6 Alternate Forms of College Financial Aid

by Kate Forgach, MCT Published: Feb 24, 2010

College tuition and fees have gone through the roof as gov­ern­ment fund­ing has dried up. This comes at a par­tic­u­larly bad time as college-saving accounts have top­pled. At the same time, sup­ple­men­tal work for stu­dents has dried up as older American’s, laid-off from career-track jobs, will­ingly accept minimum-wage jobs just to bring in some cash.

College endow­ments also con­tinue to shrink, mak­ing it more dif­fi­cult for col­leges to offer grants and schol­ar­ships. Finally, pri­vate stu­dent loans are harder to obtain, with a drop in about 30 per­cent of loans as banks raised lend­ing standards.

In response, our fed­eral gov­ern­ment has broad­ened loan pro­grams for stu­dents by offer­ing more loans, more money, and bet­ter rates while increas­ing tax breaks for par­ents. An expanded tuition credit for house­holds with up to $160,000 in adjusted gross income could trim as much as $2,500 from your tax bill. Still, the eco­nomic down­turn means many fam­i­lies need to rethink how and how much they’ll need to borrow.

Here are five pub­lic and pri­vate types of col­lege finan­cial aid.

1. Free Application for Federal Student Aid (FAFSA)

Your first step is to fill out the FAFSA form col­leges usu­ally require before award­ing aid, from merit schol­ar­ships to need-based grants and loans. The Department of Education begins accept­ing the appli­ca­tion Jan. 1 of each year. Applicants who have filled out aFAFSA in pre­vi­ous years are able to fill out a renewal FAFSA, but infor­ma­tion on taxes and sav­ings, for exam­ple, must be updated annu­ally. The form includes numer­ous ques­tions regard­ing the student’s finances, as well as those of his or her fam­ily, if the stu­dent is a depen­dent. The answers are entered into a for­mula that deter­mines the Expected Family Contribution (EFC).

2. Federal Perkins Loan Program

Low-interest Perkins loans of up to $4,000 a year goes to stu­dents with the great­est finan­cial need. Perkins Loans carry a fixed inter­est rate of 5 per­cent for the dura­tion of the 10-year repay­ment period. Borrowers begin repay­ment in the tenth month after grad­u­a­tion, falling below half-time stu­dent sta­tus, or with­draw­ing from col­lege. Interest doesn’t begin accru­ing until the bor­rower begins to repay the loan. The Perkins Program should bal­loon to $6 bil­lion a year, from $1 bil­lion, under President Obama’s pro­posed 2010 budget.

3. Stafford Loans

Stafford Loans are the most com­mon needs-based stu­dent loans and almost always have bet­ter terms than pri­vate bank loans. These loans may be sub­si­dized, in which the gov­ern­ment pays the inter­est while the stu­dent is in school, or unsub­si­dized. Twelve per­cent of stu­dents from fam­i­lies with adjusted gross incomes over $100,000 received sub­si­dized­Staffords in 2008/09 and the inter­est rate will decline from 5.6 per­cent to 3.4 per­cent by the 2011-12 aca­d­e­mic year.

Unsubsidized Stafford loans, which any stu­dent can receive, are get­ting more gen­er­ous, too. You can add $2,000 to the for­mer lim­its of $3,500 for fresh­man year, $4,500 for sopho­more year, and $5,500 there­after. Loan terms will remain at 6.8 per­cent; your col­lege can pro­vide a list of lenders.

4. PLUS Loan Program

PLUS loans allow you to bor­row for the full cost of a depen­dent child’s col­lege edu­ca­tion, minus any finan­cial aid. For the 2009/10 school year, the inter­est rate is 7.9 per­cent for loans that come directly from the gov­ern­ment, and 8.5 per­cent for those in which a finan­cial insti­tu­tion is the inter­me­di­ary. T he fees run from 3 per­cent to 4 per­cent of the loan.

5. Scholarships

Students needn’t always have a 4.0 GPA to qual­ify for schol­ar­ships, although it cer­tainly does help. The Department of Education pro­vides a search­able data­base for col­lege schol­ar­ships based on degree area and location.

6. Private Loans

Leave pri­vate loans until last. Before the credit crunch, you could cosign a pri­vate stu­dent loan with a credit score as low as 620. Now, banks require credit scores of 680 to 700, or even 730.