student and is a great way to support that need for pizza at midnight or a week-end movie – without calling home for another deposit into your checking account!

While funding a postsecondary education may seem overwhelming, Congress has lessened the drain on families by creating federal tax benefits. Take a look at IRS Publication 970. Also check with your state for additional state tax benefits. For example, New York State form IT-272 Congressional rules and regulations are constantly impacting financial aid. Check out the Advocacy Corner at CapitolZSolutions. Take a moment to read the stories shared with the Student Aid Alliance by students across our nation and then share your own story.

Thank you for your efforts to preserve education funding!

Capitol Z Solutions