Financial: Budgeting & Savings

Skyrocketing College Costs: Advice for cash-strapped parents

Posted: Saturday, October 07, 2000 at 04:22 PM CT

College costs are going through the roof. With 1998 costs running about $31,000 for private institutions and $14,000 for public colleges, parents have reason to worry about how they'll foot the bill. Faced with such costs, few parents--and students--have much choice other than taking out a loan. "Some 45 percent of undergraduates and half of all graduate students finance their education with student loans," says Robin Leonard, co-author of Take Control of Your Student Loans (

"Taking out loans to cover college costs is better for parents than tapping into retirement savings," says Leonard. And fortunately, a variety of need-based aid is available, including loans at very low interest rates as well as outright grants. You can help defray the costs of higher education by helping your college-bound child take advantage of grants, loans from the government ( and private lenders, and work-study programs.

Before you and your student decide which sources to tap, you'll first have to determine how much you can pay and how much you need to borrow. Need-based loans are granted based on the cost of attendance minus the student and parents' ability to pay. That expected family contribution is primarily determined by the student and parents' income and assets.

"Unfortunately, what the government thinks you can pay and what you think you can afford can be miles apart," says J. Edward Dalton, president of College Financial Service in Virginia Beach, VA. Need-based loans are typically subsidized by the government and don't charge interest until after graduation. Unsubsidized loans, on the other hand, are not granted based on need and accrue interest immediately.

How to Apply for Aid

To apply for federal grants or loans, you and your child must fill out the Free Application for Federal Student Aid ( after January 1 of the year college will begin. After the form has been processed, the college will review the results and will inform you of your loan eligibility.

Sources of Aid Abound

The vast majority of student loans are held by just four organizations: the government, the Student Loan Marketing Association (Sallie Mae) in Washington, D.C., New York-based Citicorp, and New England Education Loan Marketing Co. (Nellie Mae) in Washington, D.C. As well as initiating loans, Sallie Mae ( and Nellie Mae ( purchase loans from government and private lenders, enabling them to replenish their funds and make more student loans. Nellie Mae also does a big business in making private loans to graduate students.

Here's a rundown of the financial aid options available:

  • Pell grants: These need-based federal grants do not need to be repaid and are offered exclusively to undergraduates. Last year, the maximum award was $2,700.
  • Federal Supplemental Educational Opportunity Grants: These grants range from $100 to $4,000 and are offered to needy undergraduates. They don't need to be repaid.
  • Stafford loans: The government offers both subsidized and unsubsidized Stafford loans ranging from $2,625 to $10,500 per year. The interest rate is variable (adjusted annually), up to 8.25 percent. Students have a six-month "grace period" (usually after graduation) before you must begin repayment.
  • Perkins loan: These low-cost federal loans are offered at 5 percent interest to undergraduate and graduate students with exceptional need. Undergraduates may borrow up to $3,000 a year, while graduate students may receive up to $5,000 annually. There is a nine-month grace period before repayment begins after graduation. Students are allowed up to 10 years to repay.
  • PLUS Loans: These loans are not need-based and are offered to parents with good credit histories to pay for a child's education expenses. The yearly limit on a PLUS Loan is equal to the cost of attendance minus any other financial aid received. The interest rate is variable, up to 9 percent. Generally, repayment must begin within 60 days after the final loan disbursement for the academic year. Interest accrues immediately.
  • Federal work-study: This program provides jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. Job assignments may be at the school or off-campus for a non-profit organization or public agency. The total federal work-study award depends on when your student applies, their level of need, and the funding level of their school.
  • Private loans: Financial institutions, colleges, and professional associations also are good sources of money to help supplement federal loans. Special programs may be available for graduate students in business, law and health professions.

Free Money

Don't forget about scholarships, particularly if your child doesn't qualify for need-based aid. There are many merit-based scholarships out there that don't take need into account. A good source of information about scholarships is Peterson's annual directory, Scholarships, Grants, and Prizes.

"There's no reason why a kid can't go to college," says Dalton. "You can get the money one way or another. Your child may have student loans to pay off after graduation, but they can get the money they need to earn their college degree."

Sherri Eng is a business journalist based in the San Francisco Bay Area. She has written stories on career and workplace issues, small business, and banking since 1992.

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