Know Before You Owe
Is your child heading to college soon? Are you worried about being weighed down by debt as a result? These five tips can help you successfully navigate the world of student loans.
The more you know about specific schools, financial aid, and loans in particular, the better prepared you'll be to make wise choices. Researching schools and understanding what they offer will help you recognize the value of your financial investment.
Ed Kerestly, director of student financial services at Abilene Christian University, says, "Determine what you value in the educational experience and make sure it's a match with the values of the college you choose. Then tackle the affordability issue by determining what assistance is available to pay for college."
And when it comes to financial aid and funding part of an education through loans, be sure you understand the process. "When deciding to take out student loans, make sure you've taken full advantage of the federal loan options available," says Greg Gearhart, director of financial aid at Messiah College.
"Loans should be considered for paying college costs after you've exhausted all other options and determined the amount you'll need to borrow to cover those necessary expenses that remain," agrees Kerestly.
Once you've narrowed down the school choices, be sure you know the schools' schedules for completing financial aid and loan applications. Securing loans is typically the final step. But be careful—opportunities can be missed throughout the application process simply because tax filing or the necessary paperwork isn't completed on time.
Kerestly gives this overview of the financial aid and loan timeline: "The timeline for applying for financial aid and receiving loans doesn't begin until January of a student's senior year in high school when both students and their parents will complete the FAFSA (Free Application for Federal Student Aid) and have this information sent to the colleges they're considering. The schools will then prepare award letters listing scholarships, grants, loans, and work-study opportunities, along with an estimate of the annual cost of attendance at their school. Beginning in March, schools send out their award letters to assist [admitted] students in making their college decisions—typically by May 1. It's not until after that time that parents need to begin the loan process."
Including all family members in conversations about money can be tough. While it may seem easier for the parents to take care of everything, remember that the student is the one who will be legally responsible for most types of student loans. So everyone needs to know the costs, benefits, and requirements of the different types. Talk openly and honestly about finances and how you can best work together.
"Among the first things students and parents should do as they start the college search process is discuss finances," says Gearhart, "including how much each person can contribute to the college costs, and how much is reasonable for the student to borrow by the time she's completed her degree. They should also have a good idea of employment opportunities and expected salaries in the student's intended major."
And the discussion should be ongoing. "Students should plan to be involved in the entire financial aid process and, especially, keep track of how much they're borrowing," Gearhart says.
Schools employ skilled professionals who help many people navigate the financial aid process every year. They know the ins and outs and the latest information on loans, repayment terms, and interest rates. Take advantage of their expertise.
"Students and their parents often feel like they have to figure out everything on their own," says Kerestly. "This is not the case. Don't be afraid to ask questions and seek assistance. The financial aid or student financial services offices are there to help you."
Latham recommends doing online research but discourages basing decisions on the experiences of others. "Don't rely on the word of friends and neighbors," she says. "Their experience with financial aid may not be like yours, and this can be the source of some misguided or outdated—although well-intended—advice."
Connecting with your college of choice can also keep you from paying unnecessary fees. "Don't pay anyone for financial aid searches or advice," Latham says. "You can get this same help and information for free from the financial aid office at your college."
Communicating with the school will also give you a clearer sense of its strengths. You'll be better able to determine how your educational investment will benefit your child during college as well as after graduation.
Experts agree that the number one pitfall to avoid when it comes to loans is over-borrowing. It can be tempting to use loans to fund a lifestyle rather than an education. But while education is an investment with a good return, that spring break trip to the beach is not. Finding other ways to fund day-to-day expenses might cramp your child's style a little bit now, but it will help preserve his or her credit score and open the door to future opportunities.
When you find yourself tempted to borrow more, sometimes a little reality check can help. Recent research by ProgressNow Education Network shows that the average repayment period for student loans is 21.1 years with a payment amount of around $500 per month for people with bachelor's degrees, and about $650 per month for those with graduate or professional degrees. Helping your child limit his or her living expenses can keep future loan payments low enough that he or she will still have the freedom to purchase bigger items after graduation, like a car or home.
Online calculators, such as FinAid's loan calculator, make it easy to calculate the actual cost of a loan, including the total amount of interest paid. Looking at what you'll owe upfront and keeping track of expenses throughout college will help you and your child stay focused on what's important enough to spend money on and what's not.
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