Christine Benz: We're talking today about college funding, and one increasingly important aspect of paying for college for lot of families is financial aid. What all comes under that umbrella of financial aid?
Adam Zoll: Well, in fact, Christine, I think the financial aid is probably one of the most misunderstood components of college financing. When most people hear financial aid and the prospects of getting financial aid for their child, for example, their eyes light up, and they think free money.
Benz: They think free ride maybe even.
Zoll: Maybe even free ride, which is exceedingly rare for people to get a full-ride scholarship, but even financial aid in itself is often mistaken for being free money. But, in fact, a good portion of financial aid is actually in the form of loans, which do need to be paid back. When you hear financial aid, if a school is offering your child financial aid, make sure that you understand exactly what that means: how much of this is in the form of scholarships or grants, which do not need to be repaid, and how much of it is in the form of loans. And if you are getting loans you need to, among other things, consider what the terms of the loan are, what the interest rate is, and what the repayment terms are. So just make sure that you understand exactly what's meant by financial aid if it's mentioned to you.
Benz: Let's take a look at the numbers, Adam. How does financial aid break down in terms of which students are receiving which types of aid?
Zoll: Overall, about 70% of all students receive some form of financial aid. About 60% of them receive grants or scholarships, which is the type of aid that is not need to be repaid. About 40% are getting financial aid in the form of loans and, of course, there is some overlap between those two groups.
Benz: Some students doing both, or probably many.
Zoll: Some people are getting both. It's important to distinguish between different types of financial aid. There is need-based aid that's based on the student’s income or the student’s family’s income, and there is merit-based aid. Merit-based aid is based on qualities that the student has. Maybe it's his grade point average, maybe it's demographics where he comes from. The school may be looking for students from a given state, because they like to…
Benz: To balance things out a little bit.
Zoll: They like geographical diversity. Or it could be that a student has a specific skill or talent that the school is looking for. There are different types of aid--need-based and merit-based--and, in fact, lots of schools are using merit-based aid more and more to try to attract the kind of students that they think will provide the type of student body that they hope to have.
Benz: And you say that you don't necessarily need to be a lower-income family to qualify for the merit-based aid.
Zoll: Well, for the federal need-based aid, generally, if your family is making more than, say, $50,000, $60,000 per year, you probably won't qualify for need-based grants or scholarships from the federal government. However, at private schools, which obviously have a much higher price tag in most cases, students from higher-income families often will qualify for merit-based aid or even need-based aid. So I would encourage children from higher-income families to still apply for a financial aid or even apply if they are going to a public school because you never know. But specifically if they are going to a private school, oftentimes students from higher-income families will qualify for aid.
Benz: I want to drill into the loan piece a little bit more. Are there any guidelines that you can give people about how much they should borrow to make sure that they are not biting off more than they can chew?
Zoll: One commonly used guideline is that students or their families should not borrow more than the student would make potentially in their first year on the job. So if a student is going into a profession that's going to pay them $40,000 per year, taking out $60,000 in loans is probably not a great idea. You really need to factor this, and this should be part of your return on investment equation in terms of looking at the larger financial payoff of the education that you are paying for.
Benz: Would you also suggest, Adam, that people look at some of the federally subsidized loans before they turn to the private loan market?
Zoll: Generally, the federal loans are going to have better terms than the private loans. There is a lot happening in terms of the federal loan system right now, where the federal loans are now going to be tied to market rates, which in essence puts them on a similar footing to the private loans. There will no longer be the subsidized Stafford loan, which there has been for the past several years. But one thing to be aware of is even though loans rates, for example, in the near term may be lower than they had been for some borrowers, over time, if rates creep up enough, those loan rates are going to creep up with them, so you really need to keep track of where interest rates are headed.
Benz: Adam, thank you so much for being here to provide these pointers.
Zoll: My pleasure.