9 things you have to know about financial aid for college

Your student has plenty of options when it comes to finding and securing financial aid to help pay for college. But there is a lot to know about the FAFSA, scholarships, loans and financial aid in general. Following are nine must-knows as you and your family begin navigating the world of financial aid.

1. Every college applicant should fill out the FAFSA — every year.

The FAFSA (Free Application for Federal Student Aid) is what the federal government and schools use to decide how much to give or loan to a college-bound student. Your student should fill it out — even if you think that they won’t qualify for any money.

“I often hear from families who apply for financial aid the first year that their eldest child goes to college. They don’t get anything other than low-cost loans, so the second year, they may say, ‘Why bother?’ says Mark Kantrowitz, author of "Filing the FAFSA." “But the financial aid formulas are very complicated, so there are very subtle things that can change from one year to the next that can have an impact on aid eligibility.”

Maybe your second child is heading to college while your first kid is still in school, or maybe your income changed. Or it's possible that the colleges your second child is applying to are more expensive. All of these things could mean that your younger child receives more grant and scholarship money.

Bottom line: Fill it out every year that you have a child attending college. You have nothing to lose and potentially a lot to gain.

2. The earlier your student sends in their FAFSA, the better.

The form is available October 1 each year, and that’s precisely when your student should consider filling it out, so they can potentially get to the front of the line for nabbing a piece of the financial aid pie.

Why? There's generally more money to give away at the start of the financial aid application season. “So you need to be organized," says Damian Rothermel, a certified financial planner® who specializes in college funding. “If you’re not in the front of the line, you typically have to be a better prospective student to get the same amount of money.”

3. Even high earners may qualify for aid.

Yes, you and your student should fill out the FAFSA if you earn more than $100,000 a year. “You might still be able to get colleges to give you money depending on how attractive the student is,” says Rothermel. It just takes a little planning, which should ideally start a couple of years before your kid heads to college. It can be helpful to have your financials set up as optimally as possible to help qualify for the most amount of aid.

And this can be especially true if you have some large assets to your name. “There are certain types of accounts that are not favorably looked at for calculations because the school expects you to use the money for college,” Rothermel says. Depending on your age and when your child is going to school, retirement accounts, education accounts, real estate, stocks, bonds and mutual funds all have their pluses and minuses when it comes to filing for aid, so it's best to consult with a financial professional who specializes in college planning to help determine your financial aid eligibility — and how to maximize it.

4. Your student may be able to negotiate their financial aid package.

Colleges are a business, so they usually want high-performing students who may help boost their reputation — and who could possibly become donors later on. Knowing this may give you and your student some haggling leverage.

Your student’s first step is to send their FAFSA to several colleges — not just the one they may have their heart set on. Schools can see if your student is sending the form around, Rothermel says, adding that this may motivate them to offer competitive grant and scholarship money to help sway them to their side.

And once your student receives a financial aid package from a school, “they can always appeal their award letter from the college and ask for more,” he says. “If they say they’ll give your student $10,000, your student might say, ‘Well, I want $15,000.’ The school may not go up that high, but they may work with you and your student.”

5. Student loans should be a last resort.

Yes, it’s often easier to get a loan than a grant or a scholarship — but it may be worth the extra work to first apply for financial aid, and only consider a student loan when you and your student have exhausted their grant and scholarship options.

“Given the mix of interest rates and repayment plans, every dollar you borrow is going to cost you about two dollars by the time you pay back that debt,” says Kantrowitz. And students should be encouraged to keep this in mind once they're in college. “Before students spend loan money on anything, they should double the price and then ask themselves if they'd still purchase it at that price.” Would you pay $11 for that coffee? How about $2,000 instead of $1,000 for a spring break trip?

As tempting as it is to go on a shopping spree when an extra $1,500 hits your account, your student will most likely be grateful post-graduation if they only spend student loan money on education necessities — and consider applying anything that's left over back to the loan.

6. Federal student loans are usually preferable to private loans.

Federal loans offer flexible payment terms if your student is unemployed or underemployed after college. Private student loans usually don't. So if the contract says that their payments on a private loan post-graduation will be $500, that's typically what they’re going to pay. And it’s nearly impossible to discharge private student loans in bankruptcy.

Another thing to keep in mind when thinking about going the private student loan route: Parents often have to co-sign on them, which could turn into a problem later for both the student and the parents.

“There’s no safety net with a private student loan,” says Joshua R.I. Cohen, an attorney specializing in student loans who often counsels distraught borrowers. “It’s not uncommon for me to get calls from parents who are co-signers on private student loans — who want to sue a child because their kid isn't making payments.”

And the repercussions can be extensive if you don't do your homework before taking out a private student loan. “Parents need to understand when they cosign that they are 100% liable for the loan — and that can cost them their retirement,” Cohen says. If a student neglects to make timely payments, not only could it ruin the parents’ credit, but it could also impact the student’s credit score, making it hard to get a future car loan, home loan or even another student loan for a postgraduate degree.

7. That said, you shouldn't take federal student loans lightly.

While for most people federal loans are generally a better option than private loans, they’re still not a cakewalk. If your student defaults, the federal government can garnish their wages or take their tax refund. “All they have to do is give you a 30-day warning notice — and boom! — they hit your wages. Same thing with your tax refund," Cohen says. "There's no lawsuit involved.”

And although the situation can be fairly easy to address — the government may allow your student to fix their loans for a different payment term — it could take anywhere from 30 days to 10 months to get out of default.

Another thing to keep in mind? For the first few years your student is paying off their student loans, the money will be applied to the interest instead of the principal — so their balance won't feel like it's budging much month after month, which can be disheartening. “It’s just like paying a mortgage,” Cohen says. “It takes a good five years before you really touch the principal. But don’t lose faith. Just make the payments.”

8. Securing big-ticket scholarships isn't as easy as you'd think.

It’s common for high schoolers to think that they can simply apply for a couple of big scholarships and be done with it. But that’s akin to winning the lottery — with so many equally qualified students applying for scholarships, it comes down to a game of chance.

So to increase those chances, your student should apply for smaller scholarships as well. “The students you hear about winning a gazillion dollars in scholarships probably applied to every single scholarship for which they were eligible,” Kantrowitz says. “Because for every win, there will be dozens of rejections.”

9. The “net cost” of college can be misleading.

Some colleges have been known to present how much your student will actually pay — the "net cost" — by simply subtracting the entire financial aid package that they're offering from the cost of attendance. But that financial aid package typically includes loans. And loans, as we stated above, should be a last resort.

Say your student is looking at two colleges that both cost $15,000 per year. College A offers a financial package of $5,000 in scholarships and/or grants, and assumes your student will take out a $5,000 loan. College B offers $7,000 in scholarships and/or grants, and assumes your student will take out a $3,000 loan. Clearly, College B is the more attractive choice because your student will pay less overall and won’t be racking up as much interest on the loan. 

“Instead of looking at the net cost, you should look at the net price, which is what you get when you subtract just the grants from the cost of attendance,” Kantrowitz says. Net price flips the equation, so that you know exactly what you’ll need to use in savings, income and any loans that you take out.

Another thing to be wary of is something called front-loading. “It’s essentially a bait and switch, where the mix of grants and loans in the financial aid package as a freshman is going to be more generous toward the grants than in subsequent years,” says Kantrowitz. So in your student’s freshman year, they could get a great package and then find they have a much higher bill by their senior year, thanks to fewer grants in the later college years.

To help guard against this, use a tool like College Navigator, which shows the number of students receiving grants, as well as the average grant amount for both freshman and the general population. “If the college practices front-loading grants," Kantrowitz says, "those figures will be substantially different."