Financial Aid Inside and Out

A smorgasbord of grants, loans, scholarships, and work-study options form one half of the student financial aid equation. The student's need, talent, and time and his or her family's financial circumstances comprise the other half. Bringing both sides of this equation into strategic balance to pay for college can be as difficult as solving a partial differential equation. But it can be done…with a little help.

Financial aid includes a number of basic options:

• Grants are cash gifts, free money. Whether awarded by your school, a private entity, or the government, grants are based on need. The biggest federal grant program for undergrads is the Pell Grant. Up to $3,000 per year goes to students with the highest demonstrated need. Also check out the Supplemental Education Opportunity Grant and, for matching funds to state grants, the State Student Incentive Grant (another federal initiative).
  
  
• Scholarships recognize accomplishments in academics and other areas, such as athletics or music; they also may be awarded because of need. Like grants, scholarships don't require repayment. Because the competition for scholarships is fierce, start the application process at least a year in advance. Students should talk to their guidance counselor and check the many Internet resources.
  
  
• Work-study is a federal program through which the student earns money by working at an approved job.
  
  
• Student loans are sums borrowed by parents or the student under contract and often with lengthy repayment periods. Federal student loans are available through the Ford Direct Lending Program (FDLP), which offers loans directly through the federal government, and the Federal Family Education Loan Program, which provides loans to students through approved commercial lenders.

Federal family education loans
The most widely used FFELP loans are Stafford loans and PLUS loans. Stafford loans are made directly to students and capped at 8.25 percent. They are limited to $2,625 for the first year, $3,500 for the second and $5,500 for the third, fourth and, if necessary, the fifth years. Graduate students can borrow up to $8,500 per year. Six months following completion of school, repayment begins.

PLUS loans are made to parents. There is technically no dollar limit to PLUS loans, but payments begin as soon as the ink dries on the loan.

Choosing between FFELP and PLUS loans will require some strategic planning with parents and financial aid counselors. Generally, however, the student can get lower interest rates on Stafford loans and can defer the interest payments Note: With a subsidized loan, including the Subsidized Stafford Loan or Perkins Loan, interest is paid by the government while the student is in school, during the six-month grace period, and during any deferment periods. Subsidized loans are based on financial need. If your loan is unsubsidized, the government does not pay the interest. You are responsible for the interest from the date the loan is disbursed, even while you are in school.

For details on the more than $40 billion in Student Financial Assistance programs available through the federal Department of Education, please visit their Student Financial Assistance site.

Are you sure you want to borrow?
Your loan is a contract, legally binding, and enforceable. If you don't complete your education, sorry about that, you still must make payments. That new degree doesn't get you a job? Your obligation to repay remains unchanged. You must continue to make payments even if you're not billed or reminded. You must continue to pay while a request for a deferment or forbearance is being considered. And whenever your status changes – you graduate, drop below half-time attendance at school, transfer to another school, or change your name, address, or social security number – you must notify your loan manager.

How do I apply?
First, check with the financial aid office at the colleges to which you are applying. If the college requires a specific financial aid application, read it, complete it, and don't miss deadlines.

Apply for federal financial aid by completing a free Application for Federal Student Aid (FAFSA). Use the US Department of Education site listed above to access FAFSA on the Web. All colleges require the FAFSA from students who are applying for federal aid, and it also serves as the application for state scholarships. You'll need a number of documents handy to complete the FAFSA, including income tax returns for the fiscal year that just ended, W-2 and 1099 forms, current bank statements and mortgage information, non-covered medical and dental expenses, business records, investment records, and social security numbers. To complete the FAFSA on the Internet, go to www.fafsa.ed.gov/.

How do I get approved?
Federal financial aid is based on the cost of your planned education minus the expected family contribution – the amount a family is expected to kick in. The maximum loan amount for which you will be eligible will be based on combined student and parent income and assets, not including the value of the home. The calculation is typically based on 35 percent of the student's assets and 50 percent of the prior year's student earnings. The parents' contribution is based on a number of variables, including number of parents with earned income, age of the older parent, family size, income and assets.

You'll increase your chances of getting approved for a loan by following these guidelines:

• Spend student assets and income first.
• Pay off consumer debt.
• Minimize capital gains.
• Keep savings in the parent's name.
• Minimize educational debt.
• Don't use a trust fund to shelter money; this may have the reverse effect.
• Encourage generous others (rich uncle, grandparents) to wait until after graduation before giving money.
• If you need a home equity loan and you have a second home, take the loan out on the second home and pay off the mortgage loan on the first.
• Maximize the number of family members in school at the same time to maximize the money available to each.

A final word
Be sure you've thoroughly researched your loan options, rights, and responsibilities before applying for a student loan. Read all the financial aid publications you can find. When you apply for a loan, remember that timing, accuracy, and honesty are critical factors. And when the day to begin repayment comes, determine to pay on time no matter what it takes. You will protect your credit record, strengthen your bargaining power for future credit, and potentially save thousands of dollars through favorable credit terms.