How Well Do Families Navigate The Student Loan Process?
You’ve done the math and realized that there’s no way to send your child to college without a loan.
The loan process for college can seem complicated.
In an attempt to find out what parents really experienced when they went through the student loan process, we conducted a survey of the members of our Paying For College 101 Facebook group.
Over one hundred and forty-five parents responded to the survey, sponsored by College Ave Student Loans.
Here’s what they had to say:
Informed Parents Make Better College Financial Decisions
83% of respondents with students borrowing a private loan, cosigned a loan for their child to attend college.
Nearly 68% said they knew exactly what their monthly payment would be, and 88% said they understood how interest was calculated.
Informed parents will hopefully make better decisions, so those numbers made us happy. (Although, of course, we would love for them to be even higher.)
Despite this, there were still some respondents who were not as well-versed on the process: “We are really clueless on all this loan stuff.”
Parents got a variety of loans with 59% getting federal student loans (Stafford, subsidized), 24% with private student loans, 12% with a federal Parent PLUS loan, and 5% with a private parent loan.
Most parents borrowed less than $5,500 (24%). But 21% borrowed between $5,551 and $10,000, and 18% took out loans for $10,001-15,000.
Twenty-seven percent of parents borrowed between $15,001-30,000, and 10% of parents have loans that exceed $30,000.
Of the respondents who cosigned for a student loan, nearly 95% said that a parent or family member cosigned for the loan.
Know what that means? They are on the hook for paying back the loan if the student doesn’t.
Parents obviously know this, but the survey also showed that parents feel the loan process, from finding an endorser to repayment plans and interest rates, is baffling and stressful. And federal loans have a different process from private student loans.
Interest rates can be tricky.
As one parent said, “So many lenders give a potential borrower a large range on interest rates and rarely give the lower end of that range. (It’s) unfortunate that people who actually pay up on loans are the ones who pay these insanely high interest rates because others borrow more than they can handle and default.”
Parents can shop around to find lenders that might offer pre-qualification like College Ave Student Loans. The free tool tells you whether you qualify for a loan and what interest rates you can expect without impacting your credit score.
Other parents were even unsure what type of loan they needed: federal student loan, private student, or parent loans, or a federal Parent PLUS loan.
“I don’t understand the EFC!”
Some parents wondered about their expected family contribution (EFC).
For example, one parent said her EFC was $7,000 but she had to get a $20,000 loan and of course that doesn’t include the interest that will accumulate.
The EFC, which is listed on the Student Aid Report, often is perplexing to parents.
All of your taxed and untaxed income, including your student’s income, assets like savings and benefits, including unemployment or Social Security, are used in the EFC formula.
Colleges take the information from the Free Application for Student Aid (FAFSA) including your EFC to calculate your financial aid you might receive.
Cost of Attendance (COA) minus Expected Family Contribution (EFC) equals the amount of Financial Need.
“So my family contribution is more like $40,000 for the year not anywhere near $7,000.00,” she wrote. “I don’t understand what we are doing wrong not getting any financial assistance as I am a single mom making $48,000 a year.”
Many parents were confused about how much to borrow and didn’t know about origination fees, which are charged on federal Direct and Parent Plus loans.
Less is obviously better, but there are many factors to consider: estimate the total cost for college, borrow for only what your student really needs (tuition, books, room and board – not trivial things), research earning potential after graduation, research various types of loans, and think long-term about what you or your child can ultimately pay back.
Here’s a tip: If you can, pay off interest on loans starting while your student is in school.
As A Cosigner, Student Loans Can Also Feel Like A Parent’s Loan
Parents are confused about the name private “student loans” because a parent may share responsibility to repay them.
The reality is these days, there are few students that can cover the cost of college all on their own. In fact, most families need assistance of some sort to cover college costs.
So, when loans are referred to as “student” loans, many feel it’s a misnomer. Parents are usually very involved in paying back loans, cosigning for private student loans, or even taking out private loans in their own name.
To reflect these feelings, a better term might be “family” education loan.
In addition to increasing college costs, the other reason parents are so involved in the loan process is because students generally have no credit history, which means they cannot – usually – borrow money on their own from any private lenders.
Instead, parents or another relative must cosign the loan and financial help is based on their income, not the student’s.
If parents have bad credit, this often means the student won’t qualify for some loans.
“Many families already have enough debt and now need to add to it with cosigning,” one parent wrote. “Middle income families just do not qualify for anything today.”
If your financing strategy includes federal student loans, Stafford or Direct Loans are in the student’s name and do not require a cosigner.
Many of the respondents had different ways to approach the college funding situation…
“Our student would need a cosigner, so we decided to fund her first year and she will have to get scholarships to fund the next 3+ years,” said one.
“We chose to split the cost of college with our child so she will have a better chance of paying off her federal student loans earlier,” said another.
The best advice for parents about to embark on the financial aid journey.
Do your homework. Research loans online.
Learn the difference between federal and private loans. Ask questions.
“We treated it like a house mortgage, shopping for rates, consolidation, etc.,” a parent said.
“Also, people need to understand that what worked for one family will not work for another family as there are just too many moving parts to this whole process.”
Advice from Parents
Many parents, exhausted by the entire college loan experience, offered some advice to their peers who may be at the beginning of this tedious journey.
In fact, 47% of parents we surveyed said they would change how they handled the college admissions process to help minimize the amount of loans their family needed to borrow.
One parent recommended seeing if lower, in-state tuition at public schools is available to out-of-state students.
Many colleges offer students who qualify for in-state or discounted tuition depending on regional, state, and college-specific programs.
Some states have agreements with neighboring states that give students in-state tuition at any public school in either state.
A survey from College Ave Student Loans conducted by Barnes & Noble College InsightsSM found that 80% of students wished they had researched more scholarships.
Waiting until the last-minute costs money for something that a student may have been able to receive for free.
Private scholarships probably won’t pay for a full ride to college, but they certainly can help with costs.
Students can also receive more than one and usually use them at any college.
More than one parent wrote that they should have more thoroughly learned how colleges award financial aid.
Granted, this is a complex process, but one that every parent who is investing in their child’s education should intently research.
Each college has its own methods for processing applications and awarding aid.
Financial packages may or may not include loans.
Don’t be afraid to ask the college admissions and financial aid staff questions.
You want to get the best financial aid package possible, and many times you may be able to negotiate the offer.
The college admissions and financial planning process is hard work that requires hours of research and years of planning, starting during a student’s freshman year in high school.
The best advice? Don’t procrastinate. If your child plans to attend college, start looking at all options – now.
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This post is sponsored by College Ave Student Loans.