You want the best for your kids. That includes doing what you can to help them pay for college in a world where the cost of college goes up by 3.2% each year, according to the College Board.
As you try to figure out how to help your student with college, it’s important to look at Department of Education student loans and understand how your situation can impact your child’s eligibility for certain programs.
Here’s what you need to know as a parent.
1. Your information likely will be required on the FAFSA
The first thing your child needs to do is fill out the Free Application for Federal Student Aid (FAFSA). Schools use it to determine the financial aid your student qualifies for.
There’s a good chance your child will be considered a dependent student, meaning your income and other information must be included on the FAFSA. The following graphic shows you the factors that are considered when determining dependency status.
The Department of Education makes it clear that even if you don’t claim your child on your tax return, they can be considered a dependent. And that means your information will be required on the FAFSA.
Here’s what you need to prepare as your child fills out the FAFSA:
- Your own FSA ID so you can electronically sign the FAFSA (you can get your FSA ID from the Department of Education website)
- Your Social Security number
- Your federal tax return information
- Records of savings and checking account balances, along with investment information (you don’t have to provide the value of the home you live in, however)
The following image illustrates where on the form you need to provide your information so your child’s FAFSA will be accepted.
If this information isn’t included, your student’s FAFSA might be rejected, which means they might not receive federal student aid.
2. Your income impacts which Department of Education student loans your child receives
Schools use your child’s FAFSA to determine how much your family is expected to contribute to your student’s education. Even if you don’t plan to contribute financially to your child’s education, the government and schools have an Expected Family Contribution (EFC).
The EFC formula is mandated by law and considers the following factors:
- Family size
- Family members attending college
- Government benefits, such as Medicaid and Social Security
You can get an idea of what to expect by looking at the Department of Education’s EFC worksheet.
If your income is low enough to qualify, your child might receive subsidized Department of Education student loans. Subsidized loans reduce the cost of attendance because the government pays the interest on these loans while your child is in school. Interest doesn’t accrue until after the borrower graduates and the grace period is over.
On the other hand, if you have a high income, your child will have access to only unsubsidized student loans. Interest will accrue for your student while they’re in school, resulting in a higher repayment amount.
Edvisors, a college planning website, recommends that you plan ahead and avoid taking capital gains or retirement account distributions just before your child goes to school. The information you provide on your 2018-19 FAFSA will use your 2016 taxes, making it what Edvisors refers to as your “base year.”
“Every $10,000 increase in parent income will reduce eligibility for need-based financial aid by about $3,000,” according to Edvisors. “Every $10,000 increase in student income will reduce aid eligibility by as much as $5,000.”
3. You need to fill out the FAFSA each year
Don’t assume you’re done because you filled out the FAFSA once. Each year your child is in college and considered a dependent student, you need to provide updated information for a new FAFSA.
Changes to your income and family situation can impact the programs offered to your student. For example, the first year I attended college, my parents’ income was high enough that I qualified for only unsubsidized loans. However, my sister started attending college my sophomore year. With two students in college, my parents’ income suddenly wasn’t sufficient, and my sister and I both qualified for subsidized loans.
Every time your child fills out a new FAFSA to renew their student aid for the next school year, you need to be prepared with more recent information.
4. You might be able to borrow to help your child pay for school
It’s also possible for you to get Department of Education student loans to help your child cover the costs of school.
Federal Parent PLUS Loans are available — if you’re willing to put yourself in debt in the name of your child’s education. You can take out a PLUS Loan for any amount that remains after your child’s federal financial aid is exhausted.
One of the benefits of Parent PLUS Loans, unlike many private loans, is the fact that you can request a deferment while your student is in college and during the six-month grace period following graduation. That means you can put off making your first payment until after your student completes school.
Parent PLUS Loans have an interest rate of 7.00%. If you have good credit, though, you might be able to qualify for a private student loan with a lower rate. With a lower rate, it’s possible to reduce the total cost to you over time. However, when looking for private student loans, you might need to prepare to begin repayment while your child is in school.
Carefully weigh your options before deciding to borrow money to put toward your child’s college costs. While you might want to help your student pay for school, you don’t want to put your own finances at risk.
There’s more than one way to help your child
Don’t feel like you have to help your child with college by paying for school — either by paying with existing assets or by borrowing. Be realistic about your financial situation and what makes sense for your family.
Offer guidance as your student applies for Department of Education student loans by filling out the FAFSA and research scholarships they might qualify for. Help them move into their dorm or give them a stipend for groceries each week. It might not be possible for you to cover tuition, but every little bit helps.
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