Should you go into Student Debt to Pay for College?

With the cost of tuition, fees, room and board at public four-year colleges running around $20,000 -- and up to $70,000 for some elite private schools, how can families foot the steep education bill without getting crushed by student debt? Now that college acceptances are in, it's time to figure out how to pay for that coveted degree. Before you agree to the financial award offered, know that if your family finances have changed since you completed your FAFSA forms, due to a job loss, high medical expenses or caring for an elderly parent, you can appeal to get a better package. You will need to gather supporting documentation and be a bit of a squeaky wheel, but it is well worth the time and energy.

If the prospective student has received a better package from an equally ranked school, it is worth inquiring as to whether a match is available. In this case, financial aid officials say that it is better for the student to make the appeal directly, rather than have the parents call.

You should also know that the financial offers are only good for the first year of borrowing--families have to apply annually for aid. That means that your award could drop in the subsequent three years, which is why you should ask the college how much its costs could change. You can research whether a reduction is likely by using the Education Department’s College Navigator,  which highlights what percentage of first-year students at each school, earns scholarships compared with the entire undergraduate student body.

The biggest problem that families have is that there is no uniform standard for how colleges detail true net cost of earning a degree. That puts the onus on families to parse through the likely four-year total cost of attendance (tuition, fees, room, board, books, travel), the amount of financial aid available and the money that will be accessed through loans and work-study.

Once you have nailed down the costs, then it’s time to decide whether or not you will borrow money to finance the degree. Students should explore federal loan options before private ones, because most private loans have variable interest rates that can rise substantially in the future and only federal loans are eligible for different kinds of loan repayment options.

Colleges also often include federal parent PLUS loans in the aid package, but those come with a hefty loan origination fee of nearly 4.3 percent. Parents should check out the private sector too and remember that parental borrowers have to start making monthly payments immediately. Finally, education experts suggest that students only borrow a total of what they can earn in their first full year of employment and parents should be careful not to blow up their own retirement plans to finance education.

Because so many parents are trying to juggle competing financial goals, many grandparents have gotten into the act. While a grandparent’s assets are not included when colleges determine eligibility for financial aid, if a 529 plan is established in the grandparent’s name for the benefit of the grandchild, it can negatively impact the student’s financial aid award.

The reason is that when money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income, which can reduce a student’s aid eligibility significantly. In order not to diminish the ability to receive aid, grandparents should consider gifting the money to the parents, who can then deposit the gift into their own 529 accounts. Experts note that it makes sense to wait until after the aid has been determined before making the gift.