Hi, everyone. Today I’m over at Vosa talking about wants versus needs, so please be sure to check out my post there. I am so pleased to welcome Natalie, The Finance Girl. She has prepared a very thorough step-by-step guide on financing your child’s college education. If you would like to guest post at The Heavy Purse, please review our guest post policy and contact us with your idea.
It’s that time of year again! Time to figure out how you’re going to send your child to college. And although I’ve been out of law school for three years, I vividly remember the seven years I spent with my mom determining how I’d pay for college. It was sort of a nightmare. I knew I was responsible for paying for both my undergraduate education and my law school education, but beyond that, I pretty much put on earmuffs (regrettably) and didn’t pay attention to what I was getting myself into.
What I do remember about the financial aid process is that there was a surplus of information regarding the specifics but not a real path to follow regarding the whole process. That’s why I want to share this guide with you, in order to provide a step-by-step guide to helping your child finance college.
1. Look at Your Finances
Before you can help your child finance college, you need to determine what, if anything, you’ll contribute. Look closely at what money you can put toward your child’s education. This may be a yearly contribution, a one-time contribution, or a combination of both. Your contribution may come from a 529 Plan, Coverdell ESA, trusts, liquid savings, investments, or cash flow. (For more on how to save for college, see Shannon’s post, How to Save for Your Child’s College Education.)
2. Research the Cost of College
After you know how much money you can contribute to your child’s education, research the cost of sending your child to college.
College costs include
- Tuition and fees (the cost of taking classes)
- Room and board (the cost of housing)
- Books and supplies (the cost of materials for class)
- Personal expenses (the cost of a variety of things, including a cell phone bill, food, entertainment, laundry, etc.)
- Transportation (the cost of commuting to class and going home)
3. Apply for Financial Aid
After you know what your contribution will be and you know how much your child’s college will cost, you can apply for financial aid to make up the difference.
There are three ways your child can receive financial aid for college:
- FAFSA (federal, state, and college aid)
- Private scholarships and grants
- College-specific aid
The Free Application for Federal Student Aid (FAFSA) is the application your child needs to use to apply for most financial aid, including federal and state grants, work-study awards, and federal loans.
You can apply for FAFSA online here. The first day you can fill out your FAFSA is January 1. Because of varying school deadlines, you may want to apply as close to January 1 as you can. When you apply, you’ll need a lot of information from your taxes, so having that available will be helpful.
After you complete and submit your child’s application, you’ll receive your Student Aid Report (SAR). Review this to ensure the information is complete and accurate. Included in the SAR will be your Expected Family Contribution (EFC). Your EFC is an indicator of your family’s financial strength, and it is used to determine your financial aid award. Your EFC is also sent to your state scholarship agency and the colleges you listed on your child’s FAFSA.
Private Scholarships And Grants
Aside from completing the FAFSA application, your child can apply for private grants and scholarships. Companies, foundations, organizations, and a variety of other agencies award students grants and scholarships. These private grants and scholarships will have their own applications (i.e., they are not part of FAFSA), so you’ll need to search and follow the specific rules and deadlines for each private application.
The college your child plans to attend may offer specific grants and/or scholarships. Contact the school’s counselor to determine available awards, the application process, and deadlines specific to the college.
4. Review your financial aid package
Once you’ve reached this step, you’re ready to see if everything lines up by reviewing your child’s financial aid package. This package includes the total amount of aid offered to him by all sources. Note, the package is not all free money. There may be several things in your award package, including grants, scholarships, loans, and work-study. Also, remember that this financial aid package applies only to the year for which you applied and may be different in subsequent years.
If your financial aid package includes grants: hooray! A grant is an award that does not need to be repaid, and it is usually awarded based on need (example: The Federal Pell Grant).
Scholarships are also included in your child’s financial aid package. A scholarship does not have to be repaid (like a grant), but it is awarded based on merit. Often, scholarships have rules – so pay attention to the specifics. For example, in order to continue to receive the scholarship, your child may be required to maintain a certain GPA.
If your child’s financial aid package includes loans, he will be responsible for repaying the loans, plus interest. Award packages may include a variety of student loans, including Federal Stafford Loans, Federal PLUS Loans, Graduate / Professional PLUS Loans, Perkins Loans, or campus-based loans.
The terms of each loan will vary, so pay close attention to the details. Note the interest rate, whether the rate is fixed, the total cost of the loan, when the loan enters repayment, repayment options, and what you’re likely to repay monthly.
Work-study is an award for student employment. It means that your college may help you find a job to earn the expected amount. Payment from work-study is usually spent books and personal expenses.
5. Determine your next steps
After reviewing your financial aid package, determine where your contribution is best spent. For example, maybe your child has an academic scholarship so you decide to contribute to his room and board.
The point is to make sure you think about where you want your money to go and allocate it accordingly (in a sense, you’re budgeting here: making sure that every dollar you’re contributing is intentionally spent).
After you know where your contribution is going and what financial aid your child will receive, you need to determine whether there is a gap in cost versus funds. If your contribution combined with the financial aid package is less than the cost of sending your child to college, you’ll need to determine where to get the rest of the money.
Assuming you’ve considered all sources of aid (private grants and scholarships, the college’s awards, and your federal aid package), at this point, your left with private loans.
If you have to use private loans to make up the different in your contribution and financial aid, pay close attention to the details of the loan. Often, private loans have variable interest rates, are unsubsidized, do not qualify for income repayment plans, are not dischargeable in bankruptcy, and are not forgiven upon death. Pay attention to the loan’s specific terms regarding the interest rate, whether the rate is variable or fixed, and what repayment plans are available. For example, if you cosign a private loan for your child that has a variable interest rate, you’ll want to be aware of this, so you can make that loan a top priority in repayment.
You may have to cosign for your child to receive a private loan. If you’re going to cosign, plan on repaying the loan. And if your child repays it, awesome – you’re in the clear! The point is to recognize that by cosigning the loan, you’re equally responsible for repayment. If your child does not repay the loan and neither do you, it will be as if you took out the loan for yourself and failed to repay it (envision creditors calling, your credit negatively affected, and your wages being garnished).
After all the planning is done, communicate with your child about the cost of college.
If there is one thing I wish I knew before I went to college, it would be the specific cost. I would have looked more closely at taking on the debt, and how it would play a part in my career and life choices. That’s not to say college should be discouraged because of cost. But there should be a clear idea of how much money it will cost over time and monthly.
By understanding the cost of college and having a plan, you and your child can make intentional choices that will minimize confusion and regret, while creating realistic expectations.
Editor’s Note: Thank you Natalie for such a detailed post. Figuring out how to pay for college is a daunting task, which is why it’s so important you take the time to sit down with your children and go through the material together. Natalie makes an excellent point that if you ultimately need to cosign a loan for your child that you should only sign it if you are prepared and able to pay it back yourself. Yes, ideally your child will pay back the loan but if they cannot, you have much more to lose than they do.
Natalie Bacon is an attorney and personal finance blogger. You can find her at The Finance Girl blogging about finance and intentional living.
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