by Jeff Levy, IECA (California)
While advising families on college affordability, it is important to keep in mind that there is no “one-size-fits-all” solution. One family may benefit most from a list of schools that meet 100% of need, while another might require schools where their child could receive substantial merit aid. Helping families devise effective strategies to minimize out-of-pocket costs requires that we first look closely at their needs, values, priorities, student academic profile, and family finances. Otherwise, our suggestions will surely miss the mark.
One approach to reducing the cost of college is to find institutions that have eliminated loans altogether in their financial aid packaging. Currently, there are fifteen such schools and many more that have eliminated loans for low to medium income applicants, according to this Naperville North High School document. Many of these schools, though not all, are among the most selective in the country, so this approach is particularly useful for high achieving students with demonstrated need.
How can a no-loan school reduce the family’s upfront costs? Typically, loan offers are counter-intuitively included in financial aid packages. Federal Direct Loans for dependent undergraduates are capped at $5,500 for the first year, $6,500 for the second, and $7,500 for the third and fourth years, with an aggregate limit of $31,000. So a student who qualifies for, say, $20,000 in need-based aid her first year at a $60K college may receive a package consisting of grants, work study, and the $5,500 federal loan maximum. In this scenario, the family’s upfront contribution would be the total cost of college less the financial aid award, or $40,000. If they can’t meet that expense from savings and current income, they would have to borrow through the Parent PLUS loan program or an even less attractive private loan. Repayment of these loans begins shortly after disbursement, making this an immediate additional expense for a family already spending every dollar earned.
At a no-loan school, a student can still borrow through the federal student loan program. At the current interest rate of 3.86%, these loans are less expensive than Parent PLUS loans, have much lower fees, and a ten-year repayment schedule that doesn’t begin until after graduation. The parent contribution of $40,000 could thus be reduced by $5,500 the first year and up to the allowable maximum each of the subsequent years. This student would accumulate debt that they wouldn’t have otherwise taken on at this no-loan school, but the parents will be in a much stronger position to help pay down that debt after graduation when they are no longer faced with hefty college bills. This strategy could also work for families with no demonstrated need since unsubsidized student loans simply require submission of the FAFSA and are not need-based.
Student debt is a contentious issue, and opinions differ widely on how much a student should borrow. But familiarizing ourselves with the advice of two of the country’s leading experts may be instructive. Mark Kantrowitz, founder of the Finaid and Fastweb websites, says, “A good rule of thumb is that your total education debt for your entire college education should be less than your expected starting salary after you graduate.” Sandy Baum, Senior Fellow at the George Washington School of Education and Human Development, suggests more conservatively that student loan payments be no higher than ten percent of expected gross monthly income after graduation. If a student expects to earn $38,000 after graduation, ten percent of that income would service a loan of $31,000. Eight percent of that income would service a loan of $25,000.
Borrowing may not be right for every family. But just as we borrow to make home ownership possible, reasonable borrowing for this second most expensive lifetime purchase can be a smart strategy. For a high achieving student able to enroll at a no-loan school, a smart approach to borrowing can give a financially strapped family a necessary cushion as they struggle to meet their substantial college costs.