How to Get a Grip on Student Loans

04/25/2011 2:01 pm EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

If your family includes a high school senior who is planning to attend college, the past four months have been a nightmare of paperwork—starting with the Free Application for Federal Student Aid (FAFSA) and right on through the application process.

Then came the acceptance letters, followed by the financial-aid offers from the schools. And now you face the kitchen-table dilemma that one reader described to me, asking for help:

“Our son has heard back from most of the colleges he applied to—with only one rejection. Fortunately, two of his three top choices accepted him. They’ve all sent some form of aid package, and each is different.

How do we decide? This feels like the weight of the world!”

Attached was a list of the aid packages, and a request for an analysis.

Since most schools have a May 1 deadline for responding to acceptance letters with a non-refundable deposit, the moment of truth is here for many families. The joy of acceptance has been replaced with the reality of choice based on financial aid.

Reality Check
My first advice to this reader, though he didn’t ask: Please let me say that you lost control of the process months ago!

I know you’re from the Chicago area. Why are all of your son’s choices out-of-state schools, including two in California?

For sure, that has added to your family’s tuition costs in a big way, as well as creating additional travel costs. I think it’s important that every senior (too late now) apply to an in-state school—or even consider going to community college for two years—in order to hold down costs and future loan repayments.

For example, I saw these numbers on your spreadsheet about the University of California, Berkeley:

  • Total costs: $54,464
  • Total aid: $52,818.

It seems like there isn’t too much of a gap—but the issue is in the details of the offer.

Every school you listed had the same “expected family contribution” (EFC), as determined by the FAFSA form you filed in January. Yours is $20,385.

So when you pick a school that costs $54,000 a year, you know that you will be taking on a lot of debt, or hoping for some free money in the form of grants, work-study programs, or scholarships that do not have to be repaid. You received only about $4,000 in work study and grants.

In this case, the gap is nearly $30,000 a year in loans—every year, assuming that the loans are renewed.

That means this education is going to cost you and your son nearly $120,000—plus interest!—until those loans are repaid. That’s why it pays to start out with a lower-cost, in-state school on the application list.

Comparing Aid Packages
When you compare a package of loans, you are basically comparing interest rates, as well as terms, such as when interest starts accruing. You are also deciding who will be responsible for the loans—parents or student.

Each of your loan packages offers a complicated combination of Perkins loans, Federal subsidized Stafford loans, Federal Parent PLUS loans, and unsubsidized Stafford loans. All of these government-sponsored programs have the same end—money for tuition—but take (sometimes radically) different paths to get there.

And even though these loans fill the cost gap, they are far from a good deal when it comes to interest rates. The Federal Stafford Loan has a fixed interest rate of 6.8%, and the Federal PLUS loan has a fixed rate of 7.9%. Perkins loans have a fixed interest rate of 5%.

All that interest can add up as you repay after graduation.

There are several online tools to help you compare aid packages, and the cost of repayment. Start at CollegeBoard.org, by clicking on the “College Planning” tab. Then click on the green tab “Pay for College.” On that page you’ll find a link to the “Compare Aid Awards” tool.

You can compare up to four schools—and the types of awards included in this calculator cover all those you’ve listed. All you have to do is fill in the blanks for the offers from the four schools you’re comparing.

Then go to Finaid.org and use their calculators to compute the monthly and total repayment costs of this loan package.

Words of Advice from the Pros
Want help? You don’t have to simply accept the aid that is offered, according to Reecy Aresty of PayLessForCollege.com, who specializes in helping you gently negotiate a higher award of money that does not have to be repaid.

Aresty offers a free review of financial-aid packages to my readers. If you hire him to negotiate on your behalf, the fee ranges from $195 to $395, depending on the number of schools involved. You can e-mail him at Reecy@PayLessforCollege.com.

Says Aresty: “Although May 1 is the deadline for non-refundable deposits at many schools, some families opt to make multiple deposits in order to keep the aid appeals process going beyond May 1.”

He also notes that if the aid offers are close, it may be worth losing a deposit at one school to gain more grants of money at another.

Signing on for a financial-aid package is one of the largest financial decisions any family can make, so do your research and don’t just look at the bottom line. Like your home mortgage, you expect to repay this loan over the years, while the value of the asset—your home or your education—grows over the years.

As we’ve all learned, that’s a good idea over the long run—but the payments can be a huge burden over the short run.

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