Last week, I started putting together a financial aid primer for families interested in the intricacies involved in paying for college. While many students won’t have to pay full sticker price for their college education, most families will need to evaluate the practicality of taking out loans and graduating with debt.
It’s 2018 and Americans are more burdened by student loan debt than ever. According to Student Loan Hero, “Americans owe over $1.48 trillion in student loan debt, spread out among about 44 million borrowers. That’s about $620 billion more than the total U.S. credit card debt. In fact, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year.”
With numbers that high, it’s incumbent upon everyone to understand the relative value of their education and have an open discussion about the practicality of how a student’s education will provide a return on this investment.
Deferment of a loan: A period of postponement during which the repayment of loan principal is suspended because the borrower meets one or more deferment requirements.
Demonstrated need: The difference between your Expected Family Contribution (see below) and the total cost of attendance.
Direct PLUS loan: Federal loans available to parents or to graduate/professional students. The interest rate is higher than other loans available to undergraduate students, and borrowing limits are much higher. They’re also frequently called Parent PLUS loans, and they’re the only federal student loans that require a credit check.
Expected Family Contribution (EFC): A formula that estimates how much of a college’s price tag you can, in theory at least, afford to pay. The FAFSA formula takes several factors into account to determine a family’s EFC: annual income, certain assets, family size, parental age (the older the parent the larger the allocation toward retirement) and reasonable non-discretionary expenses, as well as the number of students in the household attending college currently and/or who will be attending college in the near future.
The EFC is a need-analysis, i.e., the formula used to determine a student’s need for financial assistance for college expenses.
Your EFC will be calculated once you have completed the FAFSA. It’s important to note that most colleges do not make up the difference between your EFC and the Cost of Attendance with grants. Loans are frequently part of the financial package. If your EFC is greater than the amount you have saved or greater than what you had planned to spend, you have lots of company.
FAFSA: Free Application for Federal Student Aid. Everyone, repeat, everyone should complete this form. It is simple, and you don’t need to hire anyone to fill it out for you. The FAFSA will ask questions about your income and assets, not including retirement plans; your child’s income and assets in their name; the size of your household and the number of children in the household attending college.
FAFSA forecaster: Filling out the FAFSA forecaster allows you to begin exploring financial aid opportunities such as grants and scholarships before a student’s senior year in high school. After completing these forms, you can transition to the FAFSA form, and it will automatically populate with your information.