Making College. Affordable. A Workbook on Financial Aid, Loans, and Scholarships for College-Bound Students and Their Families

Transcription

1 Making College Affordable A Workbook on Financial Aid, Loans, and Scholarships for College-Bound Students and Their Families

2 Making College Affordable The cost of college may seem scary to you and your family at first, but even though the price may seem high, college can be affordable, no matter how much you earn. TERI believes that a college education is the best investment you ll ever make. This guide explains the many different kinds of scholarships, grants, and loans available from a variety of sources to help you pay for your education. Scholarships and grants can help reduce the cost of college. Federal work-study may be available to assist you in paying for your living expenses. Loans may allow you to spread out the cost of college over a longer period of time. Making College Affordable will help you find the ways to pay for college that work best for you and your family. Making College Affordable features: An overview of the types of federal financial aid and how to apply Resources to help you budget your money wisely in order to afford college A glossary with definitions of financial aid terms Websites and college access centers where you can receive additional help or information relating to financial aid We at TERI hope you find this booklet helpful and informative. If you need further assistance, visit us at one of the many TERI College Access Centers located in Boston, Brockton, or Chelsea; find us at or call us toll-free in Massachusetts at ED-AID-4-U ( ). Best wishes for your continued success! The Staff at TERI TERI Making Financial College Aid Workbook Affordable

3 About TERI (The Education Resources Institute) TERI (The Education Resources Institute) promotes access to education for students of all ages and backgrounds. TERI is a national leader in helping low-income individuals and those who are the first generation in their families to attend college, realize their college dreams through direct service programs and policy initiatives. TERI is also one of the most experienced and largest nonprofit guarantors of private loans for education, which enables TERI to support its college access initiatives locally, regionally, and nationally. Introduction

4 Table of Contents A College Education the Best Investment You ll Ever Make... 5 Financial Aid and Federal Student Aid Overview...6 What Is Financial Aid?...6 Federal Student Aid Overview...7 Grants...7 Federal Work-Study...7 Federal Student Loans...7 Eligibility for Federal Student Aid...9 Tax Benefits for Higher Education...10 Applying for Scholarships...12 What Are Scholarships?...12 Your Scholarship Resources...13 How Do I Find Scholarships?...14 How Do I Apply for Scholarships?...15 How to Apply for Financial Aid...16 Submit the FAFSA...16 What Happens After I Submit the FAFSA?...18 Other Financial Aid Applications...19 Additional Forms...19 Filling out the CSS Profile...19 Comparing Award Packages...19 Debt Management and Loan Repayment...20 Good Debt vs. Bad Debt...20 Credit Reports and Credit Bureaus Navigating the System...21 Repayment Options for Student Loans...22 Default Prevention...23 The Importance of Budgeting...23 Glossary...24 Resources...26 Budget Worksheet...26 Your Student Resources...28 Financial Aid Award Comparison Chart...29 Internet Resources...30 Private Loan Alternatives...31 TERI College Access Centers and Educational Opportunity Centers... inside back cover 4 Making College Affordable

5 A College Education the Best Investment You ll Ever Make Investing in college pays off! You will have the opportunity to earn back the money you pay toward your education many times over throughout your lifetime both in dollars and cents and through your life experiences. A college education will give you: A better understanding of the world around you. A college degree can supply you with the skills you need to be a successful worker. When you continue your education, you will learn how to make better decisions for yourself, your family, and your future. More earning power. In general, people with college degrees earn more money than people without college degrees (although there are some exceptions). With a college degree, you may be able to better support yourself and your family, and make more informed decisions about how to wisely spend the money you earn. The graph below shows the typical yearly earnings of people who have graduated from college. The More You Learn, the More You Earn! Average Yearly Salary of People with College Degrees Source: Bureau of Labor Statistics, 2006 Introduction 5

6 Financial Aid and Federal Student Aid Overview What Is Financial Aid? Financial aid is any type of assistance that you receive to help pay for college. The two main kinds of financial aid are need-based aid and merit-based aid. Need-based aid is money that you receive based on the determination that you may have difficulty paying for college. Merit-based aid is money that you receive based on the determination that you have worked hard or excelled in some way. Average Tuition and Fees for Academic Year 2-year public colleges $2,272 4-year public colleges $5,836 4-year private colleges $22,218 Source: The College Board, 2006 Note: Costs are subject to change each year. Types of financial aid that often are need-based include: Federal, state, or school grants awards that you do not have to repay Federal work-study money you can earn by working part-time Federal loans money that you must pay back, usually after you graduate or leave school A type of financial aid that often is merit-based is: Scholarship aid money that you do not have to repay that has been awarded to you for a special reason. This aid usually is awarded through your college or university, a business, a community organization, or an individual. Students receive financial aid from many different sources. Some private organizations award scholarships to students through competition. In some circumstances, students receive awards in exchange for community service from organizations like AmeriCorps, or in exchange for military service in the armed forces. Many colleges and universities offer both need-based and merit-based grants and scholarships to their accepted students. Students also may receive need-based grants or loans from their state governments. The largest amount of financial assistance comes from the federal government in the form of federal student aid. 6 Making College Affordable

7 Federal Student Aid Overview The government offers federal student aid to help U.S. residents and eligible nonresidents pay for college. When you apply for federal student aid, you may receive some combinatation of these three types of assistance to pay for your college education: grants, loans, and federal work-study. Grants A grant is the best kind of federal aid to receive, because, like a scholarship, you do not have to pay back this money. The types of federal grants you may be eligible to receive include the Federal Pell Grant, the Federal Supplementary Educational Opportunity Grant (FSEOG), the Federal Academic Competitiveness Grant (ACG), and the National SMART Grant. Federal Work-Study Under the Federal Work-Study program, you can earn money toward your living expenses by working while you attend school. Most work-study jobs are oncampus or at local community organizations, and are usually not more than 10 to 15 hours a week. It is important to remember that you must earn workstudy money during the course of your college attendance. You will receive these funds as you earn them. They will not be applied automatically to the cost of your college tuition at the beginning of each semester. Federal Student Loans Student loans are another type of federal assistance. They may be subsidized or unsubsidized. On subsidized loans, the federal government pays the interest that accrues while you attend school, so the amount you owe when you graduate or leave school is the same as the amount that you borrowed. For unsubsidized loans, you are responsible for paying the interest that accrues while you attend school. You may choose to defer these interest payments while you are in school, which means the amount you owe when you graduate or leave school will be greater than the amount you originally borrowed. No matter what type of loan you have, or whether or not you graduate from college, keep in mind that you will have to pay back the money that you borrow. You may be eligible for federal loans, which include Federal Perkins or Federal Stafford Loans. Parents of undergraduate students and graduate students also may be eligible for PLUS loans. Federal Stafford Loan and Direct Loan Borrowing Limits Maximum Amounts Undergraduate Students May Borrow in Both Federal Subsidized and Unsubsidized Loans Dependent Independent Student Student 1st year $3,500 $7,500 (maximum of $3,500 subsidized) 2nd year $4,500 $8,500 (maximum of $4,500 subsidized) 3rd 5th years $5,500 $10,500 (maximum of $5,500 subsidized) Cumulative Limit $23,000 $46,000 Source: U.S. Department of Education Financial Aid and Federal Student Aid Overview 7

8 Financial Aid And Federal Student Aid Overview Types of Federal Financial Aid Available to Students Type of Aid Description 1 Pell Grant Academic Competitiveness Grant (ACG) Program National SMART Grant Program Federal Supplemental Educational Opportunity Grant (FSEOG) Federal Work-Study Program This is money that the federal government gives to undergraduate students who may have difficulty paying for college. The amount you receive depends on your need. Awards for may range from $400 to $4,050. This money does not have to be repaid. The ACG is intended for students who demonstrate financial need and are strong academic students. Students can receive $750 for the first academic year of study and $1,300 for the second academic year. To be eligible, a student must be enrolled full time at a competitive secondary school program. First-year students must not have been previously enrolled in an undergraduate program; second-year students must have at least a cumulative 3.0 grade point average on a 4.0 scale. The student must be a U.S. citizen and Federal Pell Grant recipient. The National SMART Grant Program is intended for students who demonstrate financial need and are strong academic students with a particular interest in math and science. Students can receive $4,000 for each of the third and fourth academic years of study. To be eligible, a student must be enrolled full time at a competitive secondary school program. Students must have at least a cumulative 3.0 grade point average on a 4.0 scale and must major in physical, life, or computer science; engineering; mathematics; technology; or a foreign language critical to national security. The student must be a U.S. citizen and Federal Pell Grant recipient. This is money that the federal government gives to undergraduate students who demonstrate high financial need. The amount you receive depends on your need, the amount of other aid you receive, and the amount the college has available to distribute. Awards for may range from $100 to $4,000. This money does not have to be repaid. This is money that you can earn while you attend school by working on your college campus or at a non-profit organization nearby. This money will not go directly toward your college tuition, but your earnings can help pay for your living expenses or books. This money does not have to be repaid. Perkins Loan Subsidized Direct 2 or FFELP Stafford Loan 3 Unsubsidized Direct or FFELP Stafford Loan This is a low-interest (5% in ) loan from your school. If you qualify for this loan, you will have to begin repaying this money once you are no longer a student. This is a low-interest loan (6.8% in ) that can help you pay for your tuition or expenses while you attend school. You must be at least a half-time student to qualify. This loan is cheaper than an unsubsidized loan, because the federal government pays your interest for you while you are in school. You will have to begin repaying this money once you are no longer a student. This is a low-interest loan (6.8% in ) that can help you pay for your tuition or expenses while you attend school. You must be at least a half-time student. This loan will accrue interest while you are in school, so the amount you owe when you leave school will be more than the amount you borrowed. You will have to begin repaying this money once you are no longer a student. Direct or FFELP PLUS Loan This low-interest loan (8.5% FFELP or 7.9% Direct in ) is available to parents who have children who are at least half-time students to help pay for their child s college tuition or expenses. The maximum amount of this loan is the child s cost of attendance minus any other financial aid the student receives. The parents are responsible for repayment of this loan. 1 Check with your school s financial aid office for applicable requirements or restrictions. 2 Direct Loans: Eligible students are able to borrow directly from the U.S. Department of Education at participating schools through the William D. Ford Direct Loan Program. 3 FFELP (Federal Family Education Loan Program) Stafford Loans: Private lenders provide funds that are guaranteed by the federal government. The student pays these loans to the private lenders that made the loan. 8 Making College Affordable

9 Dependent vs. Independent Students Significant benefits may exist to filing as an independent student, such as a more significant award package and an easier filing process. However, most students under the age of 24 are considered dependent by the federal government and must have their parents complete the FAFSA. Below is a list of questions. If the answer is yes to any of these questions, you can file as independent. Were you born before January 1, 1984? At the beginning of the school year, will you be working towards a master s or doctorate degree? As of today, are you married? Do you have children who receive more than half their support from you? Do you have dependents other than your children/ spouse who live with you and who receive more than half of their support from you? Are a) both your parents deceased or b) are you (or were you until age 18) a ward/dependent of the court? Eligibility for Federal Student Aid In order to be eligible to receive federal student aid, you must either be a U.S. citizen with a Social Security Number or an eligible non-citizen. If you are a male age 18 25, you must have registered for the selective service (if you are not already registered, you can do so on the financial aid application). You must be enrolled, or planning to enroll, in a degree program of organized instruction that leads to an academic, professional, or vocational degree or certificate. Are you currently serving on active duty in the U.S. Armed Forces for purposes other than training? Are you a veteran of the armed services? Additional special circumstances may also allow you to file as an independent. Check with your financial aid officer for answers to your questions. Financial Aid and Federal Student Aid Overview 9

10 Financial Aid And Federal Student Aid Overview Tax Benefits for Higher Education While the cost of college can be expensive, there are specific tax benefits for higher education that may make the cost of attendance less prohibitive. Educational Tax Credits The federal government offers tax credits for those who are enrolled in postsecondary education programs. Tax credits are subtracted directly from the tax amount a family owes, as opposed to tax deductions, which are subtracted from a families taxable income. The HOPE Scholarship Tax Credit The HOPE Scholarship is a tax credit, not a scholarship. A family may claim a tax credit up to $1,500 for each eligible dependent 100% on the first $1,000 of tuition and required fees, and 50% on the second $1,000, for a total credit of $1,500. The Hope Scholarship is only available for the two tax years, i.e., freshman and sophomore years. Lifetime Learning Tax Credit As part of the Lifetime Learning Tax Credit, a family may claim a tax credit of up to $2,000 per year (20% of the first $10,000 of qualified tuition) for the taxpayer, taxpayer s spouse, or any eligible dependents for an unlimited number of years. This cannot be used in the same year as a HOPE Scholarship Tax Credit. Tuition and Fees Tax Deduction The Tuition and Fees Tax Deduction can reduce taxable income by as much as $4,000 in This deduction is taken as an adjustment to income and may benefit taxpayers who do not qualify for either the Hope or Lifetime Learning tax credits. Student Loan Interest Tax Deduction Students and/or their families may be eligible to take a tax deduction of up to $2,500 for the interest paid on educational loans. This deduction is available for all educational loans including student, parent, federal, and non-federal loans. The eligibility for tax credits and amount received for these tax credits depend on income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from the cost of tuition. Note: This overview of tax credits and deductions is provided as a guide only and should not be used as tax advice. For more detailed information on higher education tax benefits, visit and search for Publication 970, Tax Benefits for Education. 10 Making College Affordable

11 Am I an eligible non-citizen? You must be one of the following: A U.S. National (includes natives of American Samoa and Swain s Island) A U.S. Permanent Resident who has an I-151, I-551, or I-551C (Permanent Resident Card or Green Card ) If none of those categories applies, you must have an Arrival-Departure Record (I-94) from U.S. citizenship and Immigration Services (USCIS) showing one of the following designations: Refugee Asylum Granted Cuban-Haitian Entrant, Status Pending Conditional Entrant (valid only if issued before April 1, 1980) Parolee (You must be paroled into the U.S. for at least one year, and you must be able to provide evidence from the USCIS that you are in the U.S. for a purpose other than a temporary one and that you intend to become a U.S. citizen or permanent resident.) If you have only a Notice of Approval to Apply for Permanent Residence (I-171 or I-464), you are not eligible for federal aid. If you are in the U.S. on certain visas, including an F1 or F2 student visa, or a J1 or J2 exchange visitor visa, you are not eligible. People with G series visas are not eligible. Source: Funding Education Beyond High School, U.S. Dept. of Education ( ). Financial Aid and Federal Student Aid Overview 11

12 Applying for Scholarships What Are Scholarships? A scholarship is an award from a private source that does not need to be paid back. Many private scholarships are merit-based, that is, awarded to students for outstanding achievements or talents. Some scholarships are limited to students with financial need. Private scholarships are sponsored by individuals, businesses, organizations, and groups with special interests, and may be awarded for: A specific field of study or occupation Race, ethnic group, or religious affiliation Special skills, or talents Community service or leadership Outstanding achievements Students who have overcome significant challenges Organizations that may award scholarships include: Businesses or corporations Community service organizations Industry associations Cultural or religious organizations 12 Making College Affordable

13 Scholarships the Best Kind of Support to Pay for College Your Scholarship Resources The Web is the fastest and easiest way to locate private scholarships. There are over 50 online scholarship databases. Three to start with are: A database designed by TERI specifically for Massachusetts residents and students planning to attend Massachusetts schools. See page 30 to find additional Internet resources on colleges, careers, scholarships, and various sources of financial aid. Applying for Scholarships 13

14 Applying for Scholarships How Do I Find Scholarships? High School Counselors and College Advisors Counselors often have information about scholarships. Ask about scholarships that other students have received and whether or not you may be eligible for them. Inquire if there are scholarships for which they can recommend you. Libraries Public libraries and college libraries have books listing scholarships. Many libraries also maintain files of newspaper clippings and brochures on local scholarships not listed in books or on the Web. Your Family Family members may be affiliated with groups that offer scholarships. Employers, community groups, unions, local businesses, civic groups, alumni organizations, veterans groups, and religious organizations are examples. Chamber of Commerce Your local Chamber may have a list of businesses and civic organizations that award scholarships to area residents. Community and Faith-based Organizations YM/YWCAs, Boys and Girls Clubs, churches, temples, and mosques have private scholarship information. Consult your high school counselor to find out more. 14 Making College Affordable

15 How Do I Apply for Scholarships? Start early! Begin researching private scholarships at least one year before you plan to go to college. Allow time to: 1. Do research Request application forms. Make sure that you meet eligibility requirements. 2. Complete the application process Scholarships have their own applications that you will need to complete. Submit all required materials such as essays and school transcripts. Give your references (teachers, youth leaders, and others you know well) enough time to submit their recommendations. Complete the FAFSA, the application used to determine eligibility for federal and state financial aid programs, if the scholarship application requires it. See page 16 for an overview of the FAFSA. Some private scholarships also require that students complete a CSS Profile. (See the CSS Profile registration booklet at com for information on which scholarship programs require the form.) 3. Meet all Deadlines! Most scholarship programs strictly adhere to deadlines. Make sure that you meet all of the eligibility requirements. Applying for Scholarships 15

16 How to Apply for Financial Aid Submit the FAFSA (Free Application for Federal Student Aid) All colleges and universities require students to complete the FAFSA form in order to be eligible for financial aid. You can complete this form on the Internet at or you can have a paper FAFSA form mailed to you by calling the Federal Student Aid Information Center at FED-AID. We strongly urge you to fill out the FAFSA online. If you do not have a computer, we suggest you speak to your guidance counselor, or visit a local college access center or library. See the inside back cover for a list of college access centers in Massachusetts. In order to complete the FAFSA form online, you will need to follow these steps: 1. Request a PIN (Personal Identification Number) for you and your parents. You can request a PIN at Be aware that it can take up to one week to receive your PIN. 2. Figure out exactly whose tax forms you will need to complete the FAFSA. (Note: If you have not yet filed your taxes, you may complete the FAFSA using estimated tax information.) If you worked last year, you will need your own W-2(s) and your income tax form, which is called either a 1040, 1040A, or 1040EZ form. (The type of form usually is indicated at the top left and bottom right corner of the page.) If you live with both natural parents, and they are currently married, you will need both your parents W-2 forms and income tax form(s). If you live with one natural parent who is not currently married, you will need the W-2(s) and tax forms of the parent that you live with for most of the year (over six months). If your parents are divorced, and you lived with each of them for an equal amount of time in the past year, then you will need the W-2(s) and tax forms of the parent who provides more money to support you. If you live with one natural parent and one step-parent, then you will need the W-2(s) and tax form(s) from both your natural parent and your step-parent. If you live with your legal guardian, then you may need his or her W-2(s) and tax forms. (Legal guardians are NOT considered parents in reference to the FAFSA unless they have legally adopted you.) 3. Complete the FAFSA at: 4. List all the schools to which you are applying on the FAFSA (up to six), so that all your FAFSA information is automatically sent to each of your schools. Find a list of all of the schools in the U.S. and their codes at ed.gov/fotwwebapp/fslookupservlet. 16 Making College Affordable

17 Checklist You ll need the following items to complete your FAFSA form Social Security Number Driver s license 2006 W-2 forms and other records of money earned Your (and your spouse s, if married) 2006 Federal Income Tax Return. This can be an IRS Form 1040/1040A/1040EZ OR foreign tax form OR a tax return from Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, the Marshall Islands, the Federated States of Micronesia, or Palau. Parents 2006 Federal Income Tax Return (if you are a dependent student) 2006 untaxed income records: Social Security benefits, Temporary Assistance to Needy Families, Welfare, and/or Veteran Benefits Records. Current bank statements Current business and investment mortgage information; business and farm records; and stock, bond, and other investment records. Alien registration or permanent residence card (if you are not a U.S. citizen) Keep these records! You may need them again. For more information, go to How to Apply for Financial Aid 17

18 How to Apply for Financial Aid What Happens After I Submit the FAFSA? 1. Once you have submitted your FAFSA, the federal government uses the information to determine how much you and your family can afford to pay for college each year. This amount is called your Expected Family Contribution (EFC). 2. Your EFC will be sent to you either by mail or on a form called your Student Aid Report, or SAR. The colleges you designated on your FAFSA also will receive your EFC, on a form called The Institutional Student Information Report (ISIR). 3. Based on your EFC and the cost of attendance (COA) for the universities and colleges to which you are applying, the school will determine your financial need. The school does this by subtracting your expected contribution from the cost of attendance. For example, if the cost of attendance for a particular school is $20,000, and your expected family contribution is $5,000, your remaining financial need is $15, Based on your financial aid need, each college will provide you with a financial aid award package with a variety of options to help you meet your financial need. The package may include a combination of Federal Perkins Loans, Federal Stafford or Direct Loans, Pell or FSEOG grants, or Work-Study. Some colleges and universities also may award their own institutional grants or aid. Note: Although you may qualify for financial aid, your aid award may not cover your entire financial need. In these cases, you the student are responsible for the remaining cost of attendance. IMPORTANT NOTE! The FAFSA becomes available in January each year. Apply as soon after January 1 as possible. Most schools have application deadlines for the FAFSA, but you do not need to wait for an admissions acceptance or complete your tax returns to fill out the FAFSA. Sample Repayment Charts The charts below demonstrate how the amount you borrow to pay for college translates into monthly payments after you graduate or leave school. It also shows how interest rates affect how much you will ultimately pay on a loan. This is important information to consider when you decide how much you can afford to borrow. 6.80% Interest Current Federal Stafford Rate Annual Amount Borrowed Total (4 Years) Amount Borrowed Monthly Payment After School Total Amount Paid $2,000 $8,000 $92.06 $11, $3, $4,500 $18,000 $ $24, $6, $6,000 $24,000 $ $33, $9, $10,000 $40,000 $ $55, $15, Total Interest Paid 8.50% Interest Current Federal PLUS Rate Annual Amount Borrowed Total (4 Years) Amount Borrowed Monthly Payment After School Total Amount Paid $2,000 $8,000 $99.19 $11, $3, $4,500 $18,000 $ $26, $8, $6,000 $24,000 $ $35, $11, $10,000 $40,000 $ $59, $19, Total Interest Paid *Please note: These figures are meant only as estimates. Consult with your financial aid office for specific information on repayment. 18 Making College Affordable

19 Other Financial Aid Applications Additional Forms While all schools require that you complete the FAFSA, some schools also may require you to fill out additional paperwork besides the FAFSA to apply for federal aid. A number of private colleges, universities, and scholarship programs, in fact, will require a form called the CSS Profile. They also may require that you complete their own institutional financial aid application, a customized form that asks questions specific to the school s financial aid process. Make sure that you contact your college s financial aid office to find out their application requirements. You may not be eligible to receive financial aid from your school if you do not complete the paperwork in full. Filling out the CSS (College Scholarship Service) Profile The CSS Profile is similar to the FAFSA but asks even more in-depth questions about your family s financial Financial Aid Formula (Sample) Total Cost of Attendance $20,000 Expected Family Contribution $5,000 Financial Need $15,000 Financial Award Package (Sample) Federal Pell Grant $2,000 State Scholarship Grant $1,000 Institutional Grant $5,000 Federal Perkins Loan $1,500 Federal Direct Loan $3,500 Federal Work-Study $2,000 Total Award $15,000 situation. You can find it online only at profileonline.collegeboard.com. If your college, university, or scholarship program requires that you fill out a CSS Profile, you will need copies of your family s W-2s and tax forms for the past two years and all financial statements, including mortgage statements; stock, bond, and mutual fund information; checking and savings account information; and any other statements reflecting additional income or unusual family expenses. The CSS Profile has a $5 registration fee, with an $18 fee for each college that you send it to. There are fee waivers that may cover the cost of registration and reporting fees for six schools. If you are eligible for a fee waiver, you will be notified at the completion of the application. If the Profile does not grant you fee waivers, you will be required to pay the full cost. Comparing Award Packages If you are accepted into more than one school, you will receive an award letter from each one. It is important to compare award letters before you decide which school to attend. Based on the amount of financial aid you receive from each school, you can determine which will be the most affordable. You can use the Financial Aid Award Comparison Chart in the back of this booklet to compare your financial aid packages from different schools. If you receive financial aid in the form of loans, you will need to decide how much debt you are willing to take on in order to attend a certain school and how much debt you will be capable of repaying successfully. For more information on dealing with student loan debt, read the next section entitled Debt Management & Loan Repayment. How to Apply for Financial Aid 19

20 Debt Management and Loan Repayment As we have discussed, it is important to borrow only the minimum amount of loans necessary to finance your education. However, when used wisely, student loans can be a good investment in your future, and many people graduate with at least some student debt. With the benefits of borrowing for college comes responsibility. Remember that loans are a promise you promise to pay later for goods, services, or money that you receive now. The original amount you borrow is called the principal, and what you are charged to use the borrowed money is called interest. Credit cards are one of the most expensive ways to borrow! Buying goods using credit cards is really just taking out a high-priced loan. Think twice before you apply for or use a credit card. Good Debt vs. Bad Debt Whenever you incur debt, it potentially can be dangerous. However, some kinds of debt are more dangerous and expensive than others. Student loans, auto loans, and mortgages are common types of loans that may help consumers to increase their wealth and earning potential. Other types of loans, such as credit cards, can be very risky. Credit cards work by lending you money to buy things you want. The credit card company pays the merchant and then often charges you a high interest rate. The credit card company will send you a monthly bill that will show what you charged, the new account balance with the interest factored in, and a minimum monthly payment that is due. If you pay off the balance in full each month, credit cards can be helpful tools. However, if you don t pay back the full balance promptly, using credit cards can be very expensive. Credit cards have many disadvantages. Here are a few reasons to be wary of them: They can create excessive debt that you can t afford It can take many, many years to pay off a balance The amount you pay off may be up to four times greater than the original amount you spend They often have very high interest rates They may be stolen in a number of ways (over the phone, lost, over the Internet, from your mailbox, etc.) 20 Making College Affordable

21 Credit Reports and Credit Bureaus Navigating the System All types of debt can be risky. Yet, if repaid properly, debt can be a valuable tool to help you build a good credit record. In turn, having good credit will allow you to borrow money from banks to buy a car, house, and many other things. Financial institutions pay credit bureaus to compile information about consumers. This information is put into a credit report, similar to a school report card, which scores your credit rating. There are three main credit bureaus that record information about your credit history: Equifax Consumer Relations PO Box Atlanta, GA TransUnion Consumer Services PO Box 390 Springfield, PA Experian Consumer Relations PO Box 2104 Allen, TX You are entitled to receive one free copy of your credit report every year from each of these three bureaus. To request a copy, contact the bureau using the information above, or visit where you can download copies online. Debt Management and Loan Repayment 21

22 Debt Management and Loan Repayment Repayment Options for Student Loans Repayment is the process of paying back the amount of money you borrowed plus the amount of interest that has accumulated. Federal student loans offer a variety of repayment options: Standard Repayment Ten years (or 120 months) maximum, with approximately the same payment amount due each month throughout the entire period. Keep in mind that making the standard repayment amount or more every month is the most financially sound way of paying back your student loan. You will never be penalized for paying extra toward your bill. Graduated Repayment You begin by making interest-only payments for up to four years. After four years, your payments become higher than the standard monthly payments would have been to ensure that the loan is still paid in full within the ten-year period. Income Sensitive Repayment You pick a monthly payment amount that equals between 4% and 25% of your gross monthly income. You are allowed to use this option for a total of five years, and it may extend your repayment term up to 15 years. Consolidation All of your student loans are paid off, and one new loan made up of the total amount you owe is created. You are usually given a term of between 12 and 30 years, which could lower your monthly payments. Extended Repayment If you have more than $30,000 in outstanding student loans, you may choose to extend your repayment term up to 25 years. If you can t afford your monthly payments, contact your lender to find out about other repayment options instead of defaulting on your loan. 22 Making College Affordable

23 Default Prevention Loans must be repaid whether or not you finish your degree. For most students, you will begin monthly payments once you are out of college. The amount you pay back depends on the amount you borrowed. If you do not repay the loan, your loan will go into default. There are serious consequences if you default on a student loan. Defaulting on a loan will affect your ability to get other credit such as credit cards, car loans, additional education loans, or a mortgage. Defaulting on your student loan also will negatively affect your credit report for up to seven years. If you are unable to afford your monthly payments, contact your lender to find out about other repayment options, instead of defaulting on your loan. Many lenders are willing to work with you to lower your payments so that you do not default. Another option to consider is consolidation, which also may lower your monthly payments. If you are having financial difficulty because you or your spouse have recently lost your job, you have a medical condition, or another serious reason, you also can talk to your lender about deferment or forbearance. Forbearance is when you discontinue your loan payments for a short period of time until you are able to recover financially. Deferment or forbearance should be a last resort, and need to be arranged with your lender ahead of time. The Importance of Budgeting So how do you properly manage your debt so that you have a clean credit report? Budgeting, or carefully planning out how to apply your income toward your expenses, is one solution. Creating a budget is an important part of successfully managing your debt. Once you create your budget, you may need to change it as circumstances in your life change. On page 26 you ll find an example of a Budget Worksheet that you can use throughout the different stages of your life. Debt Management and Loan Repayment 23

24 Glossary Academic Competitiveness Grant (ACG) Program: A federal need-based grant for students in their first and second years of secondary education with strong academic backgrounds. This does not need to be paid back. Consolidation: Combining all of your existing student loans into one, larger loan, often with a fixed interest rate, so that only one large payment needs to be made a month, rather than several smaller payments. Cost of Attendance (COA): The total amount of the various costs of attending college, including tuition, fees, books, supplies, room and board (that is, housing and food), and transportation or travel to and from college. Credit: A history of all of your credit card payments, loan payments, and other financial information for the last several years, as reported by the three major credit bureaus, Equifax, Experian, and TransUnion. Default: Failure to pay a loan. Deferment or Forbearance Period: Period of time when a student is not required to make loan payments on his or her student loans. In order to defer your student loans, you must first arrange it with your lender. Direct Loans: See Federal Student Loans. Expected Financial Contribution (EFC): The amount a student and/or the student s family is expected to pay for college, according to the federal government. This is determined by the information the student enters onto his or her FAFSA form. FAFSA (Free Application for Federal Student Aid): The primary form used to determine a student s eligibility for financial aid. Any student who wishes to be considered for financial aid for any college must complete this form. Federal Income Tax Forms: The forms that you use to file your yearly taxes. Most commonly used are 1040, 1040EZ, and 1040A forms. Federal Pell Grant: Need-based financial aid that does not have to be repaid, and that is distributed by the federal government. Federal Student Aid: Assistance from the federal government in paying for college. This includes Pell and FSEOG grants, Stafford Loans, Direct Loans, Perkins Loans, and PLUS Loans. In order to receive federal student aid, you must file a FAFSA form and demonstrate financial need. Federal Student Loans: Loans that are offered to students and/or their families based on financial need. These loans, which include Perkins Loans, Stafford Loans, Direct Loans, and PLUS Loans, have very low interest rates and must be used to pay for college. Federal Supplemental Educational Opportunity Grant (FSEOG): Need-based financial aid that does not have to be repaid and that is distributed by the federal government. Financial Aid: Financial resources geared toward helping students and/or their families cover the costs of attending college. Financial Aid Package: The amount of federal, state, and college money (in the form of grants, scholarships, loans, and work-study) that is made available by a college or university to help a student pay for attendance at that school. Financial Need: The difference between the cost of attending a particular college and what a student and/or his or her family can afford to pay. Forbearance: See Deferment 24 Making College Affordable

25 Grants: Financial aid money that does not have to be repaid. Generally, grants are awarded based on the student s financial need. Scholarships: Financial aid money that does not have to be repaid. Generally, scholarships are awarded based on the student s merit. Loans: Money that is borrowed by the student or family to pay for college costs. This money must be repaid after the student leaves college. Merit-based aid: Financial aid awarded to students who demonstrate outstanding academic achievement, or special talent in the arts, athletics, or other areas. National SMART Grant Program: A federal needbased grant for students in their third and fourth years of secondary education with strong academic backgrounds in math and science. This does not need to be paid back. Need-based aid: Financial aid awarded to students who demonstrate financial need as determined by the college they attend or plan to attend. Perkins Loans: See Federal Student Loans. Personal Identification Number (PIN): A unique number that the federal government assigns to a person after he or she applies online ( This number must be used to electronically sign the FAFSA form. PLUS Loans: See Federal Student Loans. Stafford Loans: See Federal Student Loans. Student Aid Report (SAR): A form sent to a student after his or her FAFSA has been processed that the student can use to verify his or her information and make corrections to the FAFSA, if needed. Subsidized: When a federal loan is subsidized, the government pays the interest on this loan while the student is in school. Unmet Need: The difference between the student s financial need and the amount of financial aid he or she receives from the college. Unsubsidized: An unsubsidized loan will continue to collect interest while a student is in school. W-2 Form: A record of all of the money you have earned from a particular employer during one year. Work-Study: Need-based financial aid students earn by working at work-study jobs on campus or in off-campus community organizations. Students can use their paychecks toward living expenses or other costs of college during the school year. Glossary 25

26 Resources Budget Worksheet On the following page you ll find a handy budget worksheet that you can photocopy and use every month. To use this chart: Enter your monthly income in the top row Estimate your expenses for each item listed in the gray column at left Enter these estimated expenses into the column marked Month 1 Calculate your total expenses at the bottom of the chart Look at your Budget Balance compare your total monthly income to your total expenses. Do you need to adjust your budget to better meet your expenses? Use the data from Month 1 to calculate your budget for Month 2 Adjust your budget monthly, or as often as you need to reflect your changing expenses 26 Making College Affordable

27 Month 1 Month 2 Total Monthly Income $ $ Expenses Constant Expenses Rent/mortgage Transportation: Auto payment Auto insurance Auto registration Utilities: Gas/electric/oil Water Telephone Student loan payment Renter/home insurance Health insurance Estimated taxes* Variable Expenses Savings Retirement plan Credit card debt Food/groceries Child care Transportation: Auto gas Auto maintenance Public transportation Parking Entertainment Clothing: Clothes purchases Laundry/dry cleaning Holiday/special occasions Travel expenses Pet supplies Personal care/hygiene Luxury Expenses Gym/club membership Cellular/mobile phone Food: Restaurants Snacks/coffee Utilities: Cable Internet access Other Total Monthly Expenses $ $ Budget Balance Subtract total expenses from total income *Estimated taxes: For annual income up to $27,050, estimate 15% of salary; $27,050 to $65,550, estimate $27.5%; $65,550 to $136,750, estimate 30.5%; $136,750 to $297,350, estimate 35.5%; and $297,350 or higher, estimate 39.1%. Resources 27

28 Your Student Resources Financial Aid Deadlines: Each school has different deadlines and requirements. Keep track of them by filling in the form below. School Name Deadline Date Check When Sent FAFSA FAFSA FAFSA FAFSA FAFSA FAFSA CSS Profile College Form CSS Profile College Form CSS Profile College Form CSS Profile College Form CSS Profile College Form CSS Profile College Form Financial Aid Form Passwords: Be sure to keep this form in a safe place! FAFSA Student PIN: Parent PIN: CSS Profile User Name: Password: School Passwords, Scholarship Search Passwords, etc.: Organization/Web Address User Name Password 28 Making College Affordable

29 Financial Aid Award Comparison Chart Fill in this chart to compare your financial aid award packages. College Name College Name College Name 1. Cost of Attendance 2. Expected Family Contribution 3. FINANCIAL NEED (subtract line 2 from line 1) 4. Grants Awarded 5. Scholarships Awarded 6. Total Grants/Scholarships (add lines 4 and 5) 7. Federal Stafford or Direct Loans, Subsidized 8. Federal Stafford or Direct Loans, Unsubsidized 9. Federal Perkins Loans 10. Total Federal Loans (add lines 6 through 9) 11. Federal Work-Study 12. TOTAL AID AWARDED (add lines 6,10, and 11) 13. UNMET NEED (subtract line 12 from line 3) Questions to Consider Use these questions to help you and your family make the best decision for your future. 1. Which college gives you the most grants and scholarships? This money generally does not need to be repaid. 2. Which colleges meet your total financial need (that is, cause your unmet need in line 13 to equal zero)? Which colleges do not? 3. How much of your financial aid package is in loans? This money must be repaid. Think hard about how much debt you can afford to repay. Resources 29

30 Additional Internet Resources for Learning About Financial Aid The following are websites you can visit to gain information on colleges, careers, scholarships, and various sources of financial aid. These sites are categorized for you by the types of information provided. College Planning Information These sites provide information on career, college, financial aid, and much more. TERI College Access The College Board U.S. Department of Education Academic and College Information These sites primarily provide information about colleges and academic issues. College Net College View Mapping Your Future Financial Aid Information These sites provide users with financial aid information ranging from scholarships, federal and state aid sources, credit-based student loans, EFC calculators, and aid applications. TERI College Access American Student Assistance FastWeb Financial Aid Search Financial Aid Homepage Massachusetts Educational Financing Authority FAFSA on the Web College Goal Sunday Standardized Test Sites These sites provide information about standardized tests that may be required for entry into college. Educational Testing Services Princeton Review Test Prep Credit Reports These sites provide information about your credit reports that may be used to determine your eligibility for credit-based student loans. Request Free Annual Credit Reports TransUnion Experian (TRW) Equifax 30 Making College Affordable

31 Private Loan Alternatives Borrowing Private Loans Borrowing private loans to pay for school should be your last option after exhausting all the tuition assistance, scholarship and grant money, and federal loan money that may be available. Where federal education loans offer low-interest rates, flexible repayment plans, and options for borrowers who have trouble repaying their loans, such as deferrment and forbearance, private loans may not offer such benefits. There are many private education loans available to students today, and you should ask your college s financial aid office about private loan programs available specifically for its students. Specific lenders may have agreements with your school to offer low-cost loans to students. Otherwise, to get the best possible deal, search for a loan with the lowest interest rate. Advisors at Educational Opportunity Centers also may be able to help you identify the questions to ask when determining the loan that best meets your needs. Things to Know Before You Borrow Before you sign on the dotted line, find out: The type of student loan you are taking out. Is it a federal loan or a private loan? Private loans may be used to supplement federal student loans when federal loans are not sufficient to cover the total cost of attendance. However, this should be a last resort to be used when all other sources of aid have been exhausted. The loan s interest rate. Is the interest rate fixed (stays the same throughout the whole repayment term) or variable (changes each month or year)? Will you be responsible for paying the interest while you are still in school? The total amount you are able to borrow. What your approximate monthly payments will be. How long is the average repayment term? How much will be deducted from your loan for fees. What is the actual amount of money that you will receive? When your repayment will begin. Is there a grace period before you have to begin repayment on the loan? Resources 31