Payment plans

Financial-aid options for college reduce need for student loans

While only a fortunate few students can expect to get a free college education by earning full academic or athletic scholarships, everyone can take advantage of a combination of academic aid, grants, fellowships, work-study and student loans to pay for a four-year degree, said Peter Gayle, a vice president for Prudential Advisors. Unfortunately, many prospective students and their families often don’t know where to look for this funding.

With student debt increasingly becoming a long-term burden on graduates and families, Gayle said it’s never been more important to minimize the out-of-pocket expenses to put a student through college — and to reduce reliance on student loans.

To put the weight of student debt in perspective, The Federal Reserve Bank of New York noted that in 1995, 54 percent of graduates had loans averaging $11,491. The institution’s more recent data from 2015 showed that 71 percent of graduates joined the workforce with student debt averaging slightly more than $35,000. What’s more, the Federal Reserve Bank of New York estimates that 25 percent of those who owe federal student loans are delinquent or in default.

The good news is that anyone who is willing to put in the time can likely find programs that will help foot the bill for higher education — helping to reduce the need to take out loans — so a student’s education won’t break the budget or jeopardize a financial future.

According to Gayle, families should take a few initial steps before choosing a school:

Learn how the financial-aid process works, and get the most out of options that don’t need to be repaid.

Understand each school’s actual net price — after financial aid — and set realistic expectations, choosing from the most affordable institutions.

Explore different types of financial aid, including grants, work-study programs and scholarships. Examine the specific types of aid available per school and find out how much of a family’s demonstrated financial need each school will cover.

Understand the different kinds of loans available, including a variety of federal loans and private loans, which may be used to fill any financing gaps after exhausting other options.

Understand how parents’ “available income” is used to calculate how much parents are expected to contribute to their child’s education, especially for federal financial aid purposes.

Several guides, including Prudential Financial’s “Paying for College — A Practical Guide for Families” (download a PDF version at www.prudential.com/payingforcollege), can help families take a carefully considered approach to financing a college education while safeguarding a student’s long-term financial future, including the ability to save for retirement.

For families that must use student loans, the federal government is making it easier to understand how to borrow, process applications and repay loans through new online tools. Since 2010, all new federal loans, except Federal Perkins Loans, have been issued through the U.S. Department of Education, which offers information about borrowing and repaying loans.

There are multiple options to repay federally funded student loans, which generally require repayments to start six or nine months after a student graduates, leaves school or drops to half-time enrollment. A few popular choices for repayment include types of income-driven plans, which calculate payments based on a borrower’s ability to repay. One catch: It’s critical to re-certify income and family size annually to avoid huge monthly payment increases.

When debt becomes too burdensome, some loan programs offer forgiveness through public service, federal government employment and other options such as teaching in underserved school districts.

Private loans are trickier since there is no standard: Interest rates and repayment terms vary from lender to lender. It’s also worth considering the need for life insurance to cover the full loan balance to aid co-signers or beneficiaries in the event of the borrower’s death, Gayle said. Financial advisors would be well equipped to help students and their families explore this and other options.

Some employers are also beginning to offer employee student-debt benefits to put their employees on a course for financial security. For example, at Prudential Financial, new employees hired through the company’s campus recruitment program could earn an incentive of up to $5,000 toward paying off student loans after one year of service. Other companies match student debt payments with contributions to employee retirement savings plans.

Studies show that college education can be worth the price. The U.S. Census Bureau estimates that students who attend college can earn nearly twice as much over their lifetimes as those who earn only a high school diploma. But with college tuitions continuing to rise, families must find the most effective way to finance a child’s college education to avoid jeopardizing their ability to save for retirement.

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