Many families find they must borrow at least some money to help pay expenses for their college-bound teenagers. Student loans can provide a significant share of a student’s total financial aid package. Although many college graduates often find themselves entering the job market burdened with thousands of dollars in college loan debt, a federal program may help ease that burden by offering attractive terms and rates.
The Federal Direct Loan Program (begun in 1994) allows students to borrow directly from the federal government. The direct loan program simplifies the process, and offers a variety of repayment options. The repayment plans are open both to participants in the direct loan program and to students wishing to consolidate multiple loans from private lenders or other federal programs.
Here are the available repayment options:
If you are currently dealing with college expenses, or will be facing them shortly, you may want to take advantage of federal incentives to save for post-secondary education as well as federal programs to assist in financing academic pursuits.
For more information: The Federal Student Aid Information Center: (800) 433-3243The Office of Post-Secondary Education: www.ed.gov/about/offices/list/ope/index.htmlThe College Board: www.collegeboard.org
Guardian does not offer student loans or any counseling to attain or pay down student loans.
For college students and their families, financial aid is meted out according to an equation set by the federal need analysis. This table measures a family’s income and discretionary income in order to determine how much they can contribute to their child’s college expenses, and allows families to deduct a portion of educational expenses from state and local taxes. In May of 2003, the Department of Education altered the federal need analysis and, consequently, many students will now receive a reduced amount of financial aid.
Change on the HorizonFederal laws mandate that the tables should be updated annually, and the information upon which the tables are structured is derived from data supplied by the Internal Revenue Service (IRS). This data is now outdated, according to the Department of Education, reflecting a time when state taxes were much lower. With the changes, aid will be reduced in varying amounts, since such circumstances as family size, number of children in college, etc., will differ from family to family.
In addition, Pell grants, which are awarded to lower income students, will also be reduced. A report from the Congressional Research Service (CRS, 2003) estimates that Pell grants will be reduced by $270 million. Since Pell grants are also awarded based on discretionary income, a projected 4.8 million students will receive smaller grants, and some will be denied.
Planning TipsParents who hope to increase their children’s financial aid approval odds may want to consider a few money management strategies. Since the formula is based on a family’s discretionary income, some may want to think about taking steps to reduce this amount. Here are some financial strategies that could work for your family:
A college education is invaluable. However, the cost is becoming increasingly prohibitive. Talk with your financial or tax professional today, and improve upon your family’s financially savvy money management.
Applying to colleges requires a course of study all its own. When you add the need for financial assistance, you may feel you are faced with a situation you would rather avoid altogether. The benefits of completing the required forms in a timely manner, however, can make the effort worthwhile, especially if it pays off by allowing your child to attend the school of his or her choice.
The U.S. Department of Education has several programs, involving grants, loans, and work-study, available for post-secondary education. Aid from most programs is awarded on the basis of financial need, with a couple of exceptions in the loan programs. In determining need, both the cost of education and an Expected Family Contribution (EFC) are considered.
The EFC is calculated using a formula established by Congress. Factors such as taxable and nontaxable income, assets (e.g., savings, checking accounts, family businesses, and real estate holdings), and benefits (unemployment and Social Security, for instance) are all considered in the calculation.
Federal programs include the following:
Some states base their programs not only on need but also on academic performance. The recipients of state loans generally must be legal residents of the state and enrolled in a college or university within their state. In addition, some states have “reciprocity agreements” with other states.
No matter how slight you believe your chances of receiving aid are, apply. You may qualify for more aid than you think.
It takes four years, on average, to graduate from most colleges and universities. During that time, students can amass some hefty debts. But, for many people the degree is certainly well worth the burden of accumulated debt. So, these questions remain: How should you repay the debt? And, are there any plans that can help make the “payback” any easier?
Today, there are more plans available that offer students flexible payment schedules. If you are applying for a federal student loan now, you can choose a graduated repayment plan that will allow you to make smaller payments upon graduating and larger payments at a later time when you may be earning more money in the working world.
You may also have the choice of an income-contingent repayment plan. This plan calls for you to pay a fixed percentage of your postgraduate income toward your student loan. This percentage could be approximately 5-10 percent of anything above the poverty level of a single person, currently $9,310 (U.S. Census Bureau, 2005).
A third choice is an extended repayment plan that can lower your monthly payments an estimated 20% to 30% and allow you to stretch out your loan payment schedule from 10 to 15 or even 20 years.
Consolidation Offers FlexibilityThere is good news also for students who are already debt-laden. Under the Student Loan Reform Act of 1993, you have the opportunity to consolidate your existing loans with a direct loan from the government. This plan offers a more flexible repayment schedule while interest rates remain the same.
To be eligible for this plan, you will need to ask your original lender for an “income sensitive” repayment option. This plan adjusts the monthly payments for the loan’s capital, but not the interest, to your annual income. If the original lender will not agree to this option, you may then be eligible for a direct loan from the government.
Two advantages of a direct government loan are as follows: First, the monthly installment payments of principal and interest are contingent upon your income. Because the payments are withdrawn from your wages, there will be less paperwork to muddle through. Second, as your wages increase, the percentage withdrawn from your pay will also rise, allowing you to pay off your loan more quickly and with less accrued interest charges.
If you need to borrow for the current school year, direct loans (and the income-adjusted repayment plan) are also available if you are attending one of the schools participating in this plan. Parents may also be able to take out a direct loan for as much as the entire cost of their children’s college education. It is hoped that the Education Department will soon make direct loans available everywhere.
For information or inquiries regarding federal student aid programs, contact the Federal Student Aid Information Center at 1-800-4FED-AID (800-433-3243).
Note: Guardian does not offer student loans or any counseling to attain or pay down student loans.