Student debt is rising. According to the Federal Reserve, the students owed $1.48 trillion in the second quarter of 2019. Forbes reports that having huge amounts of student debt can have detrimental effects on individual lives after graduation as they delay important financial decisions and milestones due to it. To make matters worse, a survey by PR Newswire notes that while three quarters of borrowers found obtaining financial aid for college was easy, 49 percent were unsure of how much money they had to repay every month.
Understanding financial aid can be tricky, but it doesn't take a math major to recognize that many college students are in over their heads in debt. Although many students must turn to loans to finance their degree, knowing the basics of financial aid can help you keep debt to a minimum and be prepared for repayment once your loan comes due.
5 Financial Aid Mistakes to Avoid
1. Letting the school's financial aid letter do the math for you
The financial aid offer letter may gloss over the true cost of college to present a rosy image of affordability. New America and uAspire analyzed thousands of financial aid offer letters and found that they lack clear terminology and include plenty of jargon that can cloud the actual amount of financial aid you are being offered. In fact, they found that 455 colleges that offered unsubsidized loans used 136 different ways to describe them and 24 of these did not include the word 'loan' at all!
Additionally, they may not include the full cost of attendance (COA), so students are left unsure about how much things like books, supplies, transport and other factors may cost them. It's up to you to calculate the total cost attending college along with direct payments and loans.
2. Not applying for FAFSA on time
NerdWallet reports that as much as $2.3 billion in free federal grant money was left unclaimed by the high school class of 2017. Applying for FAFSA as soon as possible after the 1st of October may mean that you do not miss out on available aid.
Remember you need to apply for Federal Student Aid every year, so not reapplying may mean you miss out on vital aid and you may have to take on more debt or loans at higher interest rates. In its report on student aid, the College Board notes that private loans do not carry the same repayment protections as federal loans, so it's important that you do not miss out.
3. Not looking at alternative ways to fund college
A big mistake many students make is not applying for scholarships and grants beyond well-known programs and university offerings. Look for essay competitions and smaller scholarship programs that may not offer the big bucks. Remember that even $500 earned through such schemes means that's $500 less than you may have to repay (with interest!) in the long run.
Applying for the Federal Work-Study program may allow you to earn money by working part-time while you study.
4. Confusing fixed and variable interest rates and repayment timescales
The Department of Education stresses the importance of knowing when you have to make your first payment. Check with your loan service provider to know when your first payment might be due.
Just when you think you have the total cost of your loan down, a variable interest rate can introduce a new monthly repayment rate. Variable interest-rate loans tend to shift continuously with an index such as the federal funds rate, prime rate or LIBOR rate. Fixed rates, by contrast, are typically locked in when you sign the loan agreement. Most private loans and some federal loans have variable rates. If you have variable-rate loans, you may choose to consolidate them at a fixed interest rate when rates are low. Remember it is up to you to keep in touch with your loan service provider to stay up-to-date on your payment schedule and repayment options so that you do not default.
5. Assuming you'll graduate on time
Failing to graduate on time can increase your expected debt burden. The College Board reports that the cost to earn a degree increases with the time taken to complete it. Avoid surprises by planning your courses and determining how many transfer credits you're eligible for at each school. College guidance counselors can help you understand what it will take to stay on track for an on-time graduation. Think about it, the faster you complete a degree, the faster you can reap the benefits of earning college-level wages.
Financial aid is a complicated array of payments, loan terms and agreements. Understanding how all the pieces of the puzzle fit together before you enroll can help prevent your finances from falling apart later.
- Baum, Sandy, Jennifer Ma, Matea Pender, and CJ Libassi, Trends in Student Aid 2019, New York: College Board, 2019, https://research.collegeboard.org/pdf/trends-student-aid-2019-full-report.pdf
- Decoding the Cost of College, The Case for Transparent Financial Aid Award Letters, New America and uAspire, 2018, https://www.uaspire.org/BlankSite/media/uaspire/Decoding-the-Cost-of-College.pdf
- FAFSA®: Apply for Aid, Federal Student Aid, U.S. Department of Education, https://studentaid.ed.gov/sa/fafsa, accessed November 2019
- Federal Student Loans: Repaying Your Loans, Federal Student Aid, U.S. Department of Education, https://studentaid.ed.gov/sa/sites/default/files/repaying-your-loans.pdf, accessed November 2019
- How Students missed Out on $2.3 Billion in Free College Aid, Nerd Wallet, 2017, https://www.nerdwallet.com/blog/loans/student-loans/missed-free-financial-aid/
- Ma, Jennifer, Sandy Baum, Matea Pender, and CJ Libassi, Trends in College Pricing 2019, New York: College Board, 2019m https://research.collegeboard.org/pdf/trends-college-pricing-2019-full-report.pdf
- New Report Finds Student Debt Burden Has 'Disastrous Domino Effect' On Millions of Americans, Forbes, 2018, https://www.forbes.com/sites/dianahembree/2018/11/01/new-report-finds-student-debt-burden-has-disastrous-domino-effect-on-millions-of-americans/#4f61be5112d1
- Quarterly Report On Household Debt And Credit 2019: Q2, Federal Reserve Bank Of New York Research And Statistics Group, August 2019, https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/hhdc_2019q2.pdf
- Three Quarters of Student Borrowers Say Obtaining a Student Loan Was Easy, PR Newswire, 2019, https://www.prnewswire.com/news-releases/three-quarters-of-student-borrowers-say-obtaining-a-student-loan-was-easy-300837869.html