Paying for College During Hard Economic Times

With recession-related anxiety spreading across the country, the first big college financing question facing potential freshmen has gone from “should I take out a loan?” to “how much should I take out to pay for college?”

NACAC’s The Basics of Borrowing for College Webinar brought together three professionals from the field of college admission to clarify confusing protocol, dispel popular rumors, and outline the basic steps of financing a college education.

During the process of applying for financial aid, many students are thinking about serious financial concepts for the first time. Natala (Tally) Hart, senior advisor for economic access at The Ohio State University and co-founder of a financial aid assistance program called College Goal Sunday, discussed the availability of online resources like gearup-moneyskills.org, where the advice caters to middle and high school students who have a lot of questions about financial aid.

Interest rates, payment plans, subsidized and unsubsidized loans can all seem foreign to high school students looking ahead at life after graduation. In a simple breakdown of financial aid, Hart outlined three separate opportunities for students to achieve financial support:

• Grants and scholarships, which do not have to be repaid
• Loans, which students pay back during and/or after college
• Work Study—part-time employment to assist with expenses

National research indicates that students who work some form of part-time hours, usually around 15 per week, experience improved academic success, but taking on too many work hours outside the classroom can also strain study habits and possibly interfere with class time. “Working full-time while going to school full-time is not a formula for success,” Hart said during the webinar.

Since most students have a hard time supporting their entire college experience with grants and scholarships, loans have become a popular form of financial aid. “Especially given the high cost of college and the current economy, loans are necessary for an increasing number of students and families,” said Edie Irons, communications director at The Institute for College Access & Success, as she highlighted the important differences between federal and private loans.

According to Irons, two-thirds of four-year [college] students take out loans during the course of their college careers. “It’s very important to maximize grants and scholarships,” she said. But what many students don’t realize is that loans are also a type of financial aid.

Though more students are borrowing from the federal government in larger and larger amounts every year, students should not worry about loan availability. The Department of Education recently reported no eligible students were turned down for loans last year. Another concern that has likely found its way into dinner table conversations across the nation is the worsening economic climate. The credit slump fortunately has not affected federal loan availability.

Each presenter in NACAC’s Basics of Borrowing Webinar stressed the value of federal loans and warned students and families of the risks associated with loans from the private sector. Private loans, the presenters said, are considered financial tools, like a home equity loan or credit card. Federal loans, however, offer students lower fixed rates and more options for borrowers experiencing difficulty with their payments.

When considering federal student loans, students and their families must first determine their eligibility for two distinct types of aid. The two main types of federal aid are:

• Federal need-based loans: loans available to applicants with lower incomes
• Federal non need-based loans: unsubsidized loans available to everyone

Need-based loans include Perkins loans, which come with the lowest interest rates and offer more options for forgiveness or cancellation, and the Subsidized Stafford loan, an aid package that includes government paid interest while the student is in school.

The other type of federal aid, the non need-based variety, comes with slightly higher interest rates, which are still considered relatively low. One of the most popular non need-based federal loans, the unsubsidized Stafford Loan, is available to everyone and can offer students a chance to earn a degree with less financial anxiety.

“These can be a really important tool to allow students to attend school full-time and focus on their studies, not work too much and succeed in their education,” Irons said.

According to Irons, “millions of students do not fill out the federal financial aid application.” Students and families should complete The Free Application for Federal Student Aid, regardless of their perceived financial standing. Submitting the form does not require the applicant to accept any of the subsequent offers. Applicants can even begin the process early online, updating material as it becomes available using the FAFSA 4Caster. Mark FAFSA deadlines on your calendar to secure eligibility.

Financial aid eligibility is determined by calculating student need, which is the difference between the Cost of Attendance and the Expected Family Contribution. Use the online calculation tools at finaid.org for further assistance.

Sometimes borrowers must rely on private loans in addition to their federal loans. Private student loans should be considered only after all other options have been exhausted. Irons directed all students considering private loans to evaluate the interest rates and in-school payments, use a co-signer, if available, with an excellent credit score to receive more favorable terms and read the fine print.

The downsides to private loans include a reluctance of private lenders to offer forgiveness—and the kind they do give comes with growing interest.

If a student’s only option is to add private loans on top of maxed-out federal limits, the student should reconsider the benefits of such a price. Always evaluate the risk of any foreseeable debt burden.

Webinar presenters:

Natala (Tally) Hart, senior advisor for economic access at The Ohio State University Karen E. Lanning, vice president of communications and research at the National Council of Higher Education Loan Programs (NCHELP) Edie Irons communications director at The Institute for College Access & Success