MEFA s Guide to Paying for College

MEFA s Guide to Paying for College Congratulations! The waiting is over, and your student has received college acceptance letters. Now what? Deciding which college or university to attend isn t always an easy decision. If you re like many people, how you ll pay may influence where your son or daughter enrolls. This e-book will help you evaluate your options. You ll learn to: Understand and analyze the financial aid you ve been offered, if you applied. Determine the balance of your bill. Make a plan to pay, based on your specific situation. Evaluate loan options. Knowing you have a plan to pay for college can be important in selecting a school. Don t forget to also account for other factors that are important to your family, such as academic and advising programs, location and campus safety, size, extra-curricular activities, athletics, internship opportunities and career placement of graduates. 1

Financial Aid Eligibility Let s start with a brief refresher on how financial aid eligibility is determined. If you applied for financial aid by filing the FAFSA (Free Application for Federal Student Aid), CSS/Financial Aid PROFILE or another form, you will receive a financial aid award letter from each of the colleges and universities you have been accepted to. Typically these are provided around the same time as the admissions decision, and before you need to decide where to enroll. Review these key financial aid definitions to help understand your award letter: Expected Family Contribution (EFC): The minimum amount your family is expected to contribute toward college annually. It is based on the information you provide on your financial aid applications and is calculated using standard formulas to assess your family s financial strength. Cost of Attendance (COA): Established by the college and varies from school to school. The COA represents the total cost of being a student for one year. The COA includes fixed, direct costs like tuition, fees, housing and meal plan, as well as estimated allowances for books, supplies, transportation and personal expenses. Financial Need: Each college determines your eligibility for financial aid by subtracting your Expected Family Contribution (EFC) from its Cost of Attendance (COA). If your EFC is less than the COA, you have financial need, and therefore eligibility for financial aid to helpmake up the difference. Here s the formula: Cost of Attendance (COA) Expected Family Contribution (EFC) = Financial Aid Eligibility/Financial Need 2

Financial Aid Awards Each college will assemble a financial aid package for you based on available funding, which may consist of multiple types of aid from multiple sources. The letter may also include merit scholarships that were awarded by the admissions office. Because of different levels of resources and different financial aid policies, financial aid awards may vary greatly from college to college. Carefully review each award letter and make sure you understand all aspects of your award, including the types and sources of aid. Sample University Letter *This is a sample award letter. Colleges and universities have varying information and this is intended to be illustrative. 3

Financial Aid Awards (continued) Types of Aid: 1. Grants/Scholarships Free monies that do not need to be paid back. Institutional Grants/Scholarships - These vary from school to school. Some of these awards are based on financial need and some are based on merit. It s important to understand whether there are any requirements to maintain a scholarship like a minimum GPA and whether the scholarship is renewable annually. Contact the individual school s financial aid office with questions. Federal and State Grants/Scholarships - Grants and scholarships offered by the federal and/or state government are generally awarded on the basis of financial need. Some states also have merit scholarships and tuition waivers, such as the John and Abigail Adams Scholarship in Massachusetts. Outside/Local Scholarships - Outside scholarships from private, local and national sources may be awarded based on a number of factors including financial need, academic merit, athletic, artistic or musical talent, interest in a particular field of study and other factors. Parents and students should also check with their own employers, civic groups and community organizations. Once a student receives an outside scholarship, they will need to notify the financial aid office of the college they are attending so it can be added to their financial aid award. 2. Work-Study Students earn work-study dollars by working a part-time job on or near campus. The award letter shows the maximum a student can earn. Students receive work-study funds in the form of a paycheck based on the hours they work each week. Students who do not work do not receive the funds. Work-study funds are to pay for transportation and other miscellaneous expenses, and should not be deducted from the bill when calculating the balance due. 3. Student Loans Loans made to the student may be subsidized, unsubsidized or a combination of both. Subsidized loans are need-based and do not accrue interest during enrollment, whereas unsubsidized loans are not awarded based on financial need, and accrue interest. For both types of loans, no payments are due until the end of the six-month grace period after the student leaves school. Student loans listed on a financial aid award may be from the federal government, state government and/or college. Interest rates, fees and repayment terms vary by program. If you missed a college s financial aid deadline, it is still a good idea to file the FAFSA in order to be considered for federal and state aid and low-cost federal student loans. 4

The Fine Print of Financial Aid Take the time to read your financial aid letter carefully, along with any other information the financial aid office has provided. You may find that the fine print includes essential details about accepting the financial aid offer, signing loan promissory notes, guidelines about financial aid appeals and the logistics of paying the bill. Some colleges list a Federal Parent PLUS Loan in the financial aid award package. These loans are credit-based and are not a guaranteed source of funds. The PLUS is not your only choice for college financing. MEFA offers highly competitive fixed interest rate loans. Find more information later in this e-book, or go to www.mefa.org/seniors to use the Monthly Payment Calculator and learn about MEFA s loan options. Also review each award for potential changes from year to year. Important Questions to Ask the Financial Aid Office. The following are some important questions to ask the financial aid office at each college to which you have been accepted. Some of this information may be available during Open House programs, and may also be found in the Financial Aid section of college web sites. 1. What is the total cost of attendance (COA)? What is included in the COA? 2. If you haven t applied for financial aid, is it still possible to do so and what financial aid forms are required? 3. Are there merit-based scholarships? If the student did not receive a merit based scholarship in the freshman award, is it possible to still apply? 4. Assuming cost and family responsibility remain constant, how will grant and loan amounts change from year to year? What if my situation changes? 5. Are scholarships/grants renewable each year? If so, are there conditions such as grade point average, enrollment status or major? 6. Are students required to apply for financial aid even if they receive a scholarship? 7. How does the college treat outside scholarships in the financial aid package? 8. What does the college estimate the total student debt will be upon graduation? Contact the financial aid office if you need more information or clarification about your financial aid award, and be sure to communicate with the college if you have unusual circumstances or if your financial situation changes. Financial aid administrators can be a great resource for families and are able to assist you throughout the college years. To compare your own award letters, go to www.mefa.org/seniors and take advantage of our interactive College Cost Calculator. 5

Calculating the Balance Due While you likely have received your financial aid awards by now, your college bill likely won t come along for several more weeks. It might be sent by mail or by email, and could be addressed directly to the student instead of the parent, so keep your eyes peeled. Don t wait until the bill arrives to figure out how you re going to pay for college. The first step is to estimate how much your family will have to pay to cover your share of the college expenses. Your college bill will include direct costs such as tuition, fees, housing, meal plans and health insurance. If the student has sufficient health insurance under their parent s health care plan, they can waive the health insurance plan offered by the college. Proper documentation proving the student is insured under their parent s plan will need to be provided to the Bursar s or Student Accounts office in order to have this charge taken off the bill. Financial aid with the exception of work-study will be deducted from the charges, and whatever remains will be your balance due. Books, supplies, travel costs and other incidental expenses will not be included on the bill, but don t forget to make a plan to cover those costs as they come up throughout the year. Read the fine print of your award letter to see if costs are itemized for the upcoming year. Then use MEFA s College Cost Calculator on www.mefa.org/seniors to plug in all the numbers, compare award letters and see what you re left to cover. 6

Paying the Balance Due Whether or not you applied for financial aid, you can start making a plan to cover the balance due. Bills are usually sent on a semester basis; however, MEFA recommends creating a plan to pay for the entire year. Most people use a combination of past income (savings), present income (monthly payment plans) and future income (loans). Paying for college isn t one-size-fits-all. MEFA can help you create a combination strategy that works for your family. Using a Combination Plan It s common to use a combination of resources to pay your college bills. Using college savings and/or an interest-free monthly payment plan can reduce the amount you borrow and must repay with interest. MEFA s Monthly Payment Calculator can help you make a plan to pay based on an affordable monthly payment unique to your circumstances. You can use the calculator at www.mefa.org/seniors and even print your results. 7

Paying from Past Income: Using Your Savings The major advantage of using savings, including funds from your college savings plan, is that it doesn t require you to incur additional debt. There s no one right way to allocate your savings when making a strategy to pay for college. Some families divide their savings equally over all four years. Others use more savings up front or allocate savings based on a projected internship or plans to study abroad. Have you saved through MEFA s U.Plan Prepaid Tuition Program? U.Plan distribution request forms are sent to families in May so you can inform MEFA of the student s enrollment plans. We will notify the college about your projected U.Plan distribution amount in June and funds are applied directly to the bill in August. Learn more about the U.Plan at www.mefa.org/uplan. Have you saved through MEFA s U.Fund 529 College Savings Plan? Families who have saved in the U.Fund may request or download a 529 College Savings Plan Distribution Form through www.mefa.org/ufund. Funds can be sent to your family or directly to the college via the online distribution form. If you use another savings plan, contact your savings plan administrator to find out how to disburse your savings. To learn more about disbursing savings from your U.Plan or U.Fund account, visit www.mefa.org/saveforcollege, call 800.449.6332(MEFA) or email info@mefa.org. 8

Paying from Current Income Once your financial aid credits are applied to your direct costs, the balance will be due as a lump sum before each semester begins. If you don t have enough savings available to pay this balance, the next option to consider is your current income, which includes your salary or business income and gifts. Of course, using your present income is only possible if you have excess cash available after covering your costs of living. Interest-Free Monthly Payment Plan Most colleges offer an interest-free monthly payment plan that allow you to split all or part of your bill into smaller, more manageable payments over 5 12 months. This is an excellent option if you don t have the resources to pay your bill as a lump sum. Plans generally begin in June and usually require a minimal enrollment fee. Contact the college billing office for more information. Interest-Free Monthly Payment Plan example: College Bill = $10,000 $5,000 due on August 15 $5,000 due on December 15 Monthly Payment Plan = $1,000/month for 10 months, June through March Using a Combination Plan It s common to use a combination of resources to pay your college bills. The more you can pay from savings or with an interest-free monthly payment plan, the less you will need to borrow. Any reductions you can make to your borrowing will save you money in interest and fees over the long run. MEFA s Monthly Payment Calculator can help you explore payment and loan options based on your unique situation and your family s affordable monthly payment. You can use the calculator at www.mefa.org/seniors and even print your results. 9

Paying from Future Income: An Introduction to Financing Financing requires drawing on income that you haven t earned yet, in the form of loans and credit, to be repaid later with interest. If you are considering financing any of your educational expenses, be sure to consider the big picture how you plan to pay for future years of college and whether your income or expenses may change in the future. Read each lender s fine print available on application and solicitation disclosures and understand the vocabulary of financing to make an informed decision. Annual Percentage Rate (APR): The APR reflects the total cost of borrowing money over the life of the loan, considering not only the interest rate but also the effect of principle, length of repayment and other fees on the total cost of repaying the amount financed. Co-Borrower: A co-borrower is someone who signs the loan application and loan note along with the primary borrower. This might improve your chances of being approved or help you qualify for better terms, which is especially important if the student is the primary borrower. Keep in mind that the co-borrower shares equal responsibility for repaying the loan if the primary borrower falters during repayment. Immediate, Interest-Only and Deferred Repayment: With immediate repayment, you ll receive your first monthly bill soon after the loan funds for the year are fully disbursed to the school. Interest-only loans will start with low monthly interest payments at first, and then step up to payments of principal and interest once the student graduates. Deferred loans generally don t begin repayment until after the student has graduated or left school. Lower interest rates may be available if you start repaying sooner; earlier repayment also reduces the total cost of the loan. MEFA offers all of these options, giving flexibility based on financial circumstances. Tiered Pricing: With some lenders, borrowers might be charged an interest rate or fees that are higher than advertised. The advertised lowest rate may only be available to those with exceptional credit, and higher rates and fees may apply to those with fair to average credit ratings. MEFA Loans do not have tiered pricing; all eligible borrowers receive the same low-cost fixed rate. Fixed vs. Variable Interest Rate: A fixed interest rate doesn t change during its term, so your monthly payment will remain the same for the life of the loan. With variable rate loans, the interest and your payments may go up or down over time, depending on the current market interest rates or other benchmarks. Oftentimes the cap on how high the variable interest rate might go is very high, or there is no cap at all. MEFA has always offered low-cost fixed rate loans with stable and predictable payments. Your credit score is an important factor in your applications for credit-based loans. It s important to know your credit score so that, if necessary, you can take measures to improve it before applying for Federal PLUS, MEFA or other credit-based loans. 10

Be a Wise Borrower When choosing the type of loan or how much to borrow, do your homework and compare options to be sure you re getting the loan that s right for your needs. We ve made the process easier with five simple steps. 1. Start with Federal Student Loans. Federal student loans feature a unique combination of benefits. They are guaranteed with a fixed interest rate, can be consolidated and offer multiple repayment options. Work with the college financial aid office to make sure you are maximizing all federal student loan options before you look to other financing. 2. Don t Borrow More than You Need. Review your bill or estimate your balance due with MEFA s College Cost Calculator at www.mefa.org/seniors. Pay what you can from savings, then consider your college s interest-free monthly payment plan to split the balance into smaller installments. Only use loans as a last resort. 3. Don t Borrow More than You Can Afford. Find out from the lender what interest rate you qualify for, what your monthly payment will be and the total cost of the loan. Remember to plan ahead; if you expect to borrow again for future years in college, your cumulative costs are likely to increase substantially and you should plan for increases in monthly loan payments accordingly. 4. Pay Attention to Fees, Terms and Conditions. Read the fine print for additional fees, which can boost the APR and increase your overall cost of borrowing. Find out if fees are added to the loan balance or deducted from the amount disbursed to the college. Selecting immediate repayment, choosing a shorter repayment term or having a co-borrower might lower your interest rate. Find out if there are hardship or forbearance options if you encounter financial difficulties during repayment. 5. Get The Advice and Support You Need. Education loans and lenders aren t one-size-fits-all. Read the fine print and if you don t understand something, ask for an explanation. Look for a lender that is transparent about its programs, will help you choose the right loan product for your financial situation and provides helpful answers when you need them. 11

Be a Wise Borrower (continued) Loan Programs from MEFA The MEFA Undergraduate Loan is a family loan the student and a parent or other creditworthy borrower sign together and share responsibility for repayment. MEFA offers fixed interest rate loans with multiple repayment options. MEFA Loan Benefits: Stable, fixed interest rates provides families with predictable monthly payments they can rely on for the life of the loan, regardless of changes in the economy or credit markets. Multiple repayment options so families can choose the option (immediate, interest-only or deferred) that meets their specific needs. Free, straightforward advice call 800.449.MEFA (6332) for one-on-one counseling about paying your college bill and minimizing the amount you borrow. Massachusetts benefit these low-cost loans and free services are a benefit for Massachusetts residents attending college anywhere in the U.S. and for students from any state attending school in Massachusetts Other Payment Methods Home Equity Loan Visit www.mefa.org/seniors for up-to-the-minute information on MEFA Loan options, interest rates, terms and benefits. Taking out a home equity loan may be an option for those with sufficient equity in a home or other property. Such a loan may offer better tax benefits than an education loan and the repayment schedule may be stretched over thirty years. However, since the property serves as collateral, you risk losing it if you default on a payment. After careful consideration, families should do their research on the home equity options available to them. Student Alternative Loans Student alternative loans may look like an appealing option for families where the parents are already juggling significant financial commitments, but they are generally significantly more expensive than other types of loans because many students do not have enough credit history to receive favorable interest rates. In many cases, students will also need to have a co-borrower who is equally responsible for the repayment of the loan. Credit Cards Some colleges offer the option of paying for tuition and fees by credit card. If you earn rewards with your credit card, such as airline miles, this option may have benefits. But if you can t pay your credit card bill promptly, you risk a negative impact on your credit score and will have very high interest charges on your unpaid balance. Due to high merchant fees, many colleges don t accept credit card payments or families are required to absorb the merchant fee costs. 12

What to Expect Next Let the College Know You re Enrolling Once you decide which college to attend, you must send an admissions deposit by May 1 st. This fee usually from $500 to $1,000 will be credited to your bill and is usually non-refundable after May 1 st. Once you have decided which college to attend, you need to formally withdraw your acceptances from the other colleges and decline their financial aid offers. Accept Your Financial Aid If you received a financial aid award from the college you plan to attend, follow the instructions on the award letter or contact the financial aid office directly to accept the financial aid offer. You may accept all or part of a financial aid award. Follow the school s directions if you wish to decline or reduce the amount of your loan or work-study. Don t Forget About Outside Scholarships If the student has received any outside scholarships, make sure to report them to colleges and universities. Colleges need to include them as part of the overall aid package, and in most cases the result is a lower bill for the family to pay. How the outside scholarships are incorporated into the financial aid award can vary by institution so be sure to ask the financial aid office for specifics. Make a Plan to Pay Your bill will be sent in mid-summer and will likely be due in late July/early August, but you can start making a financing plan now. May is a good time to set up a payment plan and June is a good time to apply for education loans. Need help creating a payment strategy? MEFA is here to help. Call us at 800.449.6332 (MEFA) to speak to a customer service representative. 14

MEFA is Here to Help MEFA s mission for over 30 years has been to support Massachusetts families no matter where their students go to college and to work with Massachusetts colleges and universities no matter what state their students come from. If you have a Massachusetts connection, don t miss out on the benefit of our free services and lowcost loans. Hundreds of thousands of families have turned to MEFA for guidance on paying for college. We want to help you too. Visit www.mefa.org/seniors to calculate college costs for your family, explore financing options and see how MEFA has helped other families. If you have additional questions about paying for college, we can help. MEFA is a not-for-profit state authority that works to make higher education more accessible and affordable for students and families in Massachusetts. We offer community education programs, college savings plans and low-cost financing options. Since inception, we have issued approximately $4.4 billion in bonds and have assisted hundreds of thousands of families in financing a college education. The information in this e-book is current as of March 2013, unless otherwise noted. Please call 800.449.MEFA (6332) or visit www.mefa.org/seniors for more information on how MEFA can help you through the college financing process. MEFA 160 Federal Street, 4 th Floor Boston, MA 02110 www.mefa.org info@mefa.org 800.449.MEFA (6332) 15