Not All College Loans are Made Equal: Knowing a Smart Loan from a Bad Loan

Word of the Week

Interest (n). The fee you pay for borrowing money as part of an educational loan. Usually, interest is charged monthly. The fee is calculated as a percentage of the total amount you borrowed, also called the interest rate. For example, if the interest rate is 3.4%, and your monthly payment is $100, you owe an additional $3.40 each month, for a total payment of $103.40 per month.

Bank

Much of the information in the media about college loans is terrifying. Stories about students and graduates unable to find jobs and drowning in debt seem commonplace. National student loan debt recently surpassed credit card debt. However, not all loans are made alike, and sometimes borrowing money is a good decision that allows a student to attend his or her best fit college. The key is to understand the different types of loans, choose the least expensive loans, and to understand the size of payments post-graduation.

Types of Loans

Just like scholarships, loans are financed by a number of different agencies. Who provides the funding for the loan can change how expensive the loan will be for the borrower. Some loans are also only available to families who demonstrate financial need.

Choose loans that will be the least expensive to repay. Usually, federally funded loans with interest rates that don’t change are the best choice. Big Future at the College Board has a helpful chart comparing loan types and interest rates.

Federal Government Loans—Need Based

Federal Direct Perkins Loans

These loans are awarded by the college/university to students with the highest amount of financial need.

Interest rate: 5.0% (fixed)

Federal Direct Subsidized Loans

These loans are subsidized, which means the federal government pays the interest while the student is enrolled in school. Students must begin re-paying the loan with interest six months after they are no longer enrolled at least half-time in college.

Interest rate: 3.4% (fixed)

Federal Government Loans—Not Need Based

Federal Direct Unsubsidized Loans

While the government provides the funding for these loans, they are not subsidized, which means students are responsible for paying the interest that adds up while the student is enrolled in college. Over time, the student ends up paying more.

Interest rate: 6.8% (fixed)Loan post

Federal Parent PLUS Loans

Unlike all the other types of loans listed here, these loans are available to parents or guardians. Parents can borrow the entire amount of a college education minus other financial aid.

Interest rate: 7.9% (fixed)

State Loans

Some states also finance educational loans. While Washington DC does not operate a loan program for students, students may be eligible for a college loan from the state they attend college. For examples, see MEFA Loans in Massachusetts and NJCLASS Loans in New Jersey. The U.S. Department of Education also provides a list of all U.S. State Boards of Higher Education.

Private Loans

There are other ways to borrow money for college. Private loans, sometimes referred to as alternative loans, are not sponsored by the government and often have higher interest rates than federal loans. Students and families pay more over time. Private loans should be a last option.

  • Banks offer a range of private loans with varying interest rates. They often require a parent or guardian to cosign with a student. The parent is therefore responsible for the loan repayment if the student cannot pay.
  • Some colleges and universities may also offer loans as part of their financial aid package. Make sure to ask about the interest rate and repayment terms of the loan.

No Loans are Free

All loans must eventually be repaid, so it’s important for students to fully understand what current borrowing choices will mean for their future. In most cases, it is the student’s responsibility alone to pay back a college loan. As a family, it is important to discuss post-college graduation budgeting and financial planning. Consider these questions:

  • If the parents decide to take out a Parent PLUS Loan or other private loan that requires repayment to begin immediately on a monthly basis, is it a feasible within the family’s budget (including if an unexpected expense occurs such car home maintenance, medical emergency, etc.)?
  • How much will the student’s total loan payment(s) be after college?
  • Using estimated expenses for necessities such as housing, food, and transportation, how much will the student need to earn directly after college in order to meet monthly loan payments?
  • Is the resulting salary figure a realistic number for a new college graduate? If not, the college in consideration might not be the best financial choice.

Loan Forgiveness

A few programs allow borrowers in certain fields to qualify for loan forgiveness.

  • Borrowers who pursue a career in public service are eligible for loan forgiveness of Federal Direct Subsidized and Unsubsidized Loans after 10 years if they have made 120 monthly payments towards the balance of the loan. Public service includes federal, state, and local government work, employment with tax-exempt non-profit organizations, and certain private organizations that provide public service such as the military, health providers, and emergency response workers.
  • Borrowers who teach in certain low-income schools full-time for five consecutive years may be eligible for loan forgiveness or loan cancellation. The Federal Direct Subsidized and Unsubsidized Loans and Perkins Loans are eligible loans for this program.

Tools: Loan Calculators

Loan calculators provide a figure for expected monthly repayment, based on the amount of a loan, designated interest rate, and selected repayment schedule.

FinAid.org Loan Calculator

College Board Loan Calculator

Still have questions about loans? Leave us a comment here or send us an email: dcpscollegereadiness@dc.gov.

Please remember that this post is intended for informational purposes. Always consult the college/university financial aid office and/or a tax professional for financial advice.

Scholarship Highlights – May 10, 2013

Team DC Scholarship

June 1, 2013

Max Award: $2000

Student athletes who identify as lesbian, gay, bisexual, transgender and/or queer are eligible for the Team DC Scholarship.

Development Fund for Black Students in Science and Technology

June 15, 2013

Max Award: $2000, renewable for four years

African-American students majoring in or planning on majoring in a Science, Technology, Engineering, or Math (STEM) field are eligible for this scholarship. Students must be planning on attending one of a specified list of Historically Black Colleges/Universities in Fall 2013.

Herb Block Foundation Schoalarship

July 7, 2013

Max Award: $8000, renewable for two years

Residents of the DC area who are attending an area community college in Fall 2013 are eligible for the Herb Block Foundation Scholarship. Applicants must show financial need. The award is intended as a “last dollar” award to bridge the gap between what the student can pay and other financial aid already awarded.

Scholarship Highlights – May 3, 2013

Women’s Sports Foundation Linda Riddle Endowed Scholarship

May 10, 2013

Max Award: $3000

Female athletes who have participated in high school sports and are planning to pursue athletics in college are invited to apply for this award.

Society of Women Engineers Scholarship

May 15, 2013

Max Award: $20,000

The Society of Women Engineers Scholarship Program provides financial assistance to women admitted to accredited baccalaureate or graduate programs, in preparation for careers in engineering, engineering technology and computer science.

Educated Eats Scholarship

May 31, 2013

Max award: $2,500

Students who have at least 400 hours of culinary/food service experience and minimum 2.75 GPA are eligible to apply. Students should be pursuing the culinary field and current food industry/culinary professionals wanting to deepen their study.

Net Price vs. Sticker Price

Word of the WeekStack of quarters

Net price (n.) The full cost of attendance for a particular college, minus scholarships and grants awarded to a student. Cost of attendance includes tuition and fees, room and board, books, transportation, and other miscellaneous expenses. The net price for a college will be specific to each family because it is based both on a family’s financial situation and the financial aid policies of the college.

Why is Net Price Important?

As high school sophomores and juniors begin the college search and start to look at how much college can cost, some families might experience sticker shock. Many private four-year colleges have a listed price of over $40,000 yearly, and the cost of public state university increased a record 8.3% last year alone. Families may even find themselves saying, “Let’s cross this potential college off the list right now. There’s no point in even considering colleges we can’t afford.” However, it’s important to consider the difference between sticker price, the amount published on the university website, and net price.

Don’t Get Sticker Shock

While college is certainly an investment for most families, the costs published on a college’s website is not necessarily the amount a family will pay for a student to attend that college. Why? When a student applies for college, the student and family will also apply for financial aid using the Free Application for Federal Student Aid (FAFSA), the CSS College PROFILE, and/or other financial aid forms required by the college. A student may also apply for merit-based scholarships. For many families, theses financial aid awards will greatly reduce the cost of college. This is the difference between sticker price and net price. In fact, the College Board reports that while the average sticker price for public colleges is $8,660 annually, the average net price is only $2,910. For private colleges, the average sticker price is $29,060, but the average net price is less than half of that, at $13,380. For families making less than $30,000 per year, it can be much lower. An American Enterprise Institute study notes that a family in this category paid only $4,496 to attend Stanford University in California, which had a sticker price of $55,918 in 2011.

It is necessary to have an honest family conversation about what is affordable when it comes to financing college. But as students begin to build a list of prospective colleges, don’t eliminate schools because they look expensive. Depending on the financial situation of the family and the resources of the school, a college with a higher sticker price may actually end up being less expensive than a college with a lower published cost. More expensive colleges often have higher endowments, with more money to spend on student financial aid.

Calculator.pngTools: Net Price Calculators

Since 2011, all colleges and universities that receive money from the federal government must display a net price calculator on their website. Students and parents enter their financial situation (family information, income, assets, etc.) in the calculator. The data is used to calculate the grants and scholarships that will be offered to the family. Depending on the calculator, it may also include loans that are available as part of a financial aid package. Finally the calculator displays an estimated net price based on the information entered. While it is only an estimate and not a promise of financial aid, the net price calculator can be a useful tool to understand the amount of aid a college may award to a family. Make sure to put in the most accurate information possible when using a net price calculator—the information you receive is only as good as the information you enter. The net price calculator is usually located on the financial aid webpage of a college or university. See below for examples of net price calculators.

Examples of Net Price Calculators

Davidson College, Davidson, NC

Georgetown University, Washington, DC

Princeton University, Princeton, NJ

University of District of Columbia, Washington, DC

University of Wisconsin, Madison, WI

University of Virginia, Charlottesville, VA

Wellesley College, Wellesley, MA

Xavier University, New Orleans, LA

Colleges and Universities Using College Board Net Price Calculator

U.S. News and World Report Top 300 List of Net Price Calculators

Have questions? Leave us a comment or email us at dcpscollegereadiness@dc.gov

Scholarship Highlights – April 26, 2013

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Want to look as happy as these DCPS George Washington Trachtenberg Award winners? See below for upcoming scholarships deadlines! (Photo credit to Ductai Nguyen).

Toni K. Allen Memorial Scholarship

Association of Legal Administrators

May 3, 2013

Max Award: $15,000

This award recognizes students who have an interest in the legal profession, a 3.0 GPA, and a combined SAT score of 1400 or an ACT composite score of 21. Seeking DCPS and DC Charter School applicants! Email chloe.woodward-magrane@dc.gov for the application form.

Spread Your Wings Scholarship

William O. Lockridge Community Foundation

May 3, 2013

Max Award: $1,000

Scholarships will be awarded to students who live and/or attend school in Wards 7 or 8 in Washington, DC. Students must have a 2.5 GPA or above to be eligible.

I’m First! Scholarship

Center for Student Opportunity

May 24, 2013

Max Award: $2,000, renewable for four years of college

Students must be the first generation in their families to attend college. Additionally, winners will have the opportunity to blog about their college experiences and offer advice to other first-generation college students.

It’s Financial Aid Friday

Every Friday, we will be discussing all things financial aid – how to find, apply for, and earn dollars for college; how to know a great financial aid offer from a good (or not so good) one; and how to prepare early to finance college. This week, we honor recently accepted high school seniors attempting to decode financial aid award letters they’ve received from colleges and universities.

Financial Aid Word of the Week

Award letter (n.) A letter received after you are accepted to a college/university that spells out what is included in the financial aid package from that college. Financial aid packages often include multiple sources of financial aid (grants, loans, work study) that are intended to bridge the cost between what you have to pay out-of-pocket and the total cost of the college.

Decoding a Financial Aid Award Letter

Whether it’s called the Candidate Reply Date, Common Reply Date, or Universal Reply Date, May 1st is the designated date that many colleges and universities have agreed on as the deadline for admitted students to give notification of their enrollment decision.   Less than a week from today seniors will make a final decision about where they will attend college.  While it’s important to choose a college wisely based on location, size, and academic program, families should also evaluate which school would be their “financial best fit” college. Some of the letters you and your family are receiving from colleges may look very different from one another, even though you submitted the same financial information when you applied. How do you know what you’re really getting from each college?

Five Basic Questions

As you review your financial aid award letters from each college, you should be able to answer these five questions:

  • What is the total cost (including housing and meals, fees, books, travel, and miscellaneous expenses) for one year at this college?
  • How much grant or scholarship aid (i.e. free money, no repayment needed) did the student get?
  • How much does your family have to pay for the first year? (Includes taking out a loan, working, or using savings.)
  • What are the options for paying the amount your family owes? Are those options realistic for your family’s financial reality? (For example, using a Parent PLUS Loan.)
  • What are your next steps? (Who should you call with questions or an appeal for more aid? What forms have to be submitted by what deadline?)

If the award letter doesn’t answer some of these questions, call the college’s financial aid office and ask to speak to a financial aid counselor directly. Never hesitate to speak with the admission and/or financial aid office at your prospective college or university.

(Questions thanks to FinancialAidLetter.com)

Financial Aid Tools

Award Letter Comparison

To help you compare financial aid awards, here are some online comparison tools that will help you evaluate the “financial best fit” college:

FinAid.org Award Comparison Letter Tool

BigFuture.org College Board Comparison Tool

College Abacus Shopping Sheet

Loan Calculators

A loan calculator helps you understand what your monthly payments will be for each loan you’ve received, and how much you may need to make once you graduate in order to afford monthly payments.

ECMC Loan Calculator

FinAid.org Loan Calculator

Federal Student Aid Loan Repayment Comparison Calculator

Examples of Financial Aid Award Letters

Experts look at real financial aid award letters (from 2007-2008), “decode” them, and give them a grade for clarity. Learn what to watch for while reviewing your own financial aid award letters.

Graduation Rate

You may also want to take a few minutes to review the retention and graduation rates of your prospective colleges and universities. A lower graduation rate may indicate other challenges that exist at the college or university that would require you to ask additional questions.

College Results Online

College Navigator

What Else to Consider

What does the college/university include in the cost of attendance?

Consider tuition, fees, room and board, travel expenses, books and lab fees, and miscellaneous expenses—like pizza with friends or laundry detergent. If the award letter doesn’t budget amounts for these categories, you should add them into your personal calculations.

Does this award meet 100% of my demonstrated need?

When you filled out the FAFSA, your family received a number called the Expected Family Contribution (EFC). The EFC is the amount calculated that your family can afford to pay out of pocket for college expenses yearly. Colleges base their financial aid calculations on the EFC of each family. However, some colleges may not be able to award you enough financial aid to meet your entire “need,” or the amount between the EFC and the cost of attendance. Make sure that if the financial aid award and your EFC do not add up to the total cost of attendance (don’t forget books, travel, and miscellaneous expenses!) your family has a serious conversation about how to finance the remaining cost.

Can I renew merit scholarships?

Some colleges will award more grant money (i.e. free money) in freshman year. Before assuming that you will receive the same amount of grant aid yearly, ask the college whether you will be able to renew those awards. Be aware if the scholarship requires you to maintain a high GPA or is an enrollment or first year-only award.

What is the graduation rate of this college/university?

A college will be more expensive if you take more than four years to complete your degree (or two years for community colleges). Colleges with a higher graduation rate will be more likely to assist you in graduating on time thus reducing the amount of money you have to borrow or pay.

Have More Questions?

Call the financial aid office at your prospective college or university. You may leave us a comment here or call us: the College Readiness Initiative at DCPS at dcpscollegereadiness@dc.gov.

Financial Aid Friday Scholarship Highlights

Every Friday, DCPS College Talk will highlight upcoming scholarships, financial aid, and enrichment program opportunities. Please see individual websites for more information about scholarships and funding organizations.

Apply for DC TAG!

If you are a graduating senior heading to a public college/university, Historically Black College or University (HBCU), or private college in the DC Area, you should have applied for DC TAG. If you haven’t, apply here as soon as possible!

Blacks in Government Evangeline J. Montgomery Scholarship Program

April 22, 2013

Eligibility: Students must have a minimum 3.0 GPA. Must submit a transcript, essay, and recommendations.

Apply here

Foot Locker Foundation-UNCF Scholarship

April 24, 2013

Maximum Award Amount: $5000

Eligibility: Scholarship available for graduating seniors attending one of the UNCF-partnered HBCU campuses.

Apply here

Fountainhead Essay Contest

April 26, 2013

Maximum  Award Amount: $10,000

Eligibility: Students of all grade levels can submit essays based on Ayn Rand’s novels for scholarship money.

More information

DC Area Phi Beta Kappa Association Scholarship

April 29, 2013

Maximum Award Amount: $1000

Eligibility: The student must be a high school senior with a college preparatory background who ranks in the upper 10 percent of his/her class and has a grade point average of at least 3.75 on a 4.0 scale, or have the equivalent SAT score of at least 1950.

Apply here

Sigma Gamma Rho Sorority, Inc. Dorothy Harris Scholarship

April 30, 2013

Eligibility: Students must demonstrate financial need and have a “C” or better average.

Apply here