you need to manage your loan repayment stress free.
you need to manage your loan repayment stress free.
Paying for college can be one of the most important – and most difficult — challenges families face. It’s complex. It’s emotional. To understand how to pay for college, you and your family will need to understand scholarships / grants, financial aid, savings, tax credits, student loans, and alternatives to the traditional student loan.
Below you’ll find the steps you need to navigate the process of paying for higher education in three simple steps.
- Look for “Free Money”
- Explore Financing Options (Federal and Private)
- Consider Alternatives to Traditional Student Loans
1. “Free Money”: Scholarships and Grants
The first read for you and your family should be scholarships/grants. That’s because these forms of financial aid are what we call “free money”. It’s cash to pay for school that we don’t have to pay back.
Scholarships and grants are the main vehicles for this type of financial aid. They’re essentially the same thing with one minor distinction: scholarships are usually merit-based while grants are usually needs-base.
Merit-based scholarships are based on academic performance rather than financial need. Students typically receive a separate letter with the details of the scholarship. These scholarships can come from the government (federal or state), organizations and nonprofits, or even private business. They also tend to have additional requirements to keep them in good standing. This may include minimum GPA requirements, minimum credit hours requirements, and the like.
Needs-based grants, on the other hand, are primarily driven by students’ financial background. These options are reserved for talented students who may be facing financial barriers to paying tuition in its entirety. This is based on the expected family contribution which we will cover shortly. If a student’s expected family contribution is lower than the overall cost of attendance, then the student will typically qualify for financial aid.
The cost of attendance can vary significantly from college to college so financial aid awards will differ at each school. At this point, additional investigation is often worthwhile as some more expensive (usually private) schools will offer additional financial support to make attendance feasible. It’s also worth noting that needs-based awards can change from year to year based on changes in financial situation. So it’s important to plan for four years in advance to overcome the lack of transparency with college financial aid offices and have a true understanding of how the costs will look in the future.
2. Explore Financing Options (Federal and Private)
Assuming we can’t cover all our costs with “free money”, the next option will be to explore financing options. This simply means cash to pay for school that we’ll have to pay back.
Federal options should be also considered first. That’s because they usually (not always) have a lower fixed interest rate. They also have more borrower benefits such as income driven repayment and select forgiveness programs.
Thinking About Loans (and Alternatives)
Ultimately, we need to understand that student loans (and alternative forms of financing) are investments. We’re paying (usually in the form of interest) to get money now with the goal of making more money later. Think about a business. It may take out a $1M loan to invest in a factory. Management knows that they’ll have to pay back that money plus interest. However, they know that the factory will produce revenues much greater than $1M. So the investment makes sense.
As students we have to think like investors. We’re taking out tens of thousands of dollars which we will have to repay plus interest. We’re doing so because we think that getting an education now can boost our earnings later. We must think analytically about the value of our degree and how much we’re paying for it.
While sometimes difficult, this is an important realization to take with you as you look at paying for school. Again this can be a difficult thing, but the reality is that loans need to be repaid. Once you understand the student’s future salary, you can run a quick calculation to see if the earnings will cover the monthly loan payment.
Complete the FASFA (Financial Aid)
FAFSA stands for Free Application for Federal Student Aid. Even if you don’t think your family will qualify, you should still complete the application. Any college or higher ed institution that receives federal funding will require the FAFSA to be submitted.
Upon completing the FAFSA, the student will receive an expected family contribution (EFC) number. This is the amount that the family is expected to chip in for college costs. This is used to calculate financial aid.
The EFC formula is based on a family’s financial assets. This includes the sum of parents’ income, parents’ assets, student’s income, and student’s assets. The official FAFSA generates a report called the Student Aid Report (SAR) which lists the EFC as one number. It’s often worthwhile to break down this number into the four categories with a financial professional to investigate potential cost savings. For instance, moving family assets into the student’s name may not make a difference if the EFC figure is already larger than cost of attendance.
Some school use another process to confirm financial information. This is often the CSS Profile by College Board. However, some institutions use their own.
Colleges use financial aid to attract the students that they want to admit. Colleges set year to year goals and allocate financial aid accordingly. Needs-based aid is determined by the cost of attendance (COA), expected family contribution (EFC), and the college’s gifting policy. Most schools have a gifting policy which means that they cover a certain percentage of the student’s financial need. Note that COA – EFC = Financial Need. Enrollment Management offices do their best to align gifting with the goals of the college. It is often presented as a lottery system; however, administrators have their own agenda viz. to get the class they want.
Families need to create a financial plan based on the impact of their financial awards on their cash flow. The format in which financial information is provided to families is one of the dangers around making college financing decisions. Financial aid information is on a one-year basis when it really should be for four. You should create a four year model in order to capture the true projected costs of college (especially if there are multiple children).
Once you have a clear financial picture of the college options, you can compare the other important aspects of the decision: academic profile, programs, environment, culture, etc. When we factor in things like graduation rates, potential financial aid, and future earning potential, a private college or university can often offer a better value than it’s lower priced public counterparts. Ultimately, it comes down to the value the school is offering and at what price.
Click here to learn more about the FAFSA.
Student Loans
When financial need (cost of attendance – expected family contribution) can’t be covered by gifts, scholarships, grants, or other aid then a student loan is likely necessary. There are two main types of student loans: private and federal.
Federal student loans should be the first option. They usually (not always) have a lower fixed interest rate. They also have far better borrower benefits such as income driven repayment and loan forgiveness under some circumstances. Federal loan application is covered when you complete the FAFSA.
Students can borrow only so much under their name. If more money is needed to pay for tuition, parents must take out a PLUS or private student loan. Anything besides a federal direct student loan will require a cosigner – which ultimately means that the cosigner is legally responsible for repaying the loan if the student cannot.
It’s important to note that federal student loan limits depend upon the student’s academic progress and other factors. This means that things can change if the student drops classes, fails, or transfers.
For instance, if the student transfers to a new school sophomore year and only 21 of the 32 credits earned are accepted, the transfer student is not a full academic sophomore. So the $6,500 limit for sophomores will be scaled down. Below are the federal loan limits per college academic year. (Check for updates here).
- Freshman $5,500
- Sophomore $6,500
- Junior $7,500
- Senior $7,500
Click here to learn more about federal loan limit checks.
Private Student loans are offered by banks, credit unions, or other student loan-focused lenders. They often have higher interest rates and far fewer borrower benefits. They will almost certainly require a cosigner if the student is an undergraduate. While free money and federal aid is best, we understand that private student loans are necessary for many families.
We vetted the top loan providers and created a free tool to help you compare offers.
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Student Loan Quiz
3. Alternatives to Traditional Student Loans
Contrary to popular belief, there are ways to pay for college without taking out loans. While federal or private loans are often the most practical solution, there are often other options. Consider educational investments, group rate negotiation, and peer-to-peer crowdfunding.
Educational Investments
An ISA, or Income Share Agreement, is an agreement between a student and a school where in exchange for covering the cost of that student’s tuition, the student agrees to pay back a portion of their income after graduation for a set amount of time as long as they are earning an agreed-upon yearly income.
This was created in response to unsustainable loan payments, where borrowers had a low income but high monthly payments. The payment percentage varies between 2.5-17.5% depending on what you choose and is paid over a set period of time. Agreements also include a minimum income threshold under which you do not need to make payments, as well as a payment cap in order to not punish you for making a larger-than-expected income. For a full glossary of terms, see here.
If you choose to enter an ISA, there are three ways to satisfy the agreement:
- Make the required number of payments: the percentage of income given each month is considered a payment.
- Pay the Max Payment Cap: if you are earning a higher than expected income. It is usually some amount above the funded amount.
- Reach the end of the payment window: the agreed upon time window for making payments, usually between 2 and 10 years, closes.
By achieving any of these three scenarios, you have satisfied your ISA!
You can apply with Stride to see if an ISA works for you.
Group Rate Negotiation
In the summer of 2012 two Harvard undergrads received their dreaded tuition bills. Instead of taking out these expensive, high interest loans, they decided to negotiate. They realized that if they could “buy in bulk” they could get a discount. They gathered together 700 students from 10 different schools and bargained for a lower group rate saving their classmates about $15k each.
They went on to found Juno. Juno pulls together borrowers to negotiate lower student loan rates. They have changed the game and challenged traditional student loans. Borrowers often save thousands with Juno deals – think Groupon for student loans. It’s worth signing up for offers and seeing if you can save.
Peer to Peer and Crowdfunding
Peer-to-peer (P2P) lending (also known as person-to-person, social lending, and microlending) is an option for people to get the funding they need from other people instead of banks. It’s a community based lending where one individual borrows money from another.
Make sure to do your research on peer-to-peer loans. In some cases the rates can be 20-30 percent higher and regulations vary from state to state. If you’re struggling to find the right loan from a traditional lender, this could be an option.
Upstart and LendingClub are two of the most popular platforms.
Though not often associated with education, crowdfunding has become a tool used more and more often to help pay off school.
Data from GoFundMe shows that between 2014 and 2017, over 130,000 campaigns raised $60 million on the site alone. They money generated came from over 850,000 donations for student loans and related expenses.
Some of the most popular crowdfunding sites are:
- GoFundMe – This site is known as “the leader in online education fundraising.” GoFundMe offers several education-based crowdfunding categories, including college tuition and student loan repayment.
- LoanGifting – This is a student loan management resource that also offers crowdfunding. Unlike many other sites, the money raised goes directly into a student loan and isn’t handled by the recipient.
- Indiegogo – Popular among small business startups, Indiegogo also helps fund education and learning
Unlike a loan, these funds are free and easy to set up. However, you must be realistic about your expectations: most of these campaigns do not achieve their goals. When the goal is not achieved, you do not receive any of the money. Even when they are successful, they are generally under $15,000. So, you should not expect to pay off a debt of $100,000 with this method.
But, at the end of the day, this can be a way to make a difference – big or small – in paying for your education.
Learn more on our Student Loan Alternatives page.