Money Essentials

Paying for college: Financial aid options

From college grants to school loans, you have a lot of options for financial aid

Even if you follow a regular savings plan for college, you may still come up short. Rest assured, you won't be alone.

Students at four-year public institutions received an average $6,100 in grant aid and federal tax benefits for 2010-11. At private schools, aid averaged $16,000.

Several factors are considered for aid-eligibility, principal among them your income; your non-retirement assets; how many kids you have; how many of those children are in college; and their income and assets.

There are several sources of financial aid for college. Grants and scholarships are the best because the money is usually tax-free and never has to be repaid. These include federal Pell Grants, primarily for low-income families, which offer a maximum of $5,550 per student for the 2011-2012 academic year. The max amount can change each award year and depends on program funding.

The Federal Supplemental Educational Opportunity Grant, which is administered by colleges, offers need-based awards up to $5,500 for undergraduate and $8,000 for graduate students per year. Most students who receive need-based grants also are expected to participate in the federal Work-Study program, whereby students work part-time jobs to meet the family's remaining financial need.

Finally, there are loans, which come in two basic varieties: need-based, which help families who can't afford college costs; and non-need-based, designed to fill a gap when the family doesn't have available cash, but may have illiquid assets.

The two most common and attractive need-based loans are the Perkins and the Stafford, both federally funded.

The Perkins loan is made directly to students; parents need not co-sign this loan. Students don't need to begin repaying the loan until nine months after they graduate, leave college, or fall below half-time student status; and they have 10 years to repay the loan. With a Perkins, one pays a low interest rate (5%), and interest doesn't accrue until repayment begins.

A school's financial aid office determines how much a student gets, but the cap on borrowing for undergrads is $5,500 per year, with a cumulative limit of $27,500. Graduate students can borrow $8,000 per year to a maximum of $$60,000 (which includes amounts borrowed as an undergraduate).

With the subsidized Stafford, interest does not accrue until six months after a student graduates, leaves or falls below half-time status. Dependent students can borrow up to maximums that rise the longer a student remains in school, between $3,500 freshman year and $5,500 junior year and beyond.

Top strategies to maximize aid eligibility

1. Save money in the parent's name, not the child's name.

2. Spend down student assets and income first.

3. Pay off consumer debt, such as credit cards and car loans.

4. Maximize contributions to your retirement fund.

5. Accelerate necessary expenses, to reduce available cash.


The unsubsidized Stafford is a non-need-based loan for which most students who apply for aid are eligible. Interest accrues immediately, but payment may be postponed until after graduation. Dependent students can borrow up to $2,000 per year.

Another common, non-need-based loan is the PLUS, or Parent Loans for Undergraduate Students. This loan is made to parents, not students. Parents can borrow up to the annual cost of attending college, minus any financial aid received. This loan is dependent on your credit history -- but it's based on a lack of bad credit rather than a requirement of good credit, says Cindy Bailey of College Board.

If you have a bad credit rating, such as that resulting from judgments or liens against you, you may still be eligible for a PLUS if you can find a co-signer willing to take responsibility to pay the loan if you can't.

For PLUS loans made to parents on or after July 1, 2008, the borrower has the option of beginning repayment either 60 days after the loan is fully disbursed, or six months after the student ceases to be in school on at least a half-time basis.

The repayment period can last 10 years. The interest rate is fixed at 7.9% for direct PLUS loans and 8.5% for federal PLUS loans.

There are also private loan options such as bank lines of credit; home-equity loans; and Signature Student loans, which are offered by Sallie Mae. Private loans such as these are less appealing than the unsubsidized Stafford, however, because repayment may start immediately, rather than being postponed until the student graduates.

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