As the school year comes to an end, high school seniors are saying goodbye to teachers and friends as they prepare for their journey to college. Over the last four years, these students have paid their dues by making the grades, participating in extracurricular and volunteer activities and cramming for the ACTs and SATs. Their parents have based almost all major life decisions on getting them into a good college, from deciding to reside in a top-notch school district to saving every extra penny in a 529 college savings plan. Finally, all of the hard work and sacrifice has paid off and the students have been accepted into college, perhaps the school of their dreams. Now they face just one more challenge: the financial aid award. What happens if they discover their dream is financially out of reach?
Financial aid can be one of the most confusing parts of the admissions process. The programs and awards offered by colleges and universities are extremely difficult to understand and can even be misleading. One of the biggest concerns I have is the effect this flawed system may be having on today's youth. How many exceptionally bright students are shying away from our top universities because they are perceived as elite?
Sure, figuring out how to pay for college can be scary, but it doesn't have to be. Understanding how the process works and taking advantage of available resources can help parents and students maximize the potential for a rewarding college education.
Financial Aid - What You Don't Know Might Hurt You
Financial aid award letters have become so complex that even highly educated parents are left wondering what their actual out of pockets costs will be. We're all familiar with the Free Application for Federal Student Aid (the FAFSA), which is used to calculate your expected family contribution (EFC) toward college expenses. But what most people don't realize is that hundreds of colleges use their own methods when determining the amount you can afford to pay. These formulas sometimes result in a number that is greater than what was stated on the FAFSA, leaving parents and students baffled. Imagine a middle class family's reaction when they find out their child's school expects them to give up nearly half of their annual earnings to cover costs? And that's just for one child!
To be able to plan effectively, parents and students need to focus on figuring out the net cost of each school they are considering. This may be easier said than done, but it's certainly not impossible. A good start would be to set aside 15-20 minutes to complete the College Board's Net Price Calculator. This personalized tool is a great way to estimate your actual cost vs. the sticker price of particular schools. As you examine your award letters, don't be afraid to contact the school's financial aid office if you have any questions or believe there is any missing pertinent information. Remember that scholarships amounts stated are not always set in stone. I've known families who have received an increase in their award just by asking for it! If you have offers from multiple schools, you can see if your desired school will match or beat them. Once you calculate what your actual costs and awards will be, consider the amount of debt you'll have to incur to attend each school. Too many students mistake loans for grants and wind up struggling with repayment after graduation.
Almost every school is unique in the way awards are given, which is why it is crucial to explore all options. According to a recent NY Times article, the average family with a household income at or below $48,000 paid less than $5,000 out of pocket to attend Harvard, Duke, the California Institute of Technology and the Massachusetts Institute of Technology. Other schools demanded up to three times that amount. How can anyone expect a teenager to understand all of this? It's no wonder that many low-income families simply assume that top tier schools are out of their reach.
Is Anything Being Done to Solve These Issues?
In an attempt to simplify the financial aid process, the U.S. Department of Education has developed a uniform shopping sheet that colleges may send to prospective students. In addition, they have also started posting online reports that uncover which schools are not following federal rules governing financial aid. While this is a step in the right direction, the shopping sheet is not mandatory so many schools have yet to adopt it, and the online reports are far from user-friendly.
The financial aid conundrum is certainly a societal problem. While it will require more creative solutions on the part of schools, government and the private sector, some of the responsibility must be borne by the parents and students. Start doing your homework now. The FAFSA website is an excellent resource, and even provides an informational video on how the process works. Sallie Mae offers an Award Letter Analyzer Tool that helps students make apples-to-apples comparisons of award letters from different schools. To use the tool, you'll need to register for a free account - just for doing so you'll be entered to win $1,000. How's that for an award?
In my experience those who are determined to attend college will play a significant role in making it happen. Students who work toward reducing their own tuition by means of merit or athletic scholarships or simply building savings from a part-time job will often end up being more successful than those who rely on parents or government-sponsored programs. According to a 2013 national study by the University of California, Merced, students who paid for their own college graduated with a higher GPA than those who had help from mom and dad.
Of course, it's probably unrealistic to expect a high school student to be able to cover an entire tuition bill with a paycheck from a part-time or summer job, but it's not a bad idea to take some of those earnings and stash them away into a 529 account. Every dollar saved will reduce the amount of loans that will need to be taken out, lessen the need for aid and help the student feel invested in their own education.
However, Brian McBride, an associate producer at CNN and a 2010 graduate out of Arizona State University, managed to pay off $26,500 in debt in just two years. He explained his plan on CNN Money's website. McBride owed $20,500 in student loan debt and $6,000 for his 2003 Honda Civic. He said he tackled his car loan first to pay down a higher interest rate during a six-month grace period following graduation on his student loans. In his first job out of college as a local reporter in Green Bay, Wisc., he lived frugally while working for $13 an hour. Read more here.
From her story: I started by making a budget for each of my expenses, and then made it a point to look at my bank account and my budgets spreadsheet once a week to categorize all of the money going in and out. I also calculated my monthly expenses, and tried to determine what it would take to put $500 to $1000 extra each month–on top of the $800 in minimum payments I was already making–toward putting a further dent in my loans. Since I couldn’t do it based on how much I was earning, I got creative: - Rent: I gave up my Dupont neighborhood studio and found a roommate in a cheaper neighborhood, which halved my rent. Cable I canceled my subscription, and streamed shows for free on my computer instead. - Gym: Rather than pay $95 a month for health club membership (D.C. gyms are expensive!), I started using the free facility at work, joined a running club on Meetup and streamed free workout videos online during rainy days. - Phone Bill: I limited my data usage and calls, and switched to a plan that cut my monthly bill by $30. I even told friends not to text me! - Entertainment: Instead of relying on happy hours and dinners out, I found free events on Meetup, like hiking trips and book clubs. Or I’d invite friends over for food, and they’d bring their own beer. I also only ate out if it was beneficial to my career, like networking lunches. - Travel: I went to Peru in the winter of 2010, and this year, I’m planning on Malaysia — both countries where the exchange rate is great. I stayed in hostels, and ate where locals do instead of going to pricier tourist spots. Plus, I put a little aside each month, so the expense is built into my budget and doesn’t take away from my savings. (Make travel a Priority Savings Goal in your own budget.) Read the whole thing here.
Kristin Wong paid off $12,000 in a year, despite having only a $10/hour job. In an op-ed for MSN Money, among other things, she said she moved in with her parents and held back from taking a trip or shopping for new clothes.
Sarah Knutson explained how she paid off $30,000 in debt in two years: With her first job, she made $2,000 a month and lived at home. "Each month, I repaid $1500 in debt, leaving $500 of 'fun' money," Knutson explained. She also skipped skiing and snowboarding trips.
Ohio state Rep. Christina Hagan may be an elected lawmaker, but she's waiting tables and working at her family's heating & plumbing business to try to pay off her $80,000 in student debt.
A couple paid off $30,000 in one year by skipping out on having a cell phone at all, and skipped out on having Internet and cable TV packages. "We stuck with dial-up [Internet]," one of them said.
Art Institute of Atlanta graduate Amy Kroezen collectively owed $116,000 with her husband. Neither of them made more than $35,000 a year. They decided they would commit one of their incomes solely to paying off their debt. Among other steps, she took to building her own furniture since they couldn't afford it, constructing a king-size bed, dining table and toy box. She made her own cleaning supplies and grew some of their own food. After four years, they've paid off $103,168 of their student loan debt.
Kent Lister paid off $36,000 in 7 years, saving $2,907 in interest. Tax returns had to go back into his loans, he picked up a weekend job, and then "snowballed" his payments: "When you pay off one loan/recurring payment, add that amount to your next loan. Once that loan is paid off, take those two amounts and put it into your third payment (like a snowball, it just keeps growing). Repeat until all debt is cleared."
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