Monday, July 7, 2014

College Mistake #2: Not Understanding FinAid


In my previous post, we discussed my first mistake; not having a job. In this post, we're going to discuss my second mistake, not understanding financial aid.

Let's face it... There's a lot to understand about financing higher education, and it can be pretty tough determining which options will work for you. Sometimes college admissions advisors aren't very transparent about the cost of higher education, they may not be open about how competitive the scholarship market is, they may not care whether these options are tenable for you, and they probably won't disclose the fact that government-sponsored financial aid has its limits.

I cannot possibly tell you everything that you need to know about financial aid options, or what options are available to you, but I can tell you what I've learned from experience and give you a starting point to do your own research.

Financial Aid: The Basics

"Financial Aid" by Simon Cunningham CC By 2.0
 Grants

A Pell Grant is basically free money from the U.S. Government to help finance higher education. The amount that you receive is based upon your income, the time it should take for you to earn your degree, if you are enrolled part-time or full-time, and whether or not you plan to attend a full academic year.

To apply for a Pell Grant, you have to complete a Free Application For Student Aid (FAFSA) once a year; I completed this right after I filed my tax returns electronically. You do not have to pay any amount that you receive back; however, there are limits on the amount that you can receive during your lifetime.

Some states also offer grants to eligible students. Your best bet is to type "financial aid for <insert name of state> " into your search engine to find out more about these programs. Also, if you pursue certain fields of study, you may qualify for more money from the federal and state government.

Federal Loans

Federal loans are money that has to be paid back. The type of federal loan that you receive generally depends upon your income. In order to qualify for any of these loans, a FAFSA must be completed.

Subsidized loans have better terms, and are offered to students that show a financial need. These loans don't start accruing interest, or need to be repaid, until 6 months after graduation, after you drop out, or after you attend less than half-time.

Unsubsidized loans are offered to students that do not show a financial need, but interest accrues while you are going to school; however, the repayment terms are similar to the subsidized loan's repayment terms.

PLUS loans are offered to dependent graduate and professional degree students and their parents. Like the subsidized and unsubsidized loans, repayment can be deferred for graduate and professional students.

Perkins loans are not available at all colleges and universities, and they are offered to students that demonstrate financial need. I was unemployed, and only eligible for $500 per semester. These are lower interest loans that have similar repayment terms as the subsidized and unsubsidized loans. 

The really cool thing about the loans is that you can get tax credits by repaying them while you are in school. As I mentioned in the first post of this series: more tax credits = bigger refund.

Work Study

Work study is a program that provides students with financial need the ability to work part-time to help pay for their education. When I first started attending college online, this wasn't available to me; however, several online universities have partnered with national and multinational companies to offer this program to online students. Basically, if the company has a branch/office close to the student's local area, the student can participate in the program and work at a location near her/him. However, students are awarded a certain amount, so students' work hours will be limited by their pay. So, if a student is awarded $2,700 for the semester, and is paid $9.00 an hour, the student can only work 300 hours (25 hours a week) during that semester. For an adult, "non-traditional" student, this may not be a viable option if you have to support dependents.


Private Loans

Private loans are funds lent to you by an organization, like a bank or lending company. The interest rates are generally higher, the repayment terms vary, and your ability to get a loan from a private institution really depends on the institution's criteria. Honestly, I don't know much about student loans from private lenders. I do know that students have been scammed, and I have not considered this as an option for myself. If you go this route, I urge you to make sure that you understand the terms of the loan before agreeing to it.

Scholarships

This is also free money to help fund your education, so you do not need to pay it back. However, you have to look for them. Speak with a financial aid advisor for some helpful tips on how to find scholarships, how to make your applications stand out, and to see if your college/university offers any that you qualify for.

Where I Messed Up

"Broken Piggy Bank" by Joe Shlabotnik CC By-NC-SA
  1. I didn't know that there were lifetime limits on Pell Grants. 
  2. I didn't realize that there were limits on the amounts that I could receive on subsidized and unsubsidized loans until my third year in college. 
  3. I didn't realize that I could refuse a portion of the federal loans.
  4. I didn't create a budget for my education.
Yes, the first three points were disclosed to me at some point. I am specifically mentioning these points because you will have a lot of paperwork to sign. The paperwork is going to give this information to you, and it is buried underneath a lot of legal-speak. It is very easy to miss, and hard to understand, so check out the government's website for the breakdown of this information before you apply for federal student aid.

Pell Grant

I maxed out my Pell Grant; I have some left that I can use, but it isn't enough to pay for one class. There is nothing that I can do about this, except to warn you about this eventuality.

Federal Loan Limit 

My federal student loans are a bit different. As an undergraduate, I can borrow up to $23,500 in subsidized loans and $23,500 in unsubsidized loans during my lifetime. It's a bit tough to explain, so let me give you an example. Let's say that I earn my bachelor's degree in business administration, find a great company to work for, and repay $22,000 ($19,000 principle and $3,000 interest) on my unsubsidized loans. After working for the company for a few years, I realize that I want to go back to college for a bachelor's in psychology. I run the numbers, and realize that I can't cover a few grand for college. I can apply for an unsubsidized loan and receive a total disbursement of $19,000 over the course of four years because I repaid on the $19,000 principle of my lifetime limit earlier.
You still following me here?
Refusing Portions of Federal Loans

Yes, you can do this! Let's say that your classes for a semester cost a total of $6,000; however, you receive a notice from your financial aid office that you are being awarded $8,000 for the semester. Instead of accepting the $2,000 surplus, you can refuse it, and that $2,000 will not be debited from your lifetime limit. My mistake was that I didn't understand that I could do this, until it was too late. I accepted the full amount that was offered, and then ended up using it instead of saving it. 

I know, you're probably thinking, "I could earn X amount of interest on it, if I put it in a cd or savings account." That's a really nice thought, and you need to be really honest with yourself before you try this. What are you going to do if one of your children, the family dog, the family cat, your significant other, parents, or in-laws need medication or surgery? Are you really going to say, "Well, I have $3,000 saved up, but I'm not going to fork it over because it's for my degree?" If you can, then good for you; I didn't have that kind of determination. If you're like me, you really want to refuse the surplus so that it remains available to you later on when you'll need it (remember your Pell Grant limit?).

Creating a Budget for Your Education

"Saving for College" by Tax Credits CC By 2.0

If you are already in college, and haven't received an estimate of how much your degree is going to cost you, get one now
Really, I'm serious... Stop reading and call, e-mail, smoke signal, or whatever else you have to do to contact your college for that estimate now because you will need it. 
Once you know how much the degree is going to cost you, find out the maximum amount of financial aid that you may qualify for; go here for Pell Grants, and here for federal student loans. Add the total amount of financial aid that you qualify for from whatever programs are available to you, and then subtract the estimated cost of your degree. If this results in a negative number, that's the amount that you will need to save up to finish your degree. You can also do what I did, and track your college costs by semester using this spreadsheet; feel free to download it and play with some numbers.

Even if the result isn't a negative number, it's a good idea to plan ahead and save for unexpected events; this way you will have the money on hand to pay for these unexpected expenses without coming up short on the cost of tuition later on. 

If you need help getting started with a budget, here's a spreadsheet that I used in a personal finance class. It's a shame that I wasn't able to take the class when I first started college, because it would have been tremendously helpful when I was a freshman. You should be able to download both spreadsheets, please contact me if you can't. 

Hopefully these tools will help you figure out how much money you will need, when you will need the money, how you are going to save up the money, and help create contingency plans. If you don't have Excel, you can download OpenOffice.org, or if you have a Google account, you can upload them to Google Drive; both programs will allow you to open Word documents and Excel spreadsheets.

I've said it before, but I think it's worth repeating...  I am by no means an expert on this subject. However, I do know three things:
  1. It's no fun being laughed at during interviews.
  2. It sucks being a college dropout with a huge debt hanging over your head.
  3. The first two things can sometimes be avoided by thinking ahead.
Best of luck to you on your college journey!


Thanks for reading!


Title image modified from original: "College Lecture" by Sean MacEntee CC By 2.0


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