What You Need To Know About College Financing 

This post is sponsored and is part of a paid campaign with Citizens Bank, N.A. With the exception of direct quotes, the below advice and opinions are mine. 

If you’ve got a college-bound kid, you already know that college costs have been steadily rising for years—at well above the rate of inflation — and students are borrowing more than ever to cover the costs of their education.  

In 2017, students who borrowed for college graduated owing nearly $29,000 in debt, and that doesn’t count the money that parents borrow to help their kids pay for college. The average price tag for tuition, plus room and board reached $21,400 last year at in-state public school and $48,500 at private schools.

As overwhelming as those numbers might be, it’s worth remembering that three-quarters of families get grants and financial aid that reduce those costs. Productively navigating the ins-and-outs of financial aid can make a huge difference in the amount of money your family actually pays for college — and how much your child (and you) have to pay in interest on student loan debt after graduation. Here’s what you need to know:

Think net price, not sticker price 

To get a true sense of how much your family will spend to attend a given school, you’ll need to know the net price, or the amount that you’ll pay after scholarships or grants, the free money that schools give out based on financial need or merit. Each school offers a net price calculator (find it here) to help estimate that figure based on your family’s situation and the school’s financial aid policies. 

While the sticker price for private schools is higher than public schools, private schools may provide more generous financial aid packages, making their net price just as affordable. Whatever the net cost, you’ll need a plan to cover that amount via some combination of savings, income, and loans.

Always fill out the FAFSA

The Federal Application for Student Aid is the first step in applying for financial aid, and it’s a crucial in the college application process — even if you think your income will preclude you from need-based aid (grants distributed for those whose families can’t afford to cover the cost of college). That’s because filling out the FAFSA is also the first step in securing federal student loans (see below), and many schools also require it for merit scholarships, given to students for a specific talent or academic achievement. 

The vast majority of students — 85%  — receive some sort of financial aid, whether that’s scholarships, loans, or work study, to pay for college. The deadline to file the FAFSA is June 30, but you can send in applications as early as October 1 the year before. Plan to file early, since some aid gets awarded on a first-come, first-served basis.

Start with federal loans offered to your child

Federal loans have several benefits that make them a smart first choice for college debt. There are no credit requirements for federal loans, and there are no limits on family income to qualify. 

In addition to being accessible, they typically have flexible repayment options after graduation. Further, your child may be eligible for Public Service Loan Forgiveness if they are going to work in the not-for-profit, government or inner city sectors of health and education. 

One drawback of federal student loans, however, is that they have relatively low limits. Freshmen are only eligible to borrow up to $5,500, while limits for upper classmen go up to $7,500. If your child needs to borrow more than that, they’ll need to turn to the private market for loans, which typically require a co-signer. Keep in mind that if you co-sign a loan for your child, you’ll be equally responsible for the debt and it will appear on your credit report and become a factor in your credit score.

Fill the gap

Once you’ve exhausted all of your options, you may still have a gap for tuition costs. When it comes to making up the difference, look at what different private lenders offer. The interest rates you’ll be offered depend on your credit profile, so they will vary more than those you get from federal loans (some will likely be higher, some may be lower.)  Most undergraduate loans will require a co-signer. 

Keep in mind that, unlike with federal loans, these options don’t offer income-based repayment plans or loan forgiveness. You should also consider whether a private lender will approve you for all four years, easing your way through. Getting educated about these options can help to ensure you make the right decision for your child and your family. 

Give yourselves options

You probably already know your college list should include an academic ‘safety’ school that you’re sure your child will get into, but it should also have a financial ‘safety’ school—one that offers a high likelihood for a strong financial aid package based on your circumstances. Include at least one state school and at least one private school on your list of financial safeties. 

When your acceptance and financial aid letters come in, sit down with your child to consider what each school’s financial aid offer would mean for your family’s overall financial picture. Remember, that a package with a higher percentage of free money, such as scholarships and grants, is more valuable than a package that’s mostly dependent on loans. If you have questions about your financial aid package, call the college’s financial aid office to ask them. (Don’t worry, this happens all the time!)

Plan for payments 

When evaluating payment methods and financial aid packages, it’s important to talk to your child about how their post-college lifestyle will depend on their income relative to the size of their future loan payments. A good rule of thumb, according to Mark Kantrowitz, publisher and vice president of research at SavingforCollege.com, is for students not to borrow more than their projected first year’s income (estimate yours here). If you’re not sure what your child might do when they graduate – if, for instance, they’re choosing between a career in finance and one in journalism – base the amount you borrow on the lower salary, just in case.

You can use a calculator like this one to help your child see how different sized loans might impact their budget after graduation. 

“Using a calculator is one way to make it less hypothetical and really see how the cost of college is going to affect their life,” says Liz Frazier, a certified financial planner and author of the forthcoming Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance (And They’re Never Too Young).

With Reporting By Beth Braverman