June is a special time of year, especially for the recent high school graduates and their families. A time filled with open houses and strong emotions.
By now most of the class of 2014 has made decisions regarding where they will be in the fall. Colleges have been declared, courses of study selected, FAFSA (financial aid) forms filed and aid packages announced.
Not long after the parties end and summer sets in an email will arrive, or an envelope in the mail, (Purdue actually sends text messages) with a bill attached. The bill is for first semester tuition and housing, and for many parents and students, this expense that had been considered a hypothetical “something to deal with later” will now be very real, and once again decisions will need to be made.
The question as to how to pay this bill could have long-term ramifications on our new graduates, and in my experience the actions taken when this bill arrives could end up determining a lot more than is currently perceived.
The primary question is whether to use student loans to pay this bill. Certainly, if part of the aid package awarded after your FAFSA was filed involved a Direct Federally Subsidized loan the offer is hard to pass up. These loans have low interest rates, deferred interest periods and favorable origination terms. But Direct Subsidized Loans are needs-based and the amount available is determined by your school, so typically even if you were awarded this form of aid it will not cover the entire amount of pending first bill.
Most students will also have access to Direct Unsubsidized Loans, which are distinctly different from their subsidized counterparts.
Direct Unsubsidized Loans do not involve a deferred interest period, meaning you will need to begin paying interest immediately, and interest rates are higher as well. Also, in my experience these loans can involve an origination fee meaning your may have to pay an immediate fee to borrow the money.
In my opinion, unsubsidized loans are simply not very attractive and need to be used very carefully. Unfortunately these loans are very easy to access (I once accepted one by clicking in the wrong place), and for anxious students and parents these loans can look like an immediate solution. An immediate solution with potentially long-term consequences.
Average student loan debt for a new college graduate is $29,300. That’s a lot of money, and servicing this level of debt could impact decisions ranging from housing to marriage to job choices.
I would encourage families facing this impending bill to be very thoughtful and creative. College is paid for one semester at a time, and believe it or not, even with a pending freshman you still have time on your side. Look at all your options, home equity, IRAs, savings bonds, work study, summer jobs. Any financial sacrifice made now, may end up bearing fruity four, six, or 10 years down the road.