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03/15/2018 12:00 AMPlanning for college is an exciting time. What's not so exciting is figuring out how to pay for it. Unless your family is wealthy, or has exercised uncommon discipline in saving through the years, college tuition can evoke intense sticker shock for a student without a hefty scholarship. Here are some ideas to consider when deciding how and what to borrow.
After receiving acceptance letters and choosing a college or university, head to fafsa.ed.gov and fill out a FAFSA, or Free Application for Federal Student Aid, to learn what federal loan options are available for your family from the government.
Dominic Yoia, director of financial aid for Quinnipiac University in Hamden, recommends a student apply for federal student loans (Direct Loans) first, federal parent loans (PLUS Loans) second, and private loans—from, say, Sallie Mae or a bank—as a last resort.
Know Your Loans
"If a student only borrows federal loans for four years of college, they will graduate with $27,000 in debt, which is a comfortable amount for a college graduate with a four-year degree," he said. "If a student also borrows private loans, they need to be aware of the terms, conditions, rates, and fees along with the amount being borrowed."
Federal loans come with options some private loans don't, like income-based repayment plans and loan forgiveness programs. Unlike federal loans, the interest rate on a private loan is determined by the borrower's, or their co-signer's, credit score.
What Can You Afford to Borrow?
A good rule of thumb, Yoia said, is to keep the total amount of student loan debt at or below one's expected salary the first year after graduation.
Matthew Paulsen, a certified financial planner with Barnum Financial Group in Guilford, acknowledged, "In many cases, borrowing is the only option to cover the difference. To the extent they are offered, take advantage of federal subsidized loans first, as the interest is paid for by the U.S. Department of Education as long as the student is enrolled at least half-time."
Dependent students can borrow up to $5,500 in Direct Loans for their first year of undergrad, up to $6,500 for their second year, and up to $7,500 each year after, adding up to the $27,000 Yoia mentioned for a typical four-year undergraduate degree. Only up to the last $2,000 of the amount borrowed each year can be subsidized, and unlike unsubsidized loans, the family must demonstrate financial need.
For independent undergraduates, grad students, or dependent undergrads whose parents lack the credit scores for Direct PLUS loans, the limit is $9,500 for the first year, $10,500 for the second year, and $12,500 a year for the third year and beyond. The same dollar amounts apply as those for dependent undergrads in terms of how much can be subsidized—just $3,500 for the first year, $4,500 for the second year, and $5,500 for the third year and beyond.
Parents May Help
Parents can take out federal loans for their child's college education, too.
Elizabeth Desi, senior associate director of financial aid at the University of New Haven, explained, "Parents can apply for up to the cost of attendance minus any financial aid the student is receiving. The current interest rate on the parent PLUS Loan is a fixed rate of 7 percent; however, the interest rate changes each year on July 1 for the new school year" as does the interest rate on the federal student loans, currently fixed at 4.45 percent.
"Students will likely see the federal Direct Loan as part of their financial aid award if they have submitted the FAFSA to the school," Desi added.
When it Doesn't Work Financially
Sometimes, though, federal loans and family finances don't cover costs for one's college of choice. In that case, consider an in-state, community college, or technical school. Or, can the student commute and save on housing costs and meal plans?
Payback Time
After graduation, students often have a grace period before they need to start repaying their loans. Once repayment time arrives, reevaluate your financial situation and consider your needs and options again.
Paulsen explained, "Most federal loans default to a standard 10-year repayment plan, but when consolidating loans, it is possible to extend the payment period to between 12 and 30 years depending upon the total amount of educational loans you have. There are also repayment options that are tied to your level of earned income. In some circumstances, this may allow lower payments compared to the standard or even extended plan. Just be mindful that you may pay more in interest over time by electing income-based, graduated, or extended options."
Many students ultimately feel loans are worth it to graduate with a degree.
Joshua Dallas, 26, from Madison, graduated from the University of New Haven in 2013 and pays around $300 a month toward his student loan debt. He has subsidized and unsubsidized federal loans with interest rates between 4 and 8 percent. He also took out between $3,000 and $4,000 in a private loan, but paid that off within two years of graduating because it cost him an extra $150 a month on top of the $300 a month he pays toward his federal loans.
"$450 a month was too much for me to pay for 10 years," he said. "That money can go toward way better things."
Dallas said he considers himself lucky compared to some of his fellow students.
"I was hired for my career choice a year after graduation, so I was off to a good start with a good salary and the availability of overtime," he explained. "I know people paying $800 to $1,000 a month for 10 years."
Guilford native Amy Anderson, 28, borrowed around $21,000 in subsidized and unsubsidized federal loans, and her mother took out a PLUS Loan for an additional $10,000. Anderson started at Gateway Community College in New Haven and quickly exhausted her $10,000 personal college fund. She took out loans when she transferred to Southern Connecticut State University, also in New Haven. She graduated in December 2014.
After Anderson was hired at her first post-college job, she still lived at home and had a $230 a month loan payment. She "threw so much money" at her loans, she said, and got her balance down to around $4,000.
"I didn't have a lot of debt compared to some people," she said, "and that was because I chose to go to a state school and commute. For me, college was worth it. I learned so much in my major, and I know that without a college degree it would be a lot harder to find a job."
For more information about federal student loans, visit https://studentaid.ed.gov/sa/types/loans.
Borrowing Money Costs Money
A student who borrows $25,000 at 4.45 percent interest with a 10-year repayment plan will pay around $260 a month and just over $6,000 in interest for a total of roughly $31,000. That same loan with a 20-year repayment plan will lower the monthly payment to around $157.50 a month, but the student will pay almost $13,000 in interest, totaling $38,000.
A parent borrowing $25,000 in parent PLUS loans at 7 percent interest with the same repayment plan will pay around $290 a month. Interest will total about $9,800, equaling almost $35,000 repaid. If the parent extends the repayment plan to 20 years, the monthly payment drops to around $193, but the parent will ultimately pay around $21,500 in interest for a total of about $46,500—almost double the amount of the original loan.