I Don't Need to Save, That's Why they have Financial Aid

Scrabble squares on a table spelling out the words financial aid.

What most parents don’t realize about financial aid

More and more parents today are relying on financial aid to cover the cost of attendance for their child’s college education. So, why should you save for college when there will be enough financial aid to pay for it, right? Wrong.

Financial aid is a great way to help supplement the cost of attending college, but there are a lot of things about the financial aid package you might not realize.

First, we should talk about the two different kinds of financial aid—“free money” and “not free money.” “Free money” is the part of the financial aid package that you do not have to pay back—think grants and scholarships. “Not free money” is money that you will have to pay back, or in the case of work-study, work to earn. Yes, loans are considered financial aid. And loans will make up the largest part of your child’s financial aid package.

Loans

There are a few different kind of student loans: subsidized loans, unsubsidized loans, Parent PLUS loans and private loans make up the majority. Subsidized loans are federal loans and do not accrue interest while the student is enrolled in school at least part-time, but once the student graduates or stops attending school interest starts to accrue. Subsidized loans do not require a credit check on the student, but are not available for everyone. In order to be awarded a subsidized loan your child must show a financial need; need is determined by the Free Application for Federal Student Aid (FAFSA).

Unsubsidized loans are also federal loans, but will accrue interest from the day that loan is issued. A student does not need to show a financial need in order to qualify for this type of loan, nor do they need to go through a credit check. Both subsidized and unsubsidized loans have an interest rate of 4.29% (for loans taken out in the 2015-16 school year).

Most students, and parents, do not realize there is a cap as to how much money a student can borrow in federal student loans each year. The limit does increase once a student becomes a sophomore, and junior, but starts at a cap of $5500 per academic year. In addition to a yearly cap on loan eligibility there is a lifetime cap on borrowing. For dependent students that limit is $31,000. For more information about loan limits visit the Federal Student Aid website.

Let’s think about this for a minute…your child will have a cap of $31,000 of federal loan borrowing. The average tuition cost of a Michigan public university is $12,419 for the 2016-17 school year. That is tuition only, that price does not include room and board, books, additional fees, etc. That is also money your child is going to have to pay back, with interest. So, if you don’t have a college savings plan where are you going to make up the difference?

A Parent PLUS loan is a federal loan the parent can apply for to help cover the cost of their child’s college education. A credit approval is required for this type of loan. In addition, you are generally required to start making payments once that loan is paid out to the school. You can apply for a deferment while your child is attending school at least half time, but interest will still accrue. The current interest rate on PLUS loans is 6.84%.

Finally, private loans are an option for those wishing to pay for school. These loans are generally from a bank or credit union. Interest rates and payment options are dependent on the institution. Private loans usually offer higher interest rates and have less flexible repayment options.

Work-study

Work-study is considered financial aid, but it is essentially a job. Students who show a financial need may be eligible for a work-study position; this may be on-campus or off-campus. Students will still be required to interview and obtain the position, but certain jobs are set aside specifically for work-study students. Pay varies depending on the position, but must meet minimum wage standards. The number of hours a student can work is capped based upon their financial aid eligibility.

Grants

Alright, let’s talk about “free money.” In order to receive a grant a student must fill out a FAFSA, and they must fill it out every year they plan to attend college. Federal grants, like the PELL grant are need based. When a parent and student fill out a FAFSA the federal government will come up with an EFC (Expected Family Contribution). This is the amount that the federal government says you should be able to contribute to your child’s education that year. Almost always that number is going to be a lot higher than what you think it should be. The maximum amount a student can receive in PELL grants for the 2016-17 school year is $5,815. In order to qualify for that amount the student must have an EFC of 0 and be enrolled full-time.

There are additional grants available, but those are typically a lower amount and are distributed based upon the school the student is attending, what the student’s need is and when the student filed their FAFSA.

A couple of important things to consider:

  • Parent’s assets are taken into consideration even if your child supports themselves. A student is considered a dependent student until they are married, have a child or join the military. Special considerations may be made if a student has extenuating circumstances.

  • Student assets are taken into account at a much higher rate when determining need. Student assets are calculated at about 20% and parental assets are calculated at about 5.6% of their total value.

    • 529 college savings plans are considered parental assets when the account holder/purchaser is the beneficiary’s parent. Therefore, only about 5.6% of its’ total value is taken into consideration when determining need based aid.

  • Additional need based aid amounts can vary from school to school.

Scholarships

Many scholarships are not need based; students can be awarded scholarships for everything from test scores to sports to whether or not they are left-handed. Large scholarships that cover the majority of tuition or room and board costs are hard to come by. So, the best bet for scholarships is to apply for as many small/medium sized ones as you can.

It is important to keep in mind that some scholarships are renewable and others are not. Many times scholarships are awarded and students are unable to meet the renewal requirements and they lose that scholarship for the following year.

Another point to consider is that some schools “front-load” scholarships. They will award freshman with non-renewable scholarships to entice them to attend their school. Once the student’s sophomore year comes around they are left with higher tuition bills because those scholarships were a one-time award. So, it is important to keep applying to scholarships each year and to review the details of scholarships awarded to your student.

If a student has a college savings account they are able to use scholarships in conjunction with their 529 plan. In addition, if your student is one of the lucky ones to be awarded a full tuition scholarship, there are ways you can get a refund on your 529 plan or transfer those benefits to another family member.

Save, Save, Save

Yes, your child will be able to use financial aid to help pay for college, but it is still a good idea to save. You may not be able to save enough money to pay for the entire bill, but anything you save will be less that you or your child will have to borrow in the future—and pay back with interest. In addition, you can take advantage of the tax benefits a 529 plan has to offer.

For more information on Michigan’s 529 college savings plans visit the MI 529 savings page.