Nickeled and Dimed

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This week’s Open Mic question comes from high school student Sam Lewis in Cleveland, Ohio.  Sam will be attending college next fall and is going through the process of applying for financial aid.  Here is her question:

I am currently in the process of figuring out how I will pay for college and applying for financial aid, and I have so many questions I don’t even know where to start!  Could you explain to me the process of which portion of financial aid needs to be paid back, how and when you pay it back, and how much the payments typically are?  Also, is there any other form of financial aid available other than the government Stafford loans?  I am responsible for paying for my entire education myself and am so confused on the entire process.  I want to make sure I get everything right.  Please help!

Thanks for the question, Sam.  As someone who recently graduated college and is now paying back these loans, I can tell you this is a very important topic that I wish I would have explored more before I started college.  It’s great that you are being proactive and trying to learn as much as you can before you start.  Let me break down each of your questions and try to answer them individually.

1. Which portion of financial aid needs to be paid back?

The only forms of aid that do not need to be paid back are grants and scholarships.  If you are lucky enough to receive either of these two things, it is free money that you will never be required to pay back.  The different types of scholarships are nearly endless, so search far and wide to see if you can find one (or two, or three, or four, etc.) that you meet the requirements on.  Scholarships for grades or athletics are the ones everyone knows about, but there are countless others available for many other reasons.  Ask your future college for a list of scholarships offered and check out this site for thousands of other scholarships.

Your student loans, on the other hand, will need to be paid back.  After filling out your FAFSA, you will find out how much government financial aid you will qualify for.  These loans can be broken down into two categories, lets take a look at each, subsidized and unsubsidized.  Let’s take a look at each:

Subsidized Loans

Subsidized loans are student loans that the accrues no interest while you are still in school.  The interest begins accrueing when you start paying back the loan after college.  This is a huge advantage and will save you thousands of dollars in interest expenses.  Subsidized loans are awarded strictly on the basis on need.  Basically the less money your parents make the more subsidized loans you will receive.

Unsubsidized Loans

Unsubsidized loans are simply the opposite of subsidized loans.  They do accrue interest while you are still in school and not yet paying back the loans.  The interest is also compounding, which means you owe interest on the interest already accrued.  These loans are easier to get but much more expensive to you.  You want to stay away from unsubsidized loans as much as possible.

Obviously, you want as much of your financial aid to be in subsidized loans as possible.  From the small amount of unsubsidized loans I had in college, they accrued over $3,000 during the time I was in college.  Avoid unsubsidized loans as much as you possibly can.

2.  How and when do you pay the loans back?

Payments on your student loans are deferred until six months from the day you graduate college.  If at any time after graduating you choose to go back to school for grad school or simply a different major, your loans will go back into deferment.  So while you are in college you will not have to worry about paying back any portion of your student loans.

How you pay them back is by simply sending a check to the institution you received your loans from.  The easiest thing to do is to set up automatic monthly payments to be withdrawn from your checking account.  But again, this is something you do not have to worry about until after you graduate college.

3. How much will my payments be?

This depends on how much you have in loans, what the interest rates on them are and what repayment method you choose.

As a point of reference, I have about $34,000 in student loans and pay about $250 a month.

There are two ways to reduce your payments after graduating.  One is to consolidate all your loans into one, which will usually lower your monthly payment.  Another is to stretch out the period over which you will pay the loans back.  Most loans will offer terms as low as ten years and as high as 30 years.  There are also payment methods best on your level of income.  As you earn more income, your monthly payments increase.

Student loans generally have fairly low rates, so they are not something you have to be in a huge hurry to pay off. 

Are there other loans avaible besides the government Stafford loans?

Aside from the government financial aid, you can also get private student loans from banks and other lending institutions.  But with the current credit crisis, these are becoming tougher and tougher to get.

I would recommend taking as much government aid as you can get and if you still need further aid, then look into securing a private loan.

Summing Up

Student loans are one of the few forms of debt I encourage.  If it is necessary for you to go into debt to fund your education, you should absolutely do it.  A college degree is worth over a million dollars in your lifetime, which is a fantastic return on your student loan investments.

However, that does not mean you should simply accept that student loans are your only way to pay for college.  Here are a few tips I would suggest having recently been through college (most of these I did not do myself, but I badly wish I would have).

• Explore any and every scholarship.  Check out the site I listed above.  You will be amazed at the crazy things they offer scholarships for.  After you are in college you will see many scholarships offered within whatever you choose to major in.  Apply for ALL of them.  Any amount of scholarships you get means less money owed when you graduate.
• Take summer courses at some kind of community college or “branch”.  Not only will this help you finish college faster, you will pay less than half the price of a major university.  This can significantly lower the amount of student loan debt you will have when you graduate.
• Work while you are in school and pay cash for as much of your tuition as you can.  Aside from summer, I did not work during college until my final year.  I badly wish I would have worked all four years.  Just working part-time I could have paid off a large chunk of my tuition each year.
• Don’t declare a major until you are positive about what you want to do.  I switched majors my senior year and it added a year and half of school and student loans.  By waiting as long as possible to declare a major you can avoid wasting tuition on classes you will not need for whatever you actually major in.
• Don’t transer.  Again another mistake I made which caused me to lose several credits from classes I had already taken and paid for.  Stick with your college until you are done.

You are about to enter four of the most fun years of your life.  But if you aren’t careful, your years after college could be spent paying back a lot of debt.  Educate yourself on the financial aid process and you will be ten steps ahead your classmates.  Oh yeah, and avoid credit cards!!

What advice would you give Sam about the financial aid process?  Do you have any creative ways to finance college without student loans?

If you would like to be featured in a future edition of Open Mic, send your personal finance related question to centsabilitytowealth@gmail.com.

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