In only two short months students all across the United States will be selecting which colleges they will be attending next fall. It's exciting and all the work and worry will be over. Before you breathe that sigh of relief, there is one remaining hurdle to clear, the offer of financial aid. It's important for your future that as you consider what each school has offered you, do so with an eye on your life after graduation.
We hear so often about student debt. According to the Institute for College Access and Success, the average borrower will graduate with $26,600 in debt. According to Pew Research the average college graduate earns $45,500. The rule of thumb is that the debt you take on over the course of your education should not exceed what your earnings would likely be for a person starting out in your field.
In many cases, the parent and the student go into debt when the student enters college. There are separate issues that parents and students should consider as they approach college.
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First, determine what is included in the total cost. Not all offers will look the same; all will have a total cost but some include only the direct costs (tuition and room and board) and others will include direct and indirect costs (tuition, room and board plus books, fees, transportation and personal expenses).
The problem is that to determine financial aid, colleges take the total cost (which may or may not include indirect expenses) minus your expected family contribution (EFC) which leaves your need. Colleges then will meet your need in varying degrees with financial aid. If indirect expenses were not included it's a plus for the college but those expenses are still there and you will be responsible for them.
Financial aid is broken down into two categories: self-aid, which is comprised of loans or works study, and gift-aid, which will be in the form of grants or scholarships. When you look at offers of financial aid you need to understand the college's policies on outside scholarships, which will vary from school to school.
Outside scholarships are ones you received from a source other than the college itself. For example, you won a scholarship from your high school. You must let the college know you received that scholarship. What they do with it will make a big difference.
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Some schools will apply your scholarship towards replacing the scholarships or grants they were going to give you. In the end, financially, you are no further ahead than you would have been without the scholarship. Other schools will apply your outside scholarship to reduce the amount of loans you are offered. This does save you money and makes the outside scholarship a real bonus to you.
Another important policy you need to know when you think about what your debt load will look like when you graduate is whether or not the college front loads their grants and scholarships. Almost half of colleges front load. Front loading means that they give you a really good offer that first year, but in subsequent years you will be offered fewer or smaller scholarships and grants. So the amount of loans you will be asked to assume will increase as time goes on. This practice makes it difficult to know what kind of debt you will be asked to take on for your entire education.
Finally, if parents are going to take on debt for their child's education they need to think carefully about it as they proceed. The rule of thumb for parents is that their total college debt should be able to be paid off within 10 years. This should include debt for all their children so if parents have more than one child's education to pay for they should keep that in mind as they take on debt.
One plus for parents is that if you have more than one child in college simultaneously, your EFC will be divided by the number of children you have in school. In other words, say your EFC is $10,000. That does not mean you will have to come up with $10,000 for each child. If you have two children in school you'll have to come up with $5,000 for each child with three in school $3,333.33 per child and so on.
Understanding what the policies are at the schools your child is considering is an important first step when you are looking at financial aid offers. The next step is to understand what all the numbers mean. We'll look at that next month.
