By Diane Herbst
October 01, 2020 09:30 AM
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Families across the nation spent $30,017 on college costs for the 2019-2020 academic year, according to Sallie Mae's How America Pays For College 2020 study - and plenty have received financial help.

The first step for high school seniors who plan on attending college and need help paying for it is to fill out the Free Application for Federal Student Aid (FAFSA), available on Oct. 1. The form is used by the federal government, states and colleges to award a wide array of financial aid, including grants, scholarships, and loans.

For many families with not enough money saved for college, and a shortage of grants and scholarships to cover college costs, tough decisions will need to be made about about whether or not to take out student loans and for how much, as well as whether the high cost of college is worth paying off debt for decades.

″My sort of overarching rule is, try to go to a program where you either don't have to borrow at all, or if you do have to borrow, borrow as minimally as possible,″ says Adam S. Minsky, a Boston-based attorney focused on helping student loan borrowers.

″I think that up until the last decade, the prevailing mindset has been go to the best school that you can get into, because the return on investment will be worth it,″ Minsky explains, but now,  ″I don't think that's a good philosophy. You don't need to go to the best school; folks should go to the best overall program that meets their needs, including financial."

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Fill out the FAFSA as soon as possible

This is step one to see if you qualify for aid, even if you don't think you qualify, and it is decided on a first-come, first serve basis until the money runs out, says Mark Kantrowitz, of SavingforCollege.com, adding "You can't get money if you don't apply."

Filling out the FAFSA early is especially important for families financially hard hit by coronavirus pandemic-related job losses and furloughs, and who may need additional help. These families will need to be proactive in letting college financial aid officers know of their changed financial circumstances, since aid is based on tax returns filed for income earned prior to 2020, says Kantrowitz: "Immediately contact the college to ask how you go about filing an appeal for more financial aid."

Around the time college acceptance letters start to arrive, students who applied and qualified will receive a financial aid award letter from each of his or her colleges and universities detailing the cost to attend for that academic year, including the grants, scholarships, work-study jobs and loans available. 

Be careful when reading the letter, which can be confusing, says Betsy Mayotte, president and founder of the Institute of Student Loan Advisors. For example,  it may be unclear as to what in the offer is a loan, and what is a grant or a scholarship,

Scholarships and grants

In the most recent academic year, according to the Sallie Mae study, college students received an average of $7,626 in scholarships and grants, which covered about 25 percent of the total cost of college.

Grants are primarily need-based and usually do not have to be repaid.  A variety of federal grants are available, including Pell Grants, Federal Supplemental Educational Opportunity Grants, Teacher Education Assistance for College and Higher Education Grants, and Iraq and Afghanistan Service Grants, according to the U.S. Department of Education

Work-study, which allows students with financial need to work in order to pay for education costs, is another grant option.

Search for scholarships - even if you don't think you qualify

Scholarships are financial awards offered by nonprofit and private organizations which do not have to be repaid. They are sometimes based on merit, such as achievements in academics, science, music, and other areas, and sometimes geared to students who belong to a particular group, such as scholarships for women or military families.

″When searching for scholarships, answer all of the optional questions, not just the required questions, because those optional questions are there to trigger the inclusion of specific awards,″ says Kantrowitz. ″The more applications you submit to scholarships for which you are eligible,  the greater your chances are of winning at least one.″

Not sure where to start? Check out your school's office of financial aid to see what they offer, or search for scholarships on sites including Fastweb.com and the College Board's Big Future website.

Student Loans

For the majority of students, the cost of college can't be covered solely with saved money, scholarships and grants. The next step is obtaining a student loan.

″Obviously you want to take on the least amount of debt possible,″ says Mayotte. ″In my experience counseling families, understanding what that monthly repayment amount will be is actually a lot more impactful than the big number. Telling someone you're going to owe $1,200 a month every month for 10 years: Is that a number that you're comfortable with, and will be comfortable with for a long time?″

Once you've determined how much debt you're able to take on, there are two avenues by which to pursue student loans: federal and private.

Federal student loans, which comprise the majority of student loans, are made by the federal government and typically have have lower interest rates and more flexible repayment options than private student loans, says Minsky.

″If you do have to borrow, as a general rule, federal student loans are the best and least risky types of loans out there," he says.

Borrow using subsidized federal loans before unsubsidized loans

Undergraduate students with financial need are eligible for direct subsidized loans, which means that the U.S. Department of Education pays the interest while the student is in school at least half-time, and for six months after graduating or leaving the institution.

Unsubsidized federal loans, which aren’t based on financial need, are available for undergraduates and grad students. Interest on the loan starts to accrue as soon as a student is enrolled in school. 

The Parent PLUS loan is also available through the federal government and enables parents to borrow to help their child pay for college. Parents need a good credit score for approval, and are required to pay back the loan, which generally has higher interest rates than other federal loans.

"Only the parent is the borrower for a Parent PLUS loan -- the undergrad student/child has no legal responsibility for repayment," says Minsky.

Mayotte recommends a Parent PLUS loan over a parent co-signing with their child for a private loan (see below), which makes the parent equally liable if payments are not made.

As a last resort: Private loans

Private loans are also available from a wide array of financial institutions to fill in any gaps needed to pay for education costs.

But college aid experts warn against them, due to oftentimes higher interest rates and few, if any, options for lower payments or forgiveness programs (almost always available for someone with federal student loans).

″This can make repayment more difficult,″ says Minsky, ″which can in turn cause financial difficulties, delinquency and default.″

And the consequences of defaulting on student loans can be ″terrifying, damaging, and costly," Minsky writes in a blog post which details some of the possible consequences (including wage garnishment and intercepting a tax refund, as well as severely damaging one's credit score. It's possible to recover from the financial damages, but difficult.

Mayotte, who notes that a default also stays on a credit report for at least seven years, adds: "My perspective, and I feel very strongly about this: Stay away from private loans, even if the interest rates might be lower, unless you're in a really strong financial position and have the confidence you will be for a very long period of time."