College-bound seniors will begin receiving their financial aid award letters in March. While exciting, it also can be an overwhelming process for students and families. How students finance their education can have long-term impacts on their personal finances. For educators, this creates a perfect opportunity to engage teens in a meaningful conversation, helping them to think through their options and to apply sound financial principles as they create a plan for success.
Remember, the rule of thumb for paying for college is to use free money first, your money second, and borrowed money last. See the infographic Prioritizing Options to Pay for College for more details.
Step 1: Compare Multiple Financial Aid Letters
When considering more than one potential school, it's important to compare the financial costs and aid. The Consumer Financial Protection Bureau has an online Compare Financial Aid tool that allows a student to look at the same information for up to three schools side-by-side.
Step 2: Understand the Net Cost of Attendance
The "net cost of attendance" is the total estimated cost to go to school (tuition, housing, meals, books, supplies, transportation and other education costs), and not including financial aid that does not need to be paid back, such as grants or scholarships.
If the school is using the Department of Education's Financial Aid Shopping Sheet, the net cost of attendance can be found in the box labeled "What Will You Pay for College." Students also can use the online Net Price Calculator Center to calculate the net cost of attending a specific institution.
Some grants or scholarships have conditions that the student must meet, such as maintaining a certain GPA to continue receiving aid. If the award letter includes conditional scholarships or grants, make sure the student understands the requirements and the potential cost if they do not meet the conditions (for example, if the student's grades slip for a semester).
Step 3: Explore Earned Money Options to Cover Costs
After free money, students should next look to money they have saved, or money they can earn, to pay for remaining costs.
If the student has money saved in various types of accounts, the most restrictive accounts should be applied first, such as a Coverdell Education Savings Account before a Roth IRA, which can be used for retirement if not depleted for school. CollegeInvest has a comparison chart of common college savings products and how the funds can be used.
If the student does not have enough saved money to cover costs, the next source would be earned income. The student's award letters will let them know if they qualify for work-study (the federal student aid program that subsidizes part-time employment while the student is enrolled in school). If work-study is not available, then students should consider whether they can work while attending school, and how they would balance work and school responsibilities.
Step 4: Borrowed Money as a Last Option
Student loan debt has surpassed credit cards as the No. 1 source of nonmortgage U.S. household debt. Even students who have all their net costs covered through free and earned money might still be tempted to accept a student loan for noneducational purposes, such as buying a car. It’s important for students to understand the long-term impact of these decisions and the pros and cons of different types of loans.
Students should use all federal loan options before considering a private loan. Federal loans have many benefits and protections that private loans do not offer, such as low fixed interest rates, flexible repayment plans, loan cancellation for certain employments, forbearance and deferment options. The Department of Education has more information on federal vs private student loans.
Types of federal loans include:
- Direct Subsidized Loan – no interest charged while enrolled at least half-time
- Direct Unsubsidized Loan – interest accrues immediately
- Direct PLUS Loan – parent loan, borrower must not have a negative credit history, and interest accrues immediately
Private student loans can have high variable interest rates and are not required to offer the same repayment benefits as federal student loans. Private loans generally cost more and typically require a credit check. Private loans should only be considered as a last resort.