Alise Lamoreaux

Expenses you may encounter:

• How much is the degree or certificate you want to earn going to cost?
• What factors go into the cost of the college?
• What costs are included in tuition?
• What costs are not included in tuition?
• What is college worth to you?
• How much money can you afford to spend on college?
• Where can you get financing for college if you need help paying for it?
• How much money do you think you could afford on a monthly basis to pay back a loan related to financing college?
• What is the current interest rate on student loans?
• Are interest rates all the same?
• What do you think your life will be like after college?

Paying for college is an undeniable component of the educational process. While there are political discussions underway about making college free, at this point in time, students must pay for college themselves or with the help of others. Understanding the factors that combine to create the overall cost of a college education can help a student make decisions about the college that is right for him or her.

Today’s colleges are in a competitive market for students. Thinking about the services you as a student need or want from a college environment can help define what is personally important and what you are willing to pay for.

College costs can be measured by 7 main categories:

1. Tuition: The price you pay for taking college classes is based on the academic program you choose. Tuition is also affected by selecting a school in the state where you live, and by whether the school is public, private, for-profit, or non-profit.
2. Fees: Academic programs may have additional fees beyond tuition costs. For example, a student majoring in culinary arts will need specialized tools to participate in that program. Services the college provides to students can have associated fees. For example, a student health center may have a basic fee that all students must pay whether they use the service or not. Some colleges have dining fees that give students food cards to use on campus. Student fees are not fees students can opt out of. It is important for students to examine a college’s fee structure and maximize the services that are being paid for by fees.
3. Books and supplies: The cost of books and the supplies students will need to complete a program can vary greatly. Books and supplies can add $1000 or more to the annual tuition cost. This is an important factor that is easily overlooked by students. Finding classes that offer low cost book option, open educational resources (OER), or zero textbook cost (ZTC) sections can help reduce the overall cost of college. Students can also check online or with their bookstore for used books or rental options, and/or use reserve books in the library, if available. Sometimes finding a required textbook from Amazon or Chegg or other online sources will be less expensive than purchasing a new textbook from the college bookstore. Often, students will end up financing the cost of books and supplies with financial aid. It is important to remember that an additional $1000 financed with aid or credit cards can quickly add up to an unanticipated cost of college.
4. Transportation: Getting to and from college costs vary significantly based on how close a student lives to the college campus and the transportation method selected. Some colleges may have a transportation fee as part of the student fees that might provide mass transit (trains or buses) options for getting to school. Colleges may also have parking fees for those students who drive to the campus. Seasonal weather conditions are another factor in transportation choices. As a student estimating the cost of college, remember to think about the entire school year.
5. Living Expenses: Where will you be living while attending college and with whom? The answer to this question determines a major factor in the overall cost of attending college. Living with family may be less expensive for some, but many times is not an option for students. Answers to the question of where you will live and how much it will cost vary greatly. One thing to think about is how much did it cost you to live last year? Will going to school change that and if so, how? Will you have to eat or spend money on groceries/meals differently than in the past? If the college you choose has a dining fee built into your tuition costs, don’t overlook using it. Staying healthy is an important part of college success.
6. Personal Expenses: Another wide open category of cost, but don’t forget you will still need basic health care and hygiene. And you will still have social events and family commitments. Students tend to underestimate how much money will be needed for personal expenses. For example, many students today cannot survive without smart phones, computers, and data plans.
7. Opportunity Cost: Choosing to spend time and money going to college has an opportunity cost. If you are spending time and money on your education, you will not be spending that same time and money somewhere else. One example of this relationship is employment. Attending classes and doing homework may mean you can’t work at a job as much as you want to. It may also mean you will have less time to spend with friends and family. If you have a long commute to school, that may impact other aspects of your daily life.

Financial Aid Basics

Most students will need some form of financial aid to help pay for college. Before accepting an offer of assistance, it is important for a student to understand what each possible offer means and what the student’s responsibility will be after accepting the offer. The Office of US Department of Education offers financial assistance to students in the forms of grants, loans, and work-study programs. Filling out the FAFSA application is the first start towards receiving financial aid for college.

Understanding interest rates and how they impact student loans is essential. Many students shy away from doing the math to understand what their responsibility will be in repaying a loan. It is also essential that students understand the difference between a subsidized and unsubsidized loan. Both types of loans may be offered to a student in an award letter for financial aid. Many of the horror stories about the burden of college debt on students when they graduate from college could be avoided if students better understood options for financing their college education and examined their college selection process in greater detail.

There is a difference between a flat/annual interest rate and a compound interest rate. Compound interest can make you very happy as an investor, but it works against you as a borrower. Subsidized loans do not add interest while a student is attending college. The interest is not compounded while the student is attending college. Unsubsidized loans begin charging interest as soon as you take out the loan, like a car loan would.

Formula for Compound Interest (the formula unsubsidized loans will use)

A= P(1 + r)^t

P= amount borrowed     r= interest rate    t = time (years of the loan)

Example #1

Community College Annual In-State tuition is approximately $4,000 for each year of college

*Stafford unsubsidized loan rate for 2015-2016 is 4.29%

First Year of College	Second Year of College
A= 4,000 (1 + .0429)2 A= 4,350.56	A=4,000(1+.0429)1 A= 4,171.60

Total cost for loan over 2-year period:

$4,350.56 + $4171.60 = $8, 522.16 (money borrowed first will accrue interest the longest)

The interest accrued on the loan in a 2-year period is $522.16

Example #2

Community College Annual In-State tuition is approximately $6,000 for each year

*Stafford unsubsidized loan rate for 2015-2016 is 4.29%

First Year of College	Second Year of College
A= 6,000 (1 + .0429)2 A= 6525.84	A=6,000(1+.0429)1 A= 6,257.40

Total cost for loan over 2-year period:

$6525.84 + $6,257.4 = $12,783.24 (money borrowed first will accrue interest the longest)

The interest accrued on the loan in a 2-year period is $783.24

 Example #3

College offering Bachelor’s Degree In-State Tuition at approximately $10,000 each year

*Stafford unsubsidized loan rate for 2015-2016 is 4.29%

First Year	Second Year
A=10,000(1+.0429)4 A= 11,829.63	A=10,000(1+.0429)3 A=11,343.00

Third Year of College	Fourth Year of College
A=10,000(1+.0429)2 A=10,876.40	A=10,000(1+.0429)1 A=10,429.00

Total cost for loan over 4-year period:

$11,829.63+ $11343.00+ $10,876.40+ 10429.00= $44,478.03

The interest accrued on the loan in a 4-year period is $4,478.03

The key difference between unsubsidized and subsidized loans is the amount of debt a student will leave college owing. Unsubsidized loans charge students interest while they are attending college, so the interest is growing on the loan during that time. A student might think they are borrowing $4,000.00 or $6,000.00, but unsubsidized loans add interest to the amount borrowed that adds up over time. Subsidized loans do not add interest while the student is attending college, so $4000.00 really is $4,000.00, no extras added.

Another important thing to remember when borrowing money for college is that if you add the cost of books and supplies or other needs onto the loan you have taken on for tuition, and you have unsubsidized loans, that extra money also grows over time with interest. While the tuition may have been $4000.00/year, the amount financed was more than that. Example 4 demonstrates this scenario.

Example 4

Year 1	Year 2
Community College tuition = $4,000.00 Books and supplies = $1000.00 New computer = $1000.00 Total Loan amount = $6000.00   A= 6,000 (1 + .0429)2 A= 6525.84	Community College tuition = $4,000.00 Books and supplies = $1500.00 Other fees = $350 Total Loan amount = $5850.00   A=5850.00(1+.0429)1 A= $6,100.96

Instead of owing $8, 522.16 like in Example #1, total cost for loan over 2-year period:

$6525.84 + $5850.00 = $12,626.80 which is $4,104.64 more for the same time period and degree. Be watchful when adding even small amounts of money to your loan balances. It can add up quickly!

Video: Voices of Debt: The Student Loan Crisis – Don’t Major in Debt

Loan Calculator

Students need to remember that they are consumers when it comes to taking on loans for college. Not thinking about what the debt means after college only compounds the issues. It is important to think about how much could you afford to pay monthly on a student loan once you have completed college. It’s easy to do the math on loan costs. The Smart Student’s Guide to Financial Aid has a free loan calculator that will do the work for you. All you have to do is plug in the numbers. The loan calculator will also give you an estimate of what your annual salary will need to be to be able to repay the loan. Of course, the loan calculator will not know your other financial commitments, so be sure to look at the monthly payment and decide if you afford that additional expense. College debt is considered a partial economic hardship if it requires you to use more than 15% of your discretionary income.

Here are 2 examples using the same colleges costs as the previous examples:

Loan Information	Amount
Loan Balance:	$10,000.00
Adjusted Loan Balance:	$10,000.00
Loan Interest Rate:	4.29%
Loan Fees:	0.00%
Loan Term:	10 years
Minimum Payment:	$50.00
Monthly Loan Payment:	$102.63
Number of Payments:	120
Cumulative Payments:	$12,315.47
Total Interest Paid:	$2,315.47

 

Loan Information	Amount
Loan Balance:	4,000.00
Adjusted Loan Balance:	$4,000.00
Loan Interest Rate:	4.29%
Loan Fees:	0.00%
Loan Term:	10 years
Minimum Payment:	$50.00
Monthly Loan Payment:	$50.00
Number of Payments:	94
Cumulative Payments:	$4678.45
Total Interest Paid:	$678.45

Note: The minimum monthly payment must be at least $50.00; so on the $4,000.00 loan the number of monthly payments was shortened. Also, there isn’t a prepayment penalty for repaying loans early. If you pay as little as $25 more each month on the loan you can shorten the duration of the loan by almost 3 years.

It is also important to realize that even if you don’t finish college, you will have to repay a loan taken out for college. According to an article titled The Feds Don’t Care If You Dropped Out of College. They Want Their Money, students who dropped out of college and ultimately didn’t obtain a degree or certificate, generally don’t earn higher wages after leaving school. Statistics show that students who start college but don’t finish struggle with student debt.

The US government backs loans that are taken out through FAFSA/Federal Student Aid. Repayment is expected. The government has the authority to garnish wages and withhold tax returns as part of repayment of loans that are not paid. Government-backed debt cannot be forgiven in bankruptcy, expect under rare circumstances.

 

The cost of going to college seems to be constantly increasing. Understanding the opportunity cost both now and in the future needs to be an important part of a student’s decision process when selecting a college and a major. Do the math! There are plenty of resources to help you. Follow your dreams, but be informed.

Financial aid vocabulary is a specialized language that students participating in the process must understand. Try free flashcards that can make learning financial aid vocabulary fun!

Common Financial Aid Vocabulary Definitions

Terminology	Definition
Award package	The way colleges and universities deliver their news about student eligibility for financial aid or grants. The most common packages include Pell Grants, Stafford Loans, and Work Study.
Borrower	A person or group that obtains funds from a lender for a particular period of time. A borrower signs a “promissory note” as evidence of indebtedness.
Campus-Based Financial Aid Programs	The three major aid programs are funded by the federal government, but the disposition of the funds is handled by colleges’ financial aid offices. The aid programs are: the Federal Supplemental Educational Opportunity Grant, the Federal Perkins Loan, and Federal Work-Study (FWS).
Cost of education	This includes tuition and fees, room and board, books and supplies, transportation, and miscellaneous expenses. A student’s financial aid eligibility is the difference between the cost of education and the Expected Family Contribution as computed by the federal government using the FAFSA.
Default	A failure to meet a financial obligation, especially a failure to make a payment on a loan. Defaults are recorded on permanent credit records and may result in prosecution and/or loss of future borrowing possibilities.
Dependent Student	A student claimed as a dependent member of household for federal income tax purposes.
Expected Family Contribution (EFC)	The amount of financial support a family is expected to contribute toward a child’s college education. This amount is part of the formula used by the federal government to determine financial aid eligibility using the FAFSA form.
Federal Direct Loan	A group of federal loan programs for which the lender is the federal government. Included in these programs are government-subsidized loans for students and unsubsidized loans for both students and parents.
Federal Pell Grant Program	This is a federally sponsored and administered program that provides grants based on need to undergraduate students. Congress annually sets the appropriation; amounts range from approximately $400 to $3,000 annually. This is “free” money because it does not need to be repaid.
Federal PLUS Loan	A nonsubsidized loan program for parents of undergraduate students under the Federal Education Loan Program umbrella
Federal Perkins Loan Program	A federally run program based on need and administered by a college’s financial aid office. This program offers low-interest loans for undergraduate study. Repayment does not begin until a student graduates.
Federal Stafford Loan	A federal program based on need that allows a student to borrow money for educational expenses directly from banks and other lending institutions (sometimes from the colleges themselves). These loans may be either subsidized or unsubsidized. Repayment begins six months after a student’s course load drops to less than halftime. Currently the interest rate is 0 percent while in school and then is variable up to 8.25 percent. The loan is typically repaid within ten years. Be sure to know the interest rate at the time of borrowing.
Federal Work-Study Program (FSW)	A federally financed program that arranges for students to combine employment and college study; the employment may be an integral part of the academic program (as in cooperative education or internships) or simply a means of paying for college.
Financial Aid Award Letter	Written notification to an applicant from a college that details how much and which types of financial aid are being offered if the applicant enrolls.
Financial Aid Package	The total amount of financial aid a student receives for a year of study.
Free Application for Federal Student Aid (FAFSA)	This is the federal government’s instrument for calculating need-based aid. It is available from high school guidance departments, college financial aid offices, and the Internet (www.fafsa.ed.gov). The form should be completed and mailed as soon after January 2 as possible.
Gap	The difference between the amount of a financial aid package and the cost of attending a college or university. The student and his/her family are expected to fill the gap.
Gift Aid	Grant and scholarship money given as financial aid that does not have to be repaid.
Grants/scholarships	These are financial awards that are usually dispensed by the financial aid offices of colleges and universities. The awards may be need- or merit-based. Most are need-based. Merit-based awards may be awarded on the basis of excellence in academics, leadership, volunteerism, athletic ability, or special talent.
Lender	One who provides money on the condition that the money be returned, usually with an interest charge.
Merit awards, merit-based scholarships	More “free” money, these awards are based on excellence in academics, leadership, volunteerism, athletic ability, and other areas determined by the granting organization, which can be a college or university, an organization, or an individual. They are not based on financial need.
PIN	Personal identification number.
Student Aid Report (SAR)	Report of the government’s review of a student’s FAFSA. The SAR is sent to the student and released electronically to the schools that the student listed. The SAR does not supply a real money figure for aid but indicates whether the student is eligible.
Subsidized Student Loan	The government is paying the interest on the loan while the student is in college at least part-time (six credits).
Tuition	Amount of money charged to students for instructional services. Tuition may be charged per term, per course, or per credit.
Unsubsidized Student Loan	The interest is accruing while the student is in college. The government is not paying the interest on the loan.

Making It Personal:

1. What is the tuition cost for the college/program you want to enroll in?
2. What additional fees can you expect to pay along with tuition?
3. What kinds of services will you get from the additional fees you pay?
4. Can you estimate the cost of books and supplies for your chosen program?
5. Are you more likely to be a full-time student or a part-time student?
6. What is your plan for paying for college?
7. If you were to take out loans, how much money do you think you would need to borrow?
8. Who is ultimately responsible for your college expenses?
9. Have you filled out the FAFSA application?
10. What do you feel like you need more help with in relation to financing college?

Video: Why Financial Aid Is Broken And A Simple Solution to Fix It, Susan Dynarski (TED Talk)