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Tue, Jun 8, 2010

Ideas & Trends

Making Financial Aid Pay Off (Part 3)

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On May 22, Fastweb celebrated its 15th anniversary since first bringing scholarships to the internet in 1995. Since its founding, Fastweb has helped over 50 million students pay for school, and today there are more than 9 million active members.

To celebrate this milestone, we sat down with Mark Kantrowitz, publisher of Fastweb, to answer the top questions parents and students need to know about planning and paying for college (third in a series):

Q: Private loan vs. Federal loan, which is better?

Federal loans are better than private student loans because the interest rates are fixed, you can get federal loans even if you have a bad credit score, federal loans will cost less over the life of the loan, and federal loans have a variety of flexible repayment terms that are not available through private student loans.

Q: When is it best time to start repaying a loan? While the student is still in school? After they graduate?

If a student can afford to pay the interest on unsubsidized federal loans and private student loans while they are in school, they should. Paying at least the interest avoids negative amortization, keeping the loan from getting bigger. This will save money over the life of the loan. It also means a lower loan balance when the borrower enters repayment, allowing the borrower to repay the loan faster.

Practically speaking, though, many students cannot afford to make payments on their loans while they are in school and so will have to wait until after they graduate and get a job to start paying back their loans. Most student loans have a six month grace period after graduation before repayment begins, to give the borrower time to get settled into their new job first. (The Perkins loan has a 9 month grace period.)

Q: Are there any loan or scholarship scams parents need to be aware of?

If you have to pay money to get money, it’s probably a scam.

One type of scam is the advanced-fee loan scam, where the scammer asks for a payment up front before providing the loan. Legitimate education loans do not require any up front payments, as the fees are deducted from the disbursement checks.

Scholarship scams also charge a fee. It may seem innocuous, such as an application fee or the taxes, but it is still a form of fraud. Never invest more than a postage stamp to find out information about scholarships or to apply for scholarships. Also be careful about giving out your personal information, especially Social Security numbers, bank account numbers and credit card numbers. Nobody can guarantee that you’ll win a scholarship.

Q: What happens if a parent loses his/her job while their child is in college?

If a parent loses his or her job or has a salary reduction while the child is in college, call the college’s financial aid office and ask about the procedures for a “professional judgment review.” Some colleges call it a special circumstances review or financial aid appeal. Congress delegated the authority to college financial aid administrators to make adjustments to the data elements on the FAFSA on a case-by-case basis for unusual circumstances when supported by documentation, even in the middle of the academic year. Unusual circumstances includes any significant change in financial circumstances from one year to the next as well as anything that sets the family apart from the typical family. Besides job loss and wage reductions, unusual circumstances can include high unreimbursed medical and dental expenses, private K-12 school tuition, high dependent care expenses and casualty losses due to a natural disaster. Also, some colleges may make adjustments for one-time events like high capital gains, inheritances, and Roth IRA rollovers.

Q. What can the student do to help pay for college?

Paying for college is a partnership between student and parents. The student can help by searching for and applying for scholarship on free web sites like Fastweb.com and by working a part-time job during the semester and summer vacations. The student can also borrow the federal student loans like the Stafford and Perkins loans, which have lower interest rates than the Parent PLUS loan.  More importantly, the student should focus on academics so that they can get good grades. Students who do not maintain satisfactory academic progress — at least a 2.0 GPA — lose eligibility for federal student aid.

Q. Are there any alternatives to borrowing to pay for college?

If the parents have sufficient income to pay the college bills, but perhaps not enough to pay the bill in full at the start of the academic year, they should ask the college about tuition installment plans. Tuition installment plans let the family spread the college bills into 9 or 12 interest-free monthly payments for a small up-front fee, typically less than $100.

Q. Is there any money available for middle income families? It seems like middle income families are too wealthy to qualify for need-based aid but too poor to be able to pay for college.

Almost everybody finds it difficult to pay for college. Even with need-based grants, low income families pay a greater portion of their income toward out-of-pocket costs than middle income families, who in turn pay more than high income families. But even families earning six figure salaries often struggle to pay for college, especially at some of the more expensive colleges.

The education tax benefits, which include the Hope Scholarship and Lifetime Learning tax credits, are available to middle income families. The Hope Scholarship tax credit, in particular, provides up to $2,500 per student for amounts paid by the family toward college costs. There’s also the student loan interest deduction, which allows taxpayers to deduct up to $2,500 in student loan interest as an above-the-line exclusion from income on their federal income tax returns. The unsubsidized Stafford loan and the Parent PLUS loan do not depend on financial need, and so are available for middle and upper income families in addition to low-income families.

This is the third of a 3 part series.  Check out parts 1 and 2 to learn more tips about making financial aid pay off:

Making Financial Aid Pay Off (Part 1)

Making Financial Aid Pay Off (Part 2)

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