Start college loan search earlyBy Jason Alderman
As college costs have escalated in recent years, students increasingly depend on their parents to help foot the bill: According to a recent consumer survey conducted by Visa Inc., nearly a quarter of those who attended college in the past five years cited their parents as the primary source of funding for tuition and room and board, trailed by government grants and government-backed loans (15 percent and 14 percent, respectively).
If you anticipate needing help to finance your child's college education, it's best to start investigating your options right away:
The first thing you'll need to do is to complete the Free Application for Federal Student Aid (FAFSA) form, which is required by virtually all colleges, universities and career schools for federal student aid, as well as for most aid from states and individual colleges. Get a FAFSA from your child's school's guidance counselor or financial aid office, by going to www.fafsa.ed.gov, or by calling 1-800-4-FED-AID.
Note that although the FAFSA filing deadline for federal loans for the 2008–2009 school year is June 30, 2009, many state and school deadlines are much earlier. Plus, you may be required to complete additional forms.
Several types of student loans are available, including:
- Campus-based aid. The Federal Supplemental Education Opportunity Grant (FSEOG), Federal Work-Study (FWS) and Federal Perkins Loan programs are government-funded and provided to students having the greatest economic need. Individual colleges administer some or all of these programs themselves. Filing deadlines are usually earlier than for an FAFSA.
- Subsidized Stafford loans are low-interest, needs-based loans where the federal government pays the yearly interest while students are in school. They have no loan origination fee.
- Unsubsidized Stafford loans are not based on financial need. Students are responsible for interest that accrues while enrolled in school. They have no origination fee.
- Banks and other financial institutions offer private student loans. They aren't guaranteed or subsidized by the government and typically carry higher interest rates than government loans, although you can borrow greater amounts. Details and rates vary widely.
- College-sponsored loans are offered by some colleges. Interest rates may be lower than federal student loans. Check each college's aid materials to see if they are available.
- Federal PLUS (Parent Loan for Undergraduate Students) loans let parents borrow for their children's college expenses. Interest rates are fixed – although higher than student loans – and there is a loan origination fee.
- Private parent loans are offered by banks and other financial institutions, usually at higher interest rates than PLUS loans. They may also have a loan origination fee.
- Some colleges also offer their own loans to parents, usually at rates below PLUS loans. Check each college's aid materials to see if they're available.
If college is still a ways off for your children, here are two tax-advantaged savings plans you can investigate:
- 529 Qualified State Tuition plans, where you save money for education expenses but don't pay federal (and in many cases, state) income tax on interest earned. Go to the U.S. Securities and Exchange Commission (www.sec.gov/investor/pubs/intro529.htm) or www.Savingforcollege.com to learn how 529 Plans work.
- Coverdell Education Savings Accounts are another way to save money for education where the earnings will grow tax-free until withdrawn. Check out the IRS Web site, (www.irs.gov/taxtopics/tc310.html), for more information.
Start your college financing homework now – this is one test you don't want to take unprepared.
Jason Alderman directs Visa's financial education programs. Sign up for his free monthly e-Newsletter at www.practicalmoneyskills.com/newsletter.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to your situation and about your individual financial situation.<< Back to Practical Money Matters
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