A few weeks ago I wrote two articles outlining the types of assumptions you should consider for college education within your overall financial plan. I also shared a number of different savings vehicles you could use to park away dollars for this goal. As you get closer to this goal, remember it is important to pull back on the risk in the investments you take. Several years ago in 2008, many parents got hurt because the funds they saved for college were nearly cut in half when the stock market dropped by 50%.
Beyond your savings, your other consideration is to decide how you might fill the gap between what you saved for your kid's college education, and what it will cost between tuition, room, board, fees, etc. While all of us can only hope our child wins an academic or athletic scholarship, it is best to plan conservatively and assume you will have to design a strategy to save or borrow to pay for the college education.
If you have never heard the term FAFSA (www.fafsa.org), then chances are you will at some point soon. FAFSA stands for Free Application for Federal Student Aid and this will be the form that determines what type of monies you may be eligible for to supplement your own college education savings. There are major differences between federal student loans and private student loans which are important for you to know.
What is a federal student loan?
A federal student loan allows students and their parents to borrow money to help pay for college through loan programs supported by the federal government. They usually have low interest rates and offer attractive repayment terms, benefits and options. Generally, repayment of a federal loan does not begin until after the student leaves school. Federal student loans can be used to pay school expenses such as tuition and fees, room and board, books, supplies and transportation. (www.federalstudentaid.gov) Federal student loans are delivered to students through the Direct Loan Program. Loan funds are provided to you through your school.
What is a private student loan?
A private student loan is a nonfederal loan issued by a lender such as a bank or credit union. Private student loans often have variable interest rates, require a credit check and do not provide the benefits of federal student loans.
Why are federal student loans a better option for paying for college?
Federal student loans offer borrowers many benefits not typically found in private loans. These include low fixed interest rates, income-based repayment plans, loan forgiveness and deferment (postponement) options, including deferment of loan payments when a student returns to school. For these reasons, students and parents should always exhaust federal student loan options before considering a private loan. (www.federalstudentaid.gov)
Most people may believe that filling out the FAFSA form is not a worthwhile exercise because they make too much money or have more than ample resources in the bank. I think it is important to go through the process as you can find out if your particular school is participating, and whether or not funds are available for you no matter what you think going into the application. It is important that you get your FAFSA form in as early as possible. January 1st typically kicks off the FAFSA season and some states have deadlines as early as February 15th. You can see your states deadline at www.fafsa.ed.gov. You should also be prepared to estimate your income even if your tax returns are not complete, and make certain you know which assets should be included and which will not. These can all have an effect on how much federal student aid you will ultimately receive.
The real determination of aid will come off of a calculation called the Expected Family Contribution (EFC). The EFC is the number that will actually be processed on your FAFSA form. There are three separate worksheets for the EFC formula, so make you use the right one when you complete the paperwork. For most of you, a big decision will be do you fill out the dependent student form or will you use the independent student form? At the end of the day, the lower the score you get the better chance you have to get federal student aid.
In the last of the four articles around this topic of college education, we will review the details of the different types of loans and grants that are available on the market place. This can be a dizzying experience for parents beyond the emotions of sending their first child away for college. Is it time for you to put a game plan together for kid's college education before time passes you by?
Request a FREE college planning consultation at www.oxygenfinancial.net.
Written by:
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc
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