Filled out the FAFSA in March and recently received a letter that
offered me a $3,500 unsubsidized Stafford loan. I did a little research
and found out I would have to pay interest on interest. I’m thinking
about declining it and mailing it back to the school I attend. Will I be
offered any other financial aid or is this all I’m going to receive if I
send it back declining it? I can’t afford to pay back that much money
and don’t want to go into debt. — Heather K.
If you decline your student loans, the college will
not increase other forms of financial aid to compensate. You will simply
have to pay the $3,500 from your own resources.
Nobody wants to go into debt, but the reality is that
college means debt. Almost seven-eighths (86.3%) of students at
four-year colleges who apply for federal student aid graduate with
student loans, an average of $24,651.
Borrowers of unsubsidized Stafford loans may defer
making payments until six months after graduation. However, the interest
continues to accrue and will be capitalized. Capitalization of interest
adds it to the loan balance, increasing the size of the loan and
ultimately leading to the paying of interest on interest. For example,
assuming an unsubsidized Stafford loan for a college freshman is
disbursed in two disbursements, a total of $283 in interest will have
accumulated for every $1,000 borrowed by the time the loan enters
repayment. If the borrower chooses to capitalize this interest instead
of paying it, the monthly loan payment will increase by 28% and the
total interest paid over the life of the loan will increase by $108 for
every $1,000 borrowed, assuming a 10-year repayment term. With a 20-year
repayment plan the total interest paid over the life of the loan will
increase by $236 for every $1,000 borrowed.
It is always better to pay at least the interest
during the in-school and grace periods. This yields a lower loan balance
at graduation and will save a lot of interest over the life of the
loan. Because of the lower loan balance, you will be able to repay the
loan quicker, saving you additional money. Increasing the monthly
payment by 25% will cut 2.6 years off of a 10-year repayment plan and
reduce the total interest paid by almost 28%. On a 20-year repayment
plan it saves 6.7 years and reduces the interest by more than 37%. On a
typical student loan avoiding interest capitalization will save
thousands of dollars in interest.
Of course, an even better approach is to minimize the
debt by finding a way to cut your college costs. Live like a student
while you are in school so you don’t have to live like a student after
you graduate.
My son is 23 and will be 24 by December 31. He had
more than $10,000 in unemployment compensation last year. My daughter is
22 and will be going to college full-time. I filled out the parent’s
portion of her FAFSA since she was considered a dependent student. Would
it help my son if I fill out the parental information section of his
FAFSA? Would it bring down his EFC because his sister is also going to
college? — Ohana J.
Since your son will be age 24 by December 31 of the
award year, he is automatically independent. Even if you complete the
parental information section of his FAFSA it will be disregarded and
will not affect his EFC.
If your son is still unemployed, he should ask the
college to use professional judgment to disregard his unemployment
compensation. The US Department of Education has issued a Dear Colleague
Letter to college financial aid offices allowing them to zero out the
income of independent students who are receiving unemployment benefits
during the current economic downturn. This could have a significant
impact on his EFC.
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