February 24, 2009



Paying For College In 2009

For many families, 2009 is turning out to be a tough year to think about college costs. Families may be dealing with difficult issues, like unemployment, rising mortgage payments, or even foreclosure. Even if your family isn't facing extreme financial circumstances, you always want to maximize your financial aid awards and pay for college as cheaply as possible.

Thankfully, the financial aid process hasn't changed much over the past year, although certain types of financial aid have become harder to access. We've covered some of the most frequent historical financial aid questions, and some new ones for 2009.

We've never applied for financial aid before, where do we start?

Start by completing the Free Application for Federal Student Aid (FAFSA) sometime after January 1 of your senior year in high school. You and your parents (if you are a dependent student) will need to complete the FAFSA again each year that you are in school in order to qualify for financial aid for the next year. The FAFSA helps the school determine your eligibility for federal student aid – like college grants, federal work study and federal student loans.

Our family's financial situation has changed drastically since we got our financial aid package. What can we do?

Your financial aid package for this year is based on the FAFSA you completed last January, which takes into account your family's income from the previous tax year. If you are having difficulties paying for school, or your family's situation has changed, discuss this with your financial aid office. For example, if one of your parent's has become unemployed, you may be eligible for more financial aid.

What are the best types of financial aid for a student who is paying for college?

College Grants & Scholarships – Free money!

The financial aid award letter that you get from your school will tell you if you are eligible for any federal or state grants, or if your school has awarded you any scholarship money. You may also want to look for and apply for additional scholarships on your own.

Federal Perkins Loan

A need based loan sponsored by the U.S. government with a fixed interest rate of 5%. Your financial aid award letter will tell you if you qualify for the Federal Perkins Loan. Please note: As of the 2015-16 school year, Perkins Loans are only available to eligible students who received a Perkins Loan during the prior school year.

Federal Stafford Loan

The most widely used, low-cost education college loan sponsored by the U.S. government. The amount of money you can borrow as a dependent student under the Stafford Loan program is based on your academic level*:

  • $5,500 Freshman
  • $6,500 Sophomore
  • $7,500 Junior, Senior and 5th year undergraduate students
  • $20,500 Graduate Students ($40,500 certain medical professionals)

The interest rate for the 2008/2009 school year is fixed at 6.8% for unsubsidized Stafford Loans. If you are continuing school over the next few years, and you are eligible for subsidized Stafford Loans, you are in luck! The interest rate is scheduled to decline each year through 2012 for subsidized Stafford Loans (see chart below):

Year Subsidized Stafford Loans
(Undergraduate Students)
Unsubsidized Stafford Loans
(Undergraduate Students)
 Unsubsidized Stafford Loans
(Graduate or Professional Students)
2007-08 6.8% 6.8% 6.8% 
2008-09 6.0% 6.8% 6.8% 
2009-10 5.6% 6.8% 6.8% 
2010-11 4.5% 6.8% 6.8% 
2011-12 3.4% 6.8% 6.8% 
2012-13 3.4% 6.8% 6.8% 
2013-14 3.86%  3.86%  5.41% 
2014-15 4.66%  4.66% 6.21%
2015-16 4.29% 4.29% 5.84%

Private Student Loans

Once you have maximized your free money and federal loan funds, you may consider using private student loans to cover your remaining college expenses. Because private student loans are credit-based, most students will need a credit-worthy co-signer to help them get approved.

It's important to understand that the current economic environment has also impacted the private loan market. Private student loan lenders now require the student and co-signer to meet more stringent credit criteria to get approved.

What are the various financial vehicles that parents can use to pay for college?

There are basically two products built to help parents pay for college:

Federal PLUS Loan

The PLUS Loan is a government sponsored loan made in the parent's name. PLUS Loans currently have a fixed interest rate of 8.5% (7.9% through the Department of Education) and origination fees of up to 4%. If you are currently taking out a new PLUS Loan, you have the option to defer payments until 6 months after your child leaves school. The PLUS Loan does require a credit approval.

Private Student Loans

Unlike PLUS Loans, private student loans (described in the question above) are made in the student's name. Most students do not have the income or credit history to get approved for a loan on their own, and will likely need you to co-sign the loan. As a co-signer, the private loan will appear on your credit report, and you are also responsible to make sure it gets paid back (similar to co-signing a car loan for your child). After a few years of good payment history, some lenders will allow your child to apply to remove your name from the loan. If this benefit is important to you, make sure you do your research before you complete the loan process.

In the past, financial vehicles such as 401(k) loans/withdrawals and home equity lines of credit were popular ways for parents to borrow money for college. Because home equity loans have become much more difficult to access and so many 401(k) accounts have decreased in value, these vehicles seem to be less popular in 2009.

Is there anything in the stimulus package to help students and parents with college costs?

There are three higher education related items included in the new stimulus bill. There will be an increase in the Pell grant maximum to $5,550 for low-income families by 2010-2011, a $200 million increase for the federal work study program, and approximately $13.5 billion to pay for a $2,500 tax credit for taxpayers that pay college tuition. We recommend visiting www.nasfaa.org to keep up with the most up to date information.

Note that although there were plans to increase Perkins and Stafford loan limits, this provision did not make it into the final bill.

*The amounts shown for Stafford Loan limits include both subsidized and unsubsidized borrowing limits.