Smart Strategies for Financing College Education through Loans
By Mark Yatros
If you attended college in the ’90s and are now researching higher ed options with your high school student, hold on to your wallet! Things have changed a lot since you graduated.
In 2023, the average cost of tuition for a Michigan college is $8,916 for in-state students (compared to $2,537 in 1993). When you add living expenses, books, and supplies, the total cost jumps to more than $20,300 for a freshman living on campus.
While 58% of students qualify for at least one scholarship, it’s rare to receive enough scholarships and financial aid to pay the entire cost of college. So, it’s a good idea to start planning how you’ll pay for your child’s higher education as early as possible. You may want to read my blog “College Costs HOW MUCH? Tips on how to pay for higher education (including scholarships and maximizing your 529 plan)” for some background information.
In addition, my colleagues and I at Allegiant Wealth Strategies would be happy to guide you and your child through the higher education financing maze. You can schedule a free consultation here.
In this blog, we’ll explore a popular source of money to pay for college: loans.
But, before I get into the different types of loans available and the pluses and minuses of each, I’d be remiss if I didn’t mention FAFSA.
The Lowdown on FAFSA
Every student who wants to be considered for federal student aid must complete the Free Application for Federal Student Aid. Usually, FAFSA applications open on October 1 each year. However, for the 2024-25 school year, applications open in December 2023.
The deadline for completion is June 30 each year. Each state has its own deadline, too, with Michigan’s deadline being May 1. While you can complete FAFSA any time after applications open, it is best to complete it as soon as possible for the best chance at all financing options.
After completing FAFSA, your child will receive a financial award letter from each school they were accepted to. The financial aid packages may differ school by school depending on any scholarships and grants the school offers. The award letter will also list federal subsidized and unsubsidized loans available to the student and work-study opportunities.
Federal loans are based on financial need, though all first-year students who are considered dependent on their parents can borrow up to $5,500, with up to $3,500 of this amount being subsidized (meaning the interest doesn’t start accruing until after the student finishes their education, drops below half-time, or leaves school). The minimum amount students can borrow increases slightly as they progress through school.
Pro Tip: Submit your child’s FAFSA before the deadline to maximize their eligibility for federal student aid and compare the financial aid packages from each school to understand the scholarships, grants, and loans offered. Please pay particular attention to subsidized loans because they won’t need to be repaid until your child graduates or leaves school.
Exploring Your College Loan Options
A variety of student loan options are available, each with pros and cons.
Federal Student Loans: These should be the first loan option for most students. Federal student loans have advantages such as low-interest rates and flexible repayment options. They can be used for tuition, books, housing, and other educational expenses. Repayment typically begins after students graduate or leave school.
An important benefit of federal student loans is their fixed interest rates, which remain the same throughout the loan term. This feature provides stability, allowing borrowers to plan their finances better. Additionally, federal loans offer income-driven repayment plans, letting students make payments based on their income and family size.
It is important to note that federal student loans require responsible borrowing and careful consideration of the loan terms. Students should know that these loans must be repaid, even if they leave school or don’t find employment after graduation. Failing to repay federal loans can lead to serious consequences, such as damaged credit scores and wage garnishment.
Private Student Loans: If your student doesn’t qualify for enough federal loans to pay for school expenses, private student loans are an option. Unlike federal student loans, these loans aren’t based on FAFSA, and you must apply directly for the loan with a financial institution. Also, be ready for the bank or credit union to review your child’s credit history. Because many younger students don’t have much of, or any, credit history, they will often be required to have a cosigner before receiving the loan.
Another big difference between federal and private student loans is the interest rate. Private loans normally have higher interest rates and offer fewer flexible repayment options. But one benefit of private loans is that they can cover additional expenses beyond what federal loans and other aid allow. These loans can fill in if there’s a gap between the total cost of education and the amount covered by federal loans and grants.
It's crucial to carefully compare interest rates, repayment terms, and fees from different lenders before deciding on a private loan. While private loans can be beneficial, it's important to encourage your child to explore all available options, such as scholarships, grants, and federal loans, before considering private financing.
Parent Loans: If there is still a gap between the financial aid your child receives and their total educational expenses, you could consider a parent loan. One common option is the Parent PLUS loan, which the federal government offers. One positive of Parent PLUS loans is that they can cover the full cost of attendance, including tuition, fees, and living expenses. However, it's important to note that these loans have higher interest rates than other federal loans, and parents are responsible for repayment.
Parents can also get private parent loans from private lenders. These loans can provide additional financial support when federal loans and other aid fall short. Private parent loans often offer flexible repayment options and can be tailored to fit the specific needs of parents. However, it's essential to carefully consider the interest rates, fees, and repayment terms associated with private parent loans, as they vary among lenders.
It's vital to consider your financial situation when taking out loans for your child's education. While taking on debt can help provide educational opportunities for your child, loans may lead to long-term repayment burdens for you. I urge you to exhaust all alternative options, such as scholarships, grants, and savings, before resorting to parent loans.
Pro Tip: Using online loan calculators, like this one from SmartAsset, can help you and your child understand potential monthly payments and total repayment amounts. This tool can provide a reality check on your loan affordability.
Making the Right College Loan Choice
Understanding your family’s financial situation is paramount in determining your child’s loan needs. Consider factors like your family's finances, your child’s chosen field of study, and their potential earning power after graduation. Your child’s loan choices can significantly impact their financial health post-graduation, so choose wisely.
If this all seems like a lot, it’s because it can be! But my colleagues and I at Allegiant Wealth Strategies are available to assist you in figuring out the best way to finance your child’s higher education. You can schedule a free consultation here.
Pro Tip: It’s important to include your child in all discussions about funding their schooling so they understand everything they, and you, are getting into. Taking on excessive debt can have long-lasting consequences, so ensure your child understands the pros and cons and makes a wise choice regarding their educational finances.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.
The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.