Financial Literacy

Whether you earn a certificate from a community college or a medical degree from an Ivy League university, higher education may be a great investment in your future.

Attending college doesn’t guarantee that all your dreams will come true, but earning a degree does put your life on a path that’s much more likely to result in greater economic opportunity.

Think about it - when you apply for any job, an employer generally asks about the level of education you completed. In today’s competitive job market, the more education you have, the better.

Sure, there are examples of very wealthy people who never went to college or who dropped out after inventing the latest and greatest gadget. But those stories are few and far between. A college degree helps to increase your chances of being successful. And increasing your earning potential is just part of the story – studies show that college graduates are more likely to live longer, less likely to get divorced, and are actually happier than those without a college degree.

Getting Ahead Takes Planning

The days when someone could graduate from high school, get a job in the mailroom, and work their way up to being CEO are pretty much gone. In 1972, three out of four jobs were open to those with a high school diploma or less. Today, only one in three jobs are open to those with a high school diploma or less. And over the coming decades, many of those jobs will likely disappear as the result of new technology.

But isn't going to college expensive? You bet it is. Is it worth it? Well, almost everyone agrees, "absolutely." It is true that the cost of obtaining a college degree is more expensive than it was a generation ago. You may have even heard stories in the news about college graduates with tremendous student loan debts that seem impossible to repay. The good news is that those stories are extremely unusual and do not represent the typical college graduate.

However, the important question is not how much it costs but how much you'll actually be paying out of your own pocket. Keep in mind that three-quarters of students attending college receive some financial aid. And no, not all financial aid is in the form of a loan. Billions of dollars, yes billions with a "B," are outright grants that don't need to be repaid.

If you do need to borrow for college, there are more options today for repaying student loan debt than at any time in the past. Nevertheless, you still need to make smart decisions when deciding how to pay for college. It is possible to take on an unrealistic amount of debt for your chosen career, for example. It's also possible to take on college debt and not graduate - a truly worst case scenario.

This week, we’ll take a look at how paying for college really works – from the financial aid process to student loan repayment options. It’s easy to be intimidated by the published tuition of some schools, especially four-year schools, so we’ll also dispel some myths about the true cost of college. For example, the average student almost always pays significantly less than the published tuition at four-year schools.

Let's get started!

Many financial aid programs are based on financial need, but what exactly is "financial need"? Many students and families assume they don't have financial need since they live a comfortable lifestyle. In fact, the amount of need depends on many factors, including not only income but also the cost of each school and the number of people in your immediate family who are enrolled in college at one time.

Financial need is determined by formulas that take into account student income, parental income for financially dependent students, savings, and the cost of attending a particular school. But at its simplest level:

Financial Need = your Cost of Attendance - your Student Aid Index

The cost of attendance will vary by school, but your Student Aid Index (how much your family is expected to contribute to college costs) doesn't change. So, using round numbers with a family whose Student Aid Index is $12,000:

If the student chose to attend the public two-year school, he or she would not qualify for any need-based aid since the amount the family should be able to contribute equals the cost. On the other hand, if the student chose one of the four-year schools, he or she would qualify for a great deal of aid.

On the surface, it really is that simple. Of course, the reality is that coming up with the funds to meet the need is complex.

First, let's talk about cost and the Student Aid Index.

The first part of the formula, cost of attendance, includes all the expenses involved in attending a particular school. These expenses include tuition, room and board, student fees, textbooks, supplies, transportation and other costs, which vary per school. Each school prepares a budget that takes into account all those costs, including many others. Essentially, the budget is what an average student would spend for the year while living frugally. For those living on campus, the budget includes the actual cost of the dorm and food plan. For those living off campus, there is an allowance for rent and utilities. And when schools consider transportation, they may include not only the cost to get to and from classes, but also two or three trips home per year.

In addition to the required costs (tuition, fees, books, etc.) there are those miscellaneous things students spend money on, including lab fees and art supplies. Schools really do know what it costs most students and they know that unless they use realistic budgets, students won't be able to make it through the year.

The second part of the formula, Student Aid Index, is the amount your family is expected to contribute to the cost of college. The dollar amount of the Student Aid Index is determined by a formula derived by Congress that takes into account your family income, savings, other assets, the size of your household, and other factors. The Student Aid Index is calculated through information gathered on the federal financial aid application.

There are essentially three ways to get money for college: it can be loaned to you, it can be given to you as a grant or scholarship, or you can earn it through work-study or service programs.

Education Loans

Education loans make up the vast majority of all aid dollars. Loans are borrowed from the federal government or from private lenders such as banks and credit unions.

Federal loans should be your first choice when choosing education loans. They may offer the lowest interest rates, they're easy to qualify for, and they offer the most flexible repayment plans. Federal loans are either "subsidized" or "unsubsidized." Subsidized loans are awarded based on financial need, and if you qualify, interest is not charged before graduation or leaving school. Unsubsidized loans are not need-based and interest is charged from the time you receive the money until it is paid in full. If you qualify, subsidized loans could save you thousands of dollars in interest over the life of the loan.

Private loans are becoming increasingly important since government loans are capped at a specific dollar amount for each year of school – a cap that may not cover all school-related expenses. Private loans are a good option for filling the gap between the maximum government loans and the cost of attending school. But private loans do have less flexible repayment options than federal loans, so consider private loans only after maxing out federal loans.

Repayment of student loans typically begins within six months of graduation or after dropping below half time enrollment. Remember, you are responsible for repaying education loans whether or not you graduate.

Grants and Scholarships

Grants and scholarships are financial aid awards that don't need to be paid back. These awards may be based on financial need, or academic and extracurricular merit.

Many schools will automatically consider you for school-based grants and scholarships when you apply for aid. In addition, the Federal Pell and Federal Supplemental Educational Opportunity Grant programs are based exclusively on your FAFSA form, which every person applying for federal aid must complete.

For other awards, students must seek out and apply for each and every one. Internet searches generally offer the best ways to find out about awards, but be careful about revealing your personal information. You should never have to enter your Social Security Number or pay for a scholarship search. A high school guidance counselor may also be aware of significant local awards that may not be in these other sources, so be sure to ask.

If you win a scholarship that could continue from year to year, keep in mind that you may need to earn a certain grade point average or fulfill other requirements in order to have it renewed. If you're basing a college choice on a renewable grant, you may want to ask what percentage of grant recipients keep the award year-to-year. And when receiving any grant or scholarship, you'll need to understand what happens in an unusual situation, like if you need to leave school mid-year.

Work-Study Programs

Work-Study Programs provide jobs for students with demonstrated financial need. These jobs are often on-campus, and range from career-related positions, such as research assistant for a professor, to cashier positions at a student store. Off-campus jobs are sometimes awarded as well.

The pay for work-study jobs is at least minimum wage, and earnings are limited to the amount established in each student's financial aid award package. Work-study is paid on an hourly basis. Unlike loans, work-study money does not need to be repaid.

Work-study programs are administered by each school's financial aid office. If you qualify for need-based aid, work-study may be an option you should explore.

Service Programs

Service programs provide aid to students based on the type of work they do before or after college. Examples include military service, AmeriCorps, the Peace Corps, and Teach for America. Benefits range from a few thousand dollars working for AmeriCorps to a practically free college education for military officer training. Service programs are typically NOT need-based, and spots in some programs can be very competitive – so explore these options early.

Whether or not these programs make economic sense depends on a variety of factors, including the monetary benefit, the time commitment to the program, and what other options would be available for earning money after graduation. But service programs also provide an experience that may be unavailable in other jobs – including leadership development and community service.

Loans are a reality for many college students who receive financial aid. Unlike scholarships and grants, loans must be repaid after graduation. Understanding the different loan types could help you save money in the long run, since different loans have different repayment and loan forgiveness options. Although you don't want to overload yourself with debt, borrowing an appropriate amount can be considered to be an investment in your future.

Federal loans for education are a good place to start. The interest rate may be lower than other loans and there are often ways to reduce your monthly payments, if needed. The repayment period for federal loans doesn't begin until after college and generally lasts for at least 10 years (you can always pay sooner). These loans are available through the U.S. Department of Education's Direct Loan Program.

Here's a simplified overview of the major types of student loans:

• Federal Direct Subsidized Stafford Loans - These loans are awarded to financially needy students based on their Student Aid Index (how much each family is expected to contribute to paying for college) and the cost of attendance of a particular school. The federal government pays the interest on subsidized Stafford loans while the student is in school, and interest is not charged until the student graduates or drops below a half-time course schedule.

• Federal Direct Unsubsidized Stafford Loans - Student borrowers with no calculated financial need are eligible for unsubsidized Stafford loans. Interest on these loans is not paid by the federal government and is the responsibility of the student at all times. Borrowers can either pay the interest while they are enrolled in school or have it added to the loan principal when they begin repayment.

• Federal Direct Parent Loan for Undergraduate Students (PLUS) - This loan is a good option for parents, but only after subsidized and unsubsidized Stafford loans are maxed out. The interest rate is higher than those loans. Repayment begins 60 days after the funds are disbursed, but repayment may be deferred until after the student graduates or leaves school. The PLUS program is open to any parent regardless of assets or income, but a low credit score may affect eligibility.

• Federal Consolidation Loans - A federal consolidation loan allows a borrower to consolidate several types of federal education loans with various repayment schedules into one loan. This simplifies the repayment process because there is only one payment per month. Loans being consolidated must be federal, not private, loans. And keep in mind that the interest rate and payments on the new consolidation loan may be lower, but the extended repayment period likely increases the total interest charges over the life of the loan. The benefits and drawbacks of a consolidation loan should be carefully considered.

• Private (or Alternative) Loans - These loans are from private lenders, banks, colleges, universities and other lenders that do not rely on the federal government as a guarantor (meaning they, not the government, are generally responsible for any losses if the student defaults). If you have borrowed the maximum amount available through federal loans and still need more, a private loan can help cover the cost of attendance. Just because you're eligible for a certain loan amount does not mean that you have to borrow the entire amount.

Unless you borrow only subsidized loans, one strategy to consider is paying interest while you're in school. When interest is added to the money you borrowed, referred to as capitalization, the loan becomes more expensive to repay since you're being charged on both the amount borrowed and the interest that grew while in school.

Since it will be your responsibility to pay back both federal and private loans, you will want to be conscious of, and carefully consider, your total indebtedness. Just because you are offered a certain loan amount does not mean that you have to borrow the entire amount. Borrow only what you need as part of a larger aid strategy.

The aid process can seem overwhelming at times, but there are only three major steps.

• Step 1: Complete the FAFSA. The Free Application for Federal Student Aid (FAFSA) is an online form that any student seeking federal (and other need-based aid) must complete. The form is found at StudentAid.gov.

• Step 2: Look for Scholarships. Seek out and apply for grants and scholarships, ideally one to two years before beginning college. If you have the time to complete the applications, you have nothing to lose applying for this free aid.

• Step 3: Fill the Gap. After you apply for need-based aid and scholarships, any other money for college must come from you and your family. This money could come from savings, additional student loans, working while in school, or a combination.

Of these steps, completing the FAFSA is by far the most important. The government requires the FAFSA for anyone seeking federal aid and virtually every school also requires the FAFSA for determining institutional aid.

Understanding the FAFSA
Administered by the Department of Education, the Free Application for Federal Student Aid provides the government and financial aid offices with crucial information about the financial status of each student and, for dependent students, their family's financial situation. Based on government calculations, you'll be given an official Student Aid Index that helps schools determine your eligibility for grants, subsidized loans, and college-sponsored aid.

The FAFSA can be filed online through the StudentAid.gov website, but before you get started you'll need to create a an FSA ID - an online account you can use for signing loan contracts and for accessing your federal aid information. Unless you're considered a financially independent student, your parents will need to create a FSA ID.

You'll need the following information and documents to complete the FAFSA:

• Your Social Security Number and your parents' Social Security Numbers (if dependent)
• Your driver's license number (if you have a license)
• Recent federal tax returns for you and your parents (if dependent)
• Information on financial assets such as savings account balances and investments for you and your parents (if dependent)

If you need help, the FAFSA website offers help via online chat, phone, and email. Your school's financial aid office may also be able to help. If you are confused or unsure about the FAFSA, it's important to seek help - mistakes will delay the aid process or even cause you to receive the wrong amount of aid.

You should complete the FAFSA as soon as possible after October 1 in the calendar year before you hope to receive aid. It's a good idea to complete the FAFSA as early as possible, keeping a close eye on filing deadlines for your state and school. Many sources of aid are given out on a first come first served basis, so it is extremely important not to miss a deadline.

The FAFSA must be updated each year for as long as you receive federal aid, though this process is easier in recent years.

The FAFSA Submission Summary
After submitting the FAFSA, your FAFSA Submission Summary will be available in a few days - you'll get an email notification with a link to login to your My FAFSA page. This report includes your Student Aid Index and states all the figures from the FAFSA that were used in calculating your expected contribution. The report will also be sent to the schools you listed on your FAFSA.

The first thing to do when reviewing your FAFSA Submission Summary is to check it for errors. If an error was made, it may be more difficult to qualify for aid. On the other hand, if the errors cause you to receive too much aid, you could be penalized later.

Please keep in mind that schools have formulas for calculating financial aid that may yield a different expected family contribution. Schools may also require additional documentation of income and assets. If so, the school may ask you to complete the CSS PROFILE. A service of the College Board, the CSS PROFILE collects somewhat different information when compared with the FAFSA and is used for determining eligibility for some school-based aid. If you are unsure whether the schools you are applying to require the CSS PROFILE, you can find a list of participating schools on the College Board website.

Reapplying for Federal Aid
Just when you thought you were done, there's one more thing to keep in mind. While the policies of private loan lenders will vary, any student taking out federal loans must reapply for financial aid each year.

Luckily, the re-application process if often easier than completing the FAFSA for the first time. Many students are eligible to complete a Renewal FAFSA, which already includes much of the required information. Using the Renewal FAFSA is optional and you can choose to file a completely new FAFSA each year if you prefer. Some schools also allow you to reapply for federal aid through their financial aid offices, making the process even easier.

Many students find it necessary to borrow money to help pay for college, but it's important to make smart borrowing decisions. In other words, borrow as little as possible without sacrificing the quality of the educational experience. Every dollar borrowed must be paid back later with interest - which will have a definite impact on life after college.

Think about it – assuming you use the Standard Repayment Plan and pay an interest rate of 6.9%, borrowing $2,500 a semester during four years of college results in a payment of over $250 per month for 10 years. $5,000 per semester could result in a payment of over $500 per month – and a possibly very different lifestyle as the result of student loan payments. Plus, the total amount of student debt and how well monthly payments are handled influences credit reports and credit scores – crucial factors that affect the ability to qualify for other loans in the future – from cars and homes to private graduate school loans.

That said, for most students, one of the realities of attending college is a student loan – or several student loans in fact. But the type of loans and how those loans are handled (even during college) is another part of a well-considered aid strategy.

Many students with federal loans receive a combination of subsidized and unsubsidized loans. Subsidized loans are loans in which the government covers the interest on the loan while the student is in school, potentially saving thousands of dollars. If available, these loans should generally be your family's first choice. With unsubsidized loans, the interest is added to the loan amount from day one, thus increasing the size of the loan. This process is called "capitalization". For example, if $1,000 is borrowed at an interest rate of 7% per year, at the end of year one the total amount owed is not $1,000, but $1,070, which continues to accrue interest on the new higher amount. So after four years, the original $1,000 loan would actually be a $1,310 loan. If possible, a great loan management strategy is to pay the interest on unsubsidized loans before it is capitalized. To use this strategy, you'll need to contact your loan servicer to get more information on how to pay early before capitalization occurs.

Finally, after you've selected the least expensive loans and borrowed only what's needed, the next step is to manage money responsibly while in school. Being responsible includes understanding the basics - needs vs. wants, budgeting, and credit management. It also includes understanding how expectations about debt may affect spending behavior while in school.

Part of borrowing wisely is to set financial goals in school and to track progress monthly. One important goal could be sticking to a sensible budget. Another goal could be to repay interest that accrues on non-subsidized loans prior to capitalization. If you're unsure about what kind of goals may be appropriate for you, talk with a financial aid administrator or financial advisor.

The FAFSA Simplification Act, passed by Congress in 2021, set in motion a series of reforms to the federal student aid system - the biggest changes in decades. These updates are now active and include revisions to the Free Application for Federal Student Aid (FAFSA), modifications to the way aid eligibility is calculated, and other changes that will affect millions of families.

FAFSA Changes

The FAFSA form must be completed by all students who seek federal financial aid. Major changes include:

• Simplified Application - The revised FAFSA includes approximately 36 questions, far fewer than the previous version's 108. Part of this simplification is due to the fact that students, parents, and parent spouses are now required to consent to direct access of their tax returns through the IRS Direct Data Exchange.

• Federal Student Aid ID (FSA ID) Changes – Because direct access to tax returns is required, students, parents, and parent spouses are required to register for unique FSA IDs.

• More College Choices – The maximum number of schools listed on the FAFSA form is doubled to 20.

• Removal of Selective Service and Drug Conviction Questions – To avoid preventing otherwise eligible students from applying for aid, questions regarding Selective Service and drug conviction eligibility are removed.

• Some Untaxed Income No Longer Reported – Families are no longer required to report untaxed support (for example, cash gifts from aunts, uncles or grandparents). Further, reporting of veteran's education and workman’s compensation benefits are not required.

• Improved User Experience - The redesigned site allows applicants to identify their role (student, parent, or preparer) and includes instructions embedded within the form, guiding applicants on the necessary details required. 

In addition, the myStudent Aid mobile app has been retired. Online FAFSA applications must be made using a web browser. 

Aid Eligibility Changes

Major changes to financial aid eligibility include:

• Expected Family Contribution (EFC) Replaced - The EFC, which determined how much families are expected to contribute to college, has been replaced with a similar Student Aid Index (SAI). 

• Income Protection Allowance Increased – The amount of student and parent income protected from college contribution calculations has been increased, meaning that financially independent students and families with only one student in college may be eligible for more federal aid.

• Multiple Students Benefit Removed – There is no longer an increase in the Income Protection Allowance for families with multiple students in college at the same time.

• State and Other Taxes Allowance Removed - There is no longer an allowance for state and other taxes, which previously decreased the amount of income available for college expenses and increased eligibility for aid. The effect of the change depends on the family’s state of residence, but may increase the income considered when awarding financial aid by between 1% and 9% - potentially reducing aid awards.

• Pell Grant Eligibility – Income requirements to qualify for Pell Grant aid have been revised to allow for automatic eligibility based on family adjusted gross income (AGI). This change allows students to estimate grant eligibility before completing the FAFSA.

• Newly Eligible Students - Requirements regarding Selective Service registration and the suspension of aid eligibility for those convicted of controlled substance offences have been repealed. This change affects eligibility for both loans and Pell Grants.

While income, family size, and dependency status are all used to calculate eligibility for financial aid, the other major factor is the cost of attending a particular school. Each school’s official cost of attendance is calculated by adding up the school’s tuition, dorm/meal plan costs (if applicable), and the estimated cost books, school supplies, transportation, and other factors such as off-campus housing for nonresidential students. 

The FAFSA Simplification Act gives the Department of Education more authority to regulate all cost of attendance components and requires that schools disclose those costs in a more prominent way. There are minor changes in the way cost of attendance is calculated, perhaps resulting in a slight increase in aid eligibility for some students.

The Act also gives schools more flexibility in assisting students with unusual circumstances by allowing them to change student dependency status from dependent to independent. For example, dependent students who are estranged from their parents may be eligible for aid when classified as financially independent students.

Understanding the Student Aid Index

The FAFSA Simplification Act discontinues the use of the term Expected Family Contribution (EFC) and replaces it with Student Aid Index (SAI). Like the previous EFC, the SAI is a figure that shows how much families are expected to contribute to college costs. 

Like the EFC, the SAI is a dollar amount that estimates how much each student should be able to pay for college in general (it doesn’t vary based on the cost of a particular school). The eligibility formula examines factors such as income, savings, and dependency status to determine how much each family should be able to pay each year. Colleges and universities then subtract that amount from their official cost of attendance to determine eligibility for aid.

The terminology change is intended to clarify that the dollar amount presentedin the SAI is not the total amount they are expected to pay for college. It is simply the number used to determine eligibility for school-administered financial aid – which may be different than to total cost of college for each individual.

In most ways, it’s fair to say that the SAI is the same thing as the previous EFC, but there are differences. As outlined in the Aid Eligibility Changes section above, the formula used for determining eligibility has been somewhat revised, so some families may qualify for more aid while others may qualify for less. Further, the lowest EFC amount was $0, but the new SAI can go as low as -$1,500 (that’s negative $1,500). By adjusting the financial aid formula to produce a number less than zero, schools can better identify the neediest students and could potentially provide them with additional financial aid.

The Takeaway

The FAFSA Simplification Act expands the number of students eligible for Pell Grants and streamlines the FAFSA application. The real test is whether it will assist more students and families – and that answer will likely vary. While the changes do appear to benefit low-income families, other families, especially those with multiple students in college, may receive less support than before.