You've been accepted by a bunch of good colleges, and the financial aid offers from the schools are flowing in. How do you compare them?
It's not necessarily easy -- especially if this is your first exposure to the college years. Experts warn that it's common to get confused about which combinations of loans, scholarships, grants, or work-study are best. "We're seeing a sustained high level of confusion, because there are always new entrants who are suddenly faced with vocabulary they never learned when studying for the SAT," says Robert Shireman, director of the Project on Student Debt.
But what it really comes down to is this: Which type of aid is most beneficial towards financing a college education? The simple answer, the experts say, is to look at the components in descending order of value: first scholarships and grants, then work-study or government loans. Private loans should be at the end of the list.
Naturally, though, nothing is really simple. Here are explanations of how each of different category measures up.
Experts point out that while most schools automatically consider students for merit or need-based aid, it's important for incoming students to search for additional scholarships on their own because that's the type of aid that does not require repayment. But when comparing scholarships, not all are created equal. It's important to learn about any requirements for maintaining the funding beyond the first year and to choose scholarships that aren't tied to specific majors, says Mark Kantrowitz, publisher of FinAid.org.
For example, this year's new TEACH (Teacher Education Assistance for College and Higher Education) Grant Program promises to give students a $4,000 annual grant in order to encourage them to pursue teaching (and continue in the profession for four years). However, if the requirements (among them a 3.25 GPA) are not met the grant is converted into a loan, explains Kantrowitz. He also warns that if a scholarship is not used to properly fund tuition and fees it can become taxable income. That said, no matter how much time is spent applying, most students with financial need cannot attend college on scholarships alone. "A lot of people think it's easy to win a completely free ride to college," says Kantrowitz. "But winning scholarships is a part of paying for college -- it's not an entire solution."
To help lessen the loans for upcoming years, applying for scholarships should be done annually. And if a student does receive additional scholarship money, many schools decrease loan amounts before touching grant money when it comes to calculating the next financial award letter. But besides extra cash, winning a prestigious award based on merit or a previous experience can also help the student gain recognition. "You get a line on your resume, and that can open doors," says Kantrowitz, who stresses that a scholarship or grant is the preferred form of financial aid.
While typical federal work study only covers a small amount of college tuition, proponents say it's well worth it. For example, at George Washington University, where annual tuition is $39,210, students are able to earn $2,200 to $2,500 a year by working 8 to 10 hours a week, says financial aid chief Daniel Small. Unlike another part-time job, the money does not count as income when calculating the student's next annual financial aid package. But taking a previously approved job on campus -- especially one that's related to the student's career interests -- has nonmonetary benefits too. "It helps the student connect to the university right away. They'll also have a supervisor to help them navigate the system in that first year," explains Small.
Others agree but warn that working more than approximately 10 hours a week can have an impact on grades. "When a student gets a second job off campus they are more likely to struggle," explains Susan Ort, financial aid director at the University of North Carolina at Chapel Hill. However, Ort adds that keeping a job helps students prepare for the work-life balance of the real world and that it's becoming a more popular option for those seeking aid. "There is a greater awareness, and students believe it's going to help them in the job market later," says Ort.
After exhausting grants and scholarships, experts say that federal loans present the best options. The loans are dispersed based on the calculated need in an applicant's FAFSA (Free Application for Federal Student Aid) application. Specifically, George Washington's Small says that the Perkins Loan is the best alternative but is reserved for students with extreme financial need. Secondly the subsidized Stafford loan is an option for those who can demonstrate some financial need; the loan interest is paid by the government while the student is in school. The unsubsidized version of the Stafford (where the student starts to pay interest right away) is available to all, regardless of need. The PLUS loan for parents is often the last alternative and has a fixed interest rate that's usually better than taking out private loans. Small explains that their loan application process takes two to three hours (including the FAFSA) and says that students should approximate figures instead of waiting for official tax forms or similar calculations. "Don't let the fact that you don't have the (tax) forms done stop you," says Small, arguing that it's most important to have financial aid forms in on time.
From a convenience standpoint, applying for federal loans can often take longer than spending a few minutes on the phone in order to secure a direct-to-consumer or private loan. Still, experts say that taking the time to first go through the federal financial aid process instead of turning to private loans (which usually have a higher interest rate) is worth it. "There's an ease factor (of private loans) that's really attractive, but students and families could be paying a real premium for that convenience," says Ort. "There are so many good loan products, why pick the one that just happened to come on the radio or television?"
On the subject of private loans, most experts agree that parents should be cautious. According to the College Board, private loans made up 24% of total education loans in 2006-07, and they are often a necessary part of financing an undergraduate education. "If any college is encouraging you to take out a private loan, think again in your selection," warns Shireman, who explains that parents should choose to take additional loans out only after receiving official award letters from the college. Kantrowitz recommends standardizing the loan offers by their interest rates and not taking into account the monthly payments because they can be misleading. For loans that require additional fees, he recommends converting every 4% in loan fees to 1% of interest. "Ignore the names of the products and focus on how much that loan is going to cost you," explains Kantrowitz, adding that online loan calculators are also a great way of comparing loan costs.
If parents do need to take out extra loans, adding your child to the loan application can help build his or her credit history. Becky Walker, a sophomore at Indiana University, said her father did just that and that the exposure to the loan process was also a great learning experience: "I kind of know what's going on with it so I'm not going to be completely confused later on." College financial planners like Blankenship agree that adding a student's name to a loan can help build credit and say that it has the added benefit of putting more responsibility on the student. This way, the "student takes the education process a little more seriously," says Blankenship.
And while financial aid plays a huge role in attending college, it's important to note that the initial price tag for tuition doesn't need to be a barrier. Kantrowitz notes that colleges sometimes use tuition costs for marketing purposes or exclude certain fees when revealing their tuition. He explains that when it comes to grants, parents will feel they're getting a better deal if their child goes to a $20,000 a year institution with a $4,000 scholarship rather than an institution that charges students $16,000 without providing the additional grant. More important, Kantrowitz urges parents to sit down and make the proper comparisons, especially for loans. "Standardize everything, then you can see how on an apples-to-apples basis the costs compare."