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College Costs: Paying Your Part


Many students will have to borrow some money to complete their studies and the Stafford Loan is a good place to start.

Listen up, kids, here's what your parents are thinking: Students with a financial stake in their education are usually more focused on their studies and have sharper career goals than those who don't contribute a dime to the cost their degree.

The Old Folks may not share this information with you initially, but that's what they've got in mind when they insist that a significant chunk of your summer earnings and savings go to school expenses.

Sit down with your parents and determine how you will split your earnings between school and fun. You need to determine who is responsible for what school-related expenses before classes begin.

There's also a basic reason your parents need you to be responsible for a portion of your college expenses.

"Parents shouldn't sacrifice financial health in retirement to save for college," says Rich Calvario, Program Manager for Independent 529 Plans at TIAA-CREF. "There are loans for college, but there aren't any for retirement. If you're not on solid financial ground as a parent, your student will feel that."

About 60% of all students receive some form of financial aid. Many students will have to borrow some money to complete their studies and the Stafford Loan is a good place to start. It comes in two types: Federal Family Education Loan Program and Federal Direct Student Loan Program.

Loans made through the Federal Family Education Loan Program are provided by private lenders, including banks, savings and loan associations and credit units. Uncle Sam guarantees these loans against default.

In the Federal Direct Student Loan Program, loans are administered by the schools and provided by the U.S. government to students and their parents.

Stafford loans are either subsidized – Uncle Sam pays the interest while you're in school – or unsubsidized, you're responsible for the interest, but payment can be deferred until after graduation. Keep in mind that adding deferred interest payments to the principle increases the size and cost of the loan.

You must show financial need to receive an unsubsidized Stafford Loan. About 66% of subsidized loans are made to students with a family adjusted gross income of less than $50,000; about 25% to families earning $50,000 to $100,000 and less than 10% to families earning more than $100,000.

All students, regardless of family income, are eligible for an unsubsidized Stafford Loan.

Undergraduates can borrow up to $6,000 in their freshman year, $6,000 in their sophomore year and $7,000 for each remaining year. The interest rate is 5.6% for loans made July 1, 2009-June 30, 2010. A 1.590% fee, including a 0.590% origination fee and 1% default fee, is deducted from the disbursement check.

Repayment begins six months after the student graduates or studies less than a half-time. The standard repayment term is 10 years.

You can apply for a Stafford Loan online.

Students with exceptional financial needs should consider a Perkins Loan. Your school administers the money provided by the federal government. There are no fees, the interest rate is 5% and it's repaid over ten years. The financial aid office at your school will determine the amount of the loan. There are no origination or default fees.

Parents can use a PLUS Loan to help pay for their student's education. The annual limit on a PLUS Loan is equal to your cost of attendance less any other financial aid you receive. Check with your school's financial office. Approval requires a credit check.

The US House Committee on Education and Labor is considering a bill that would eliminate government-subsidized private student lending. If signed into law, the US Department of Education would direct loans to students. It would be the most significant change in federal loan policy since the original program began in 1965.

"The sooner you start saving for college, the less you'll feel it on a monthly basis," says Calvario. "We believe it's never to late to start."

So, if your dreams of a new stereo, X-Box or iPod are shot down by mundane stuff like tuition, fees and books, remember Mark Twain's insight about how, when he was 14, he thought his father was a fool. But by the time Twain had turned 21, he was astonished at how much the old man had learned.

You'll almost certainly have the same experience with your parents and school finances.
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