By: Emily Ferreira, Managing EditorMost parents would love to see their children become healthy, responsible, and educated adults. However, the rising cost of higher education is making the latter part of that goal difficult to achieve. It is estimated that the cost of attending a private university in ten years will be $180,000. The cost of public education for that same eight-year-old would be roughly $85,000. These amounts seem astronomical now, but they could be the norm in the future. Because of this, many parents begin planning for their children’s education while the children are still quite young.
Starting a savings account or investing in mutual funds could be an excellent option for many parents. In both instances, the money set aside from their income will also accrue interest as the child ages. Ideally, this amount will be enough to fully cover the expense of a child’s future education. However, this is rarely the case. Many parents will still need to apply for student financial aid to help them send their children to college.
The Free Application for Financial Aid (FAFSA) program is the most common provider of student financial aid. The application is free and easy to complete. Sometimes the result is free money for the student. Government “grants” are the only type of student financial aid that does not need to be repaid. The most common types of financial aid; however, are college student loans. Repayment for these loans begins 6 months after the child graduates from college and will continue until the full amount (the principle plus any accrued interest) is paid in full.
Many middle class families assume that they do not qualify for financial aid from FAFSA. In many cases, this assessment is incorrect. The government takes many things into account when awarding financial aid to students. The determination comes from information calculated through a standard formula and results in the Expected Family Contribution (EFC). This is the amount the government estimates a family can afford to pay on an annual basis for their child’s education.
One of the factors the EFC takes into consideration is the parent’s and the student’s income from the previous year. It also factors in assets, along with other family expenditures. After the EFC is determined, it is subtracted from the student’s Cost of Attendance (COA). The remaining balance is the amount of financial aid the student needs to borrow from FAFSA.
The EFC calculation is used at all public universities. While the COA will vary per college, the EFC will remain constant.
A huge factor in the outcome of the EFC is the amount of money and assets that are listed in the child’s name. The parents’ assets are factored into the EFC at a rate of roughly 5.6%. On the other hand, a student’s assets are factored in at a whopping rate of 35-50%. This is something for parents to consider if they have placed a significant amount of their assets in their child’s name for tax purposes. If a student has a lot of assets, they may not qualify for financial aid.
If financial aid is needed for the first year, chances are, financial aid will be needed for the remaining three (or four) years as well. Taking out different loans each year will likely result in a number of different payments, different due dates, and different interest rates. For this reason, many students and parents have turned to student loan consolidation, with lenders such as Sallie Mae, to pay back their student financial aid. With consolidation, all student loans are lumped together so only one bill needs to be paid each month. This new loan will accrue interest based on a fixed rate making it easier to calculate into the new graduate’s budget.
Consolidating school loans works much like the original financial aid process. Bad credit is not a factor and there is no fee for the application. Also, the monthly payment amount will be based on the graduate’s monthly income, thus ensuring affordability.
No one gets excited about the idea of borrowing money. However, paying for a child’s college education is almost always a worthy investment. The loans the government offers are easy to apply for and charge relatively low interest rates. Therefore, don’t let the rising costs of a higher education lower the expectations for a child’s future.
