College has become a reality for people now, more than ever. With the increased demand has come a staggering increase in tuition at virtually all institutions. College tuition is increasing at three to four times the cost of living. Inevitably students and parents will be forced to take out a combination of government and personal loans. Managing this process properly can save you thousands of dollars and put parents and students in a much better position upon graduation.
The College Loan Process
The process begins with the filing of the Free Application for Federal Student Aid (FAFSA). This application allows you to receive Federal Aid through the institution of your choice. It is important that this is filed on time because without it, you will receive little or no federal aid.
Next, you should be applying for as many scholarships as possible. The earlier you begin this process, the more money you will receive. Apply for everything here because scholarship money does not have to be paid back. Also, note the amount of one year scholarships vs. recurring scholarships. Many people see a huge spike in their second year tuition because most of their scholarships only provide one year of aid.
Finally, you will receive an aid package from the institution you have decided to attend. This package will contain grants, loans, work study, and the dreaded parent/student contribution. This is your first opportunity to save money in the future. These aid packages can be negotiated. Do your best to get as many grants and non-repayable aid as possible. Every dollar saved in this process is literally $3 to $4 in your pocket in the future.
Federal Loans vs. Personal Loans
The loan portion of the financial aid package consists of federal loans. These loans typically have a lower interest rate because they are backed by the federal government. The parent/student contribution will have to be made up of personal loans if you do not have enough savings to cover them. These loans will typically have a higher interest rate because they are usually collateralized in the form of a second lien. This could mean a difference of 2-5% between federal and personal loan interest rates.
The next logical step is to try to get as much of the parent contribution converted to federal loans. This will be tough because your allotment is based on the tax returns you submit during the FAFSA process. For those of you reading this ahead of the game, do your best to minimize your income before your son or daughter goes off to school. Avoid selling a home or any large capital gains the year your child enters college. Conversely, accelerate losses to the year of application. Showing lower income allows you to get more grants and federal loans.
A Quick Note on Repayment
It goes without saying to pay off the higher interest debt as quickly as you can. But, you may want to consider slowly paying down the low interest federal loans. Adding in the tax saving on the interest payments, the rates on these loans can be as low as 2% to 3%. You are better off investing the money that you would use to pay down these loans because you can earn at least 5% in certificate of deposit (cd).
Remember, saving in the beginning of the process, can reduce your total debt tremendously. Look for grants and federal assistance everywhere. Finally, negotiate everything. No matter what institution you pursue, manage your debt to maximize your future income.