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Yay! You’re about to go to college. Boo! You and your family may have to borrow money to pay for it. In this Edmit guide, we’ll help you figure out how to fill last minute tuition gaps. While student loans are a primary way to do so, you can find ways to borrow less and at the lowest interest rates. We’ll also give you tips for living a full college life without spending a lot of cash. After all, would you rather overspend on textbooks or enjoy your college experience?
Our hope is that by the end of reading this Edmit guide, you’ll be confident in your overall paying for college strategy. And you’ll be able to talk to your parents about it.
Before you figure out how much you need to borrow, earn, or pay, you need to figure out how much you and your family have to cover after free money from the school and government.
Use the number the school gave you as the cost of attendance as the starting number. Then, subtract grants and scholarships.
*Note: If the cost of attendance seems depressing, don’t worry too much. We’ll tell show you how to cut it down a bit while living a better lifestyle later in this guide.
Private scholarships can also be deducted, depending on how the school evaluates them within your financial aid award. For instance, some schools deduct private scholarships from the amount of financial aid you receive from them. Others reduce the amount of student loans you receive or the expected family contribution. Call the school financial aid office to see how they’ll handle your private scholarships. This is a good time to ask about any scholarship money that might still be available, too. Sometimes students choose another school after being offered scholarships. This is your time to swoop in and get some extra scholarship cash.
As far as work study, it’s not guaranteed. Don’t subtract work income from the cost of attendance. Use work income to reduce living costs as you go.
When you finish this step, show your parents what your gap is. Then, you’ll move on to discussing borrowing and college funding gap fillers.
Student checklist for calculating the funding gap
If you haven’t done so already, fill out the Free Application for Federal Student Aid (FAFSA). The online form is the first step for applying for student loans AND lets the school and the government know you’d like money to pay for college. The school or the government offers money comes in the form of student loans, grants and scholarships.
Filling out the FAFSA form this close to beginning your fall semester doesn’t hurt your ability to get student loans or federal student loans. Federal Pell Grants can also still be awarded.
The only drawback to filling out the form this late is you may not get university grants that were already awarded to other students on a first-come-first-served basis. But you will have access to university grants and scholarships not yet awarded.
In this section, we’ll talk about borrowing both federal and private loans under your name. The reason we are talking about both types of loans them in the same section is because you should try not to borrow more than one year’s post graduation starting salary in total. Thus, if you’ve researched through Edmit, Payscale.com, or through your career office that your starting salary could be $40,000, you know you probably shouldn’t borrow an average of more than $10,000 per year.
Note: If your borrowing average is more than $10,000 per year, you may want to consider transferring colleges next year. You can use the Edmit college search tool to find one that may offer more grants and scholarships to you.
Borrow federal student loans in your name first.
You should accept federal student loans issued directly to you first. These loans have easy repayment terms, low interest rates, easy approval terms, and affordable loan limits.
You can borrow up to $5,500 as a dependent student in your first year if your parents qualify for federal student loans called Parent PLUS loans. If they don’t qualify due to adverse credit, then you can borrow a total of $9,500 in federal student loans – almost the full amount you should borrow if you’ll have a starting salary of $40,000 after graduation.
Within the borrowing limits are subsidized and unsubsidized loans. If you qualify for subsidized loans, you should borrow them. The main perk of these loans is that interest is not charged while you are at least a half-time student in college (and in a few other circumstances). For instance, you may not get charged interest when you are on a complete break from payments.
You may qualify for interest forgiveness if your income-based monthly payment is less than the total subsidized interest charged. For example, if your income-driven payment this year is $25 per month but the interest that accrues each month is $50 in subsidized loans, the government will pay the other $25 of interest until your income rises - for up to three years.
The maximum limit for subsidized student loans you can borrow during your first year is $3,500. These loans are based to some extent on financial need. Thus, you may or may not get approved for this type of loan. You also may get approved for a reduced amount. The interest rate for subsidized and unsubsidized loans issued before 5.05 percent for the 2018/2019 school year.
The next loan you should know about is unsubsidized loans. You should accept these loans before all private and Parent PLUS loans.Unsubsidized loans are similar to subsidized loans in that they have the same, low interest rate, flexible repayment options, and guaranteed payment breaks when needed. The difference is that interest adds up while in school.
If you have a gap to fill after federal student loans issued to you are exhausted, private student loans may be your next best option. Depending on your parent’s credit score, these loans may be much cheaper to borrow than parent PLUS loans from the government. For instance, PLUS loans issued for the 2018/2019 academic year had a 7.6 percent interest rate, while a student with a parent with good credit have gotten an interest rate of less than 4.5 percent for a private loan.
Why does your parent’s credit score matter in a loan issued to you? Because private student loans have similar standards for loan approvals as other bank loans do. As a student, you haven’t established a pattern of good credit and enough income to pay off the loan yet. Thus, if your parent agrees to cosign, agreeing to be legally financially responsible for the loan, you can get private student loan funding.
Just remember, your parent is considered a co-borrower. They will have to repay the loan if you don’t. Thus, it’s very important that you only borrow based on what you can realistically afford to pay back. If more money is needed, discuss with them about borrowing in their own name. We’ll also talk about other ways to save money beyond borrowing at the tail end of this guide.
Student checklist for filling out the FAFSA and borrowing student loans in your name
Below, we’re going to show you what we are telling your parents in their version of this guide. Read it carefully, just so that you’re ready to talk about it with them when you prepare for a family discussion about your college costs. After you read the parent section, we’ll get to the fun section, filling in tuition gaps and living a better college life.
What we’re telling your parents to think about:
Don’t worry if the amount they can afford doesn’t cover all college expenses. We’re going to over your federal and private student loan options. Then, we’ll show you how to get the lowest interest rates.
First, how much you should borrow as a parent is a little more complicated than deciding what your student can borrow. You potentially have expenses tied to sending your other kids to college, your own debt, and saving for your retirement. One guideline is to look at your own budget and see if you do have room for payments after your own savings and retirement are taken care of. When you calculate loan payments using either the federal Repayment Estimator or Edmit’s student loan calculator to plug in numbers to see what that monthly number adds up to for overall borrowing. For example, a $60,000 Plus loan consolidated for a 25-year period has a monthly payment of $200 per month.
If you can’t afford the annual cost of the college after evaluating loan options, your family may have to look at your student transfer to a less expensive college as early as the next semester or postponing college for a semester. If you are unsure what you can afford, you should speak with your financial planner or a credit and budgeting counselor at a local credit union.
Next, let’s look at your borrowing options.
If you have good credit, private student loans for parents are generally the better deal. Parent PLUS loans for the 2018 / 2019 school year were issued at a rate of 7.6 percent, while private student loans for parents were issued at a rate of 6 percent.
Parent PLUS loans, issued by the federal government, also have origination fees, a charge to borrow the loan from the second the loan is issued. A 4 percent origination fee adds $800 to a $20,000 loan, even if you paid back the loan the same day.
If private student loans to parents are so much less expensive, why would anyone borrow parent PLUS loans from the federal government?
Despite higher borrowing cost, there are still several advantages to federal PLUS loans:
Parent PLUS loans are easier to get approved for than private loans
The main perk of Parent PLUS loans is you don’t need great credit to get approved. The government spells out minimal standards for adverse history that could cause denial, such as debt on your credit report with an outstanding balance of $2,085 that is 90 days or more delinquent as of the date of the credit report.
The loan amount approved isn’t based on income.
You can borrow as much as you need. However, you need to think carefully about whether you can pay it back. It may not be wise to borrow $120,000 over the course of 4 years if your family income is $60,000.
Parent Plus loans have income-driven options, too.
Students generally have more options for repayment than parents do. However, there is one option for income-driven repayment option parents do have: income-contingent payments. To qualify, parents have to consolidate Parent PLUS loans when they finish borrowing for your education. You may have your own student loans already form your own education. Keeps these loans separate.
Note: When using the repayment estimator for Parent PLUS loans, calculate them as a Direct loan so the income-contingent payment pops up. Also, calculate your Parent PLUS loans and your student’s loans separately as they have additional repayment options that you don’t. Your loans for your own education have additional options as well.
Private parent student loans can have a higher monthly payment, even though they have a lower interest rate.
A private student parent loan with a 10-year repayment term at 6 percent would have a payment of about $670.00. While you pay less interest, you may not be able to afford an extra $470 versus a Parent PLUS loan.
Checklist for borrowing student loans in your name
TIP: Pay extra attention to the meal plan and work suggestions. They’ll help you have a better on-campus life. :)