September 2nd 2010
When Should You Seek Private College Financial Aid?
College financial aid for students attending college and graduate school can come from several sources, including scholarship, grants, federal loans and private loans. It can become a complicated labyrinth that isn’t always easy to navigate.
Most college planners urge students to tap out on federal funding before turning to other sources, because financial loans tend to be less expensive in the long run. Unfortunately, because college tuition is so high today—and expected to continue to increase—federal loans many times only pay for a portion of college costs.
And while scholarship and grant money are available, the number of students who attend college on a full scholarship are few and far between. The smart thing to do when planning to pay for college if you don’t have a huge college fund at your disposal (most people don’t) is to apply for federal loans. Here’s why: Federal student loans often have an interest rate that is far lower than private financial institutions, and also offer better and longer payment terms.
Usually, students don’t have to start repaying the loan until after graduation, and sometimes can even defer payment of an original loan if the student goes back to school for additional training.
These federal loans don’t pay for everything. The most a four-year student can borrow is $10,500 per year, which for some colleges is just a bite out of a much bigger pie. For graduate programs, the loans can go up to $20,500. What any particular student receives is dependent on several factors, including the college of choice and in which year the student is.
Students can choose from three federal loan programs:
—Stafford loans are available to students in two forms: for low-income students, who don’t have to provide credit references, and for other students, who do.
—Plus loans are low-interest loans taken out by parents to help pay the difference between real college costs and the amount of the student loan. Still, even with this loan tuition costs often exceed what the loans cover.
—Consolidation loans allow parents and students to consolidate multiple loans into a single loan with one monthly payment.
When students apply for a federal student loan, they fill out a Free Application for Federal Student Aid (FAFSA), which automatically includes their information for other programs, including scholarships, grants, or work programs provided by the federal and local governments.
Because financial loans are covering less and less a percentage of college tuition, private financial loans are becoming more popular. Unfortunately, as with any private loan, only those with the best credit scores will receive the best rates. Private loans can be expensive and most college planners urge parents to exhaust other financing methods first.
The best private loans have rates competitive with the federal low-interest rates, about LIBOR +/- 2.0. Watch for lenders that offer a low rate while the student is in school, then raise the rate when payments are due.
As with anything, shop around, do your research, and perhaps paying for college won’t be such a nightmare.