Readings
Overview
In this chapter, you will learn to reach your personal life goals by implementing financial planning and strategies to protect yourself, manage your money today, and put yourself in a better position for tomorrow. How you act today impacts your tomorrow.
Introduction
Student Survey
How financially literate are you? This survey will help you determine how the chapter concepts relate to you right now. As we are introduced to new concepts and practices, it can be informative to reflect on how your understanding changes over time. We’ll revisit these questions at the end of the chapter to see whether your feelings have changed. Take this quick survey to figure it out, ranking the statements on a scale of 1-4, 1 meaning “least like me” and 4 meaning “most like me.”
- I actively and regularly plan and/or monitor my finances.
- I understand the benefits and risks of credit.
- I have a plan to repay my student loans.
- I regularly take steps to protect my identity and assets.
You can also take the survey anonymously online.
Learning Objectives
In this chapter, you will learn to reach your personal life goals by implementing financial planning and strategies to protect yourself, manage your money today, and put yourself in a better position for tomorrow. How you act today impacts your tomorrow. By the end of this chapter, you should be able to do the following:
- Align your personal and financial goals through smart financial planning.
- Create a saving and spending plan and track your performance.
- Plan for emergencies.
- Identify best practices and risks associated with credit cards and other debt.
- Determine the best opportunities for you to finance your college education.
- Articulate specific ways to secure your identity and accounts.
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Introduction” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-introduction
Personal Financial Planning
If you fail to plan, you are planning to fail. Honestly, practicing money management isn’t that hard to figure out. In many ways it’s similar to playing a video game. The first time you play a game, you may feel awkward or have the lowest score. Playing for a while can make you OK at the game. But if you learn the rules of the game, figure out how to best use each tool in the game, read strategy guides from experts, and practice, you can get really good at it.
Money management is the same. It’s not enough to “figure it out as you go.” If you want to get good at managing your money, you must treat money like you treat your favorite game. You have to come at it with a well-researched plan. Research has shown that people with stronger finances are healthier (Sweet et al., 2013) and happier (Kozma & Stones, 1983), have better marriages (Drew, Britt, & Huston, 2012), and even have better cognitive functioning (Mani et al., 2013).
Financial Planning Process
Personal goals and behaviors have a financial component or consequence. To make the most of your financial resources, you need to do some financial planning. The financial planning process consists of five distinct steps: goal setting, evaluating, planning, implementing, and monitoring.
- Develop Personal Goals
- What do I want my life to look like?
- What do I really need?
- Identify and Evaluate Alternatives for Achieving Goals for My Situation
- What do my savings, debt, income, and expenses look like?
- What creative ways are available to get the life I want?
- Write My Financial Plan
- What small steps can I take to start working toward my goals?
- Implement the Plan
- Begin taking those steps, even if I can only do a few small things each week.
- Monitor and Adjust the Plan
- Make sure I don’t get distracted by life. Keep taking those small steps each week. Make adjustments when needed.
Figure 1. Steps of financial planning. (Credit: Amy Baldwin / Understanding financial literacy:
Personal financial planning / Attribution (CC-BY 4.0))
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Personal Financial Planning” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-1-personal-financial-planning
References
Sweet, E., Nandi, A., Adam, E. K., & McDade, T. W. (2013). The high price of debt: Household financial debt and its impact on mental health and physical health. Social Science & Medicine, 91, 94-100.
Kozma, A. & Stones, M. J. (1983). Predictors of happiness. Journal of Gerontology, 38, 626-628.
Drew, J., Britt, S., & Huston, S. (2012). Examining the relationship between financial issues and divorce. Family Relations, 61, 615-628.
Mani, A., Mullainathan, S., Shafir, E., & Zhao, J. (2013). Poverty impedes cognitive function. Science, 341, 976-980.
Savings, Expenses, and Budgeting
What is the best way to get to the Mississippi River from here? Do you know? To answer the question, even with a map app, you would need to know where you are starting from and exactly where on the river you want to arrive before you can map the best route. Our financial lives need maps, too. You need to know where you are now and where you want to end up in order to map a course to meet the goal.
You map your financial path using a spending and savings plan, or budget, which tracks your income, savings, and spending. You check on your progress using a balance sheet that lists your assets, or what you own, and your liabilities, or what you owe. A balance sheet is like a snapshot, a moment in time, that we use to check our progress.
Budgets
The term budget is unpleasant to some people because it just looks like work. But who will care more about your money than you? We all want to know if we have enough money to pay our bills, travel, get an education, buy a car, etc. Technically, a budget is a specific financial plan for a specified time. Budgets have three elements: income, saving and investing, and expenses.
Figure 2. A budget is a specific financial plan for a finite amount of time.
For example, you can set a budget for your family for a year.
(Credit: Amy Baldwin / Understanding Financial Literacy:
Savings, Expenses, and Budgeting / Attribution (CC-BY 4.0))
Income
Income most often comes from our jobs in the form of a paper or electronic paycheck. When listing your income for your monthly budget, you should use your net pay, also called your disposable income. It is the only money you can use to pay bills. If you currently have a job, look at the pay stub or statement. You will find gross pay, then some money deducted for a variety of taxes, leaving a smaller amount - your net pay. Sometimes you have the opportunity to have some other, optional deductions taken from your paycheck before you get your net pay. Examples of optional deductions include 401(k) or health insurance payments. You can change these amounts, but you should still use your net pay when considering your budget.
Some individuals receive disability income, social security income, investment income, alimony, child support, and other forms of payment on a regular basis. All of these go under income. During school, you may receive support from family that could be considered income. You may also receive scholarships, grants, or student loan money.
Saving and Investing
The first bill you should pay is to yourself. You owe yourself today and tomorrow. That means you should set aside a certain amount of money for savings and investments, before paying bills and making discretionary, or optional, purchases. Savings can be for an emergency fund or for short-term goals such as education, a wedding, travel, or a car. Investing, such as putting your money into stocks, bonds, or real estate, offers higher returns at a higher risk than money saved in a bank. Investments include retirement accounts that can be automatically funded with money deducted from your paycheck. Automatic payroll deductions are an effective way to save money before you can get your hands on it.
Setting saving as a priority assures that you will work to make the payment to yourself as hard as you work to make your car or housing payment. The money you “pay” toward saving or investing will earn you back your money, plus some money earned on your money. Compare this to the cost of buying an item on credit and paying your money plus interest to a creditor. Paying yourself first is a habit that pays off!
Expenses
Expenses are categorized in two ways. One method separates them into fixed expenses and variable expenses. Rent, insurance costs, and car payments are examples of fixed costs: they cost about the same every month and are predictable based on your arrangement with the provider. Variable expenses, on the other hand, change based on your priorities and available funds; they include groceries, restaurants, cell phone plans, gas, clothing, and so on. You have a good degree of control over your variable expenses. You can begin organizing your expenses by categorizing each one as either fixed or variable.
A second way to categorize expenses is to identify them as either needs or wants. Your needs come first: food, basic clothing, safe housing, medical care, and water. Your wants come afterward, if you can afford them while sticking to a savings plan. Wants may include meals at a restaurant, designer clothes, video games, other forms of entertainment, or a new car. After you identify an item as a need or want, you must exercise self-control to avoid caving to your desire for too many wants.
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Savings, Expenses, and Budgeting” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-2-savings-expenses-and-budgeting
Balancing Your Budget
Would you take all your cash outside and throw it up in the air on a windy day? Probably not. We want to hold on to every cent and decide where we want it to go. Our budget allows us to find a place for each dollar. We should not regularly have money left over. If we do, we should consider increasing our saving and investing. We also should not have a negative balance, meaning we don’t have enough to pay our bills. If we are short of money, we can look at all three categories of our budget: income, savings, and expenses.
We could increase our income by taking a second job or working overtime, although this is rarely advisable alongside college coursework. The time commitment quickly becomes overwhelming. Another option is to cut savings, or there’s always the possibility of reducing expenses. Any of these options in combination can work.
Another, even less desirable option is to take on debt to make up the shortfall. This is usually only a short-term solution that makes future months and cash shortages worse as we pay off the debt. When we budget for each successive month, we can look at what we actually spent the month before and make adjustments.
Tracking the Big Picture
When you think about becoming more financially secure, you’re usually considering your net worth, or the total measure of your wealth. Earnings, savings, and investments build up your assets - that is, the valuable things you own. Borrowed money, or debt, increases your liabilities, or what you owe. If you subtract what you owe from what you own, the result is your net worth. Your goal is to own more than you owe.
When people first get out of college and have student debt, they often owe more than they own. But over time and with good financial strategies, they can reverse that situation. You can track information about your assets, liabilities, and net worth on a balance sheet or part of a personal financial statement. This information will be required to get a home loan or other types of loans. For your net worth to grow in a positive direction, you must increase your assets and decrease your liabilities over time.
Good Practices That Build Wealth | Bad Practices That Dig a Debt Hole |
Tracking all spending and saving | Living paycheck to paycheck with no plan |
Knowing the difference between needs and wants | Spending money on wants instead of saving |
Resisting impulse buying and emotional spending | Using credit to buy more that you need and increasing what you owe |
You can write down your budget on paper or using a computer spreadsheet program such as Excel, or you can find popular budgeting apps that work for you (Depra, 2015). Some apps link to your accounts and offer other services such as tracking credit cards and your credit score. The key is to find an app that does what you need and maintains security over your personal information.
Here are some examples of apps to help manage your finances:
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Savings, Expenses, and Budgeting” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-2-savings-expenses-and-budgeting
References
Depra, D. (2015, September 2). Best budgeting apps for college students: Mint, you need a budget and more. Tech Times. http://www.techtimes.com/articles/80726/20150902/best-budgeting-apps-for-college-students-mint-you-need-a-budget-and-more.htm
Emergency Funds
Plan on the unplanned happening to you. It happens to all of us: a car repair, a broken computer, an unplanned visit to the doctor, a friend or relative in desperate need, etc. How will you pay for it? A recent study found that over 60 percent of households could not pay cash for a $400 unexpected expense (Board of Governors of the Federal Reserve System, 2018). Could you?
What Is an Emergency Fund?
An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies (Consumer Financial Protection Bureau, 2021). Some common examples include car repairs, home repairs, medical bills, and a loss of income. In general, emergency savings can be used for large or small unplanned bills or payments that are not part of your routine monthly expenses and spending.
Why Do I Need an Emergency Fund?
Without savings, even a minor financial shock could set you back, and if it turns into debt, it can potentially have a lasting impact. Research suggests that individuals who struggle to recover from a financial shock have less savings to help protect against a future emergency. They may rely on credit cards or loans, which can lead to debt that’s generally harder to pay off. They may also pull from other savings, such as retirement funds, to cover these costs.
How Much Money Should I Keep in My Emergency Fund?
There is no magic or “official” amount to keep in an emergency fund, but you can look at your own life to get an idea to start with. How much could you put into a bank account to have for emergencies? Some students and their parents will not have a problem paying for most emergencies, but many students are on their own. What can you save up over time? A common recommendation for graduates with full-time jobs is perhaps three to six months’ worth of expenses. This may not be practical for you. A large sampling of students in financial literacy classes recommend approximately $1,000.
One thousand dollars can cover a lot of small to medium unexpected expenses, such as last-minute textbooks, computer repair or replacement, car repair, or a prescription or doctor’s visit. The emergency fund is best kept separate from other money for living expenses to protect it as emergency money. While you could keep cash, an emergency fund is often best kept in a bank, in order to avoid theft or loss and still have easy access by debit card or ATM. Pizza is not an emergency!
Figure 3. Emergency funds can cover the cost of a broken phone.
(Credit: Simon Clancy / Flickr / Attribution 2.0 Generic (CC-BY 2.0))
How Do I Create an Emergency Fund?
Emergency funds can be created quickly if you have the money, or over time if you need to save a little from each paycheck, loan, or gift. You can use a financial planning tool similar to the one mentioned earlier in this chapter. Follow these steps:
- Set an emergency fund goal.
- Identify an amount to keep on hand.
- Determine how to fund it, monthly or all at once.
- Decide where you will keep your fund (e.g., a savings account), and set specific dates to deposit money in it.
- Start now!
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Banking and Emergency Funds” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-3-banking-and-emergency-funds
References
Board of Governors of the Federal Reserve System. (2018). Report on the economic wellbeing of US households. https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-dealing-with-unexpected-expenses.htm
Consumer Financial Protection Bureau. (2021, May 15). An essential guide to building an emergency fund. https://www.consumerfinance.gov/start-small-save-up/start-saving/an-essential-guide-to-building-an-emergency-fund/
Banks, Credit Unions, and Online Banking
The banking system in the United States is one of the safest and most regulated banking systems in the world. A host of federal and state agencies regulate financial institutions to keep them from accidentally or purposefully losing customer money. In the United States, financial institutions (FIs) are divided into multiple types of companies. The banking system is generally divided into banks and credit unions, which have similar offerings and are both regulated and insured by the federal government.
Choosing a Bank or Credit Union
When choosing a bank or credit union, it is important to understand what you are looking for and what benefits each company provides. Generally, large national banks offer the most advanced technology and a large network of branches. There are also smaller community banks that serve specific groups of people and may offer products to meet the specific needs of the community.
Credit unions differ from banks in that they don’t have a profit motive. Instead, they are not-for-profit organizations that are owned by the people who bank with them. Each member of a credit union gets one vote for the board of directors, which runs the credit union. This means that whether you have $5 in your account or $5 million, you get the same vote. Credit unions tend to offer better rates and lower fees, on average, than banks.
There is no single best answer for what bank or credit union you should choose. The most vital question to ask and answer about a financial institution is whether it meets both your current and your future needs. Consider interest rates, access to automated teller machines (ATMs), online transfers, automatic paycheck deposits, branch locations if you will use one, and other services important to you.
Figure 4. Banks and credit unions can be accessed in many forms, both physical and online.
(Credit David Hilowitz / Flickr / Attribution 2.0 Generic (CC-BY 2.0))
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Banking and Emergency Funds” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-3-banking-and-emergency-funds
Banking Products and Services
Banks and credit unions offer a similar set of financial products or services, called account types. The difference between the account types lies primarily in how easy it is to put money into or take money out of an account. Regulations set maximum numbers of transactions (deposits or withdrawals) for each type of account at a bank or credit union.
Checking
Checking accounts allow you to deposit money and take money out anytime you want. There are no government limits on the number of transactions, although a bank or credit union might begin to charge you if you make too many transactions. Checking accounts often don’t pay any interest or pay an extremely low rate of interest. They are used to keep money safe and pay bills conveniently. Checking accounts are ideal for depositing paychecks, cashing paper checks, buying everyday items, and paying your bills.
Savings Accounts
Savings accounts allow you a specific number of transactions each month or each quarter. If you go over the maximum number of transactions, the bank won’t let you take any more money out or put any more money into the account until the next month. Savings accounts pay a small amount of interest on your money and may have minimum balance requirements. Money in a savings account should be money you plan to spend within the next 12 to 48 months. The only exception to this is money you have saved for an emergency, called an emergency fund. Since you never know when an emergency (such as losing your job) is going to happen, you want the money to be available to you in a savings account.
Debit Cards
When you get a checking account, you’ll also get a debit card, or check card. This card allows you to access the money in your checking account (and savings account at an ATM) using a plastic card similar to a credit card. But it is not a credit card.
A debit card only uses money available in your account. Paying with a debit card is like paying with a paper check, but more immediate and convenient. You will have the option of selecting overdraft protection, which means the bank or credit union will allow you to buy stuff even if you don’t have enough money in your account; they’ll just charge you a fee, perhaps $25, for each event. This can be compared to a high-interest loan. Depending on how many things you buy in a week, overdraft protection could add many fees to your statement and use up your cash so it will not be available for your planned expenses. Consider opting out of overdraft protection and carefully keeping track of your account balance. This way you can only spend the money that you have.
Be aware that by using your debit card at an ATM associated with a different bank, you can incur fees - sometimes from both banks!
Banking Fees
Banks and credit unions charge fees to operate. Many charge fees for a checking or savings account, overdrafts, and other services. You should seek to avoid fees for which you receive no extra services or when you can get similar services elsewhere for free. Two areas that are most subject to fees are services and “triggered” events. Triggered events are primarily caused by actions such as overdrawing your account (an overdraft). Overdraft fees are avoidable. The best way to avoid an overdraft fee is to continually monitor your bank balance and only spend money that you have. Standard bank fees can often be avoided by taking one or more measures as specified by the bank, such as maintaining a minimum balance or using direct deposit.
Online and Mobile Banking
There are other important banking tools you should also consider. Online and mobile banking are among the most important activities in banking. You should list all the things you might want to do regularly with your bank accounts and make sure you can do them through the bank’s website and app. This might include making payments on loans, transferring money between your checking and savings accounts, paying bills through automated bill pay, and creating new savings accounts. Learn the rules of your account and keep track of how you use it. This can help you keep costs down and develop a positive banking relationship.
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Banking and Emergency Funds” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-3-banking-and-emergency-funds
Debt
When you take out a loan, you take on an obligation to pay the money back, with interest, through a monthly payment. You will take this debt with you when you apply for auto loans or home loans, when you enter into a marriage, and so on. Effectively, you have committed your future income to the loan. While this can be a good idea with student loans, take on too many loans and your future self will be poor, no matter how much money you make. Worse, you’ll be transferring more and more of your money to the bank through interest payments.
Compounding Interest
While compounding works to make you money when you are earning interest on savings or investments, it works against you when you are paying the interest on loans. To avoid compounding interest on loans, make sure your payments are at least enough to cover the interest charged each month. The good news is that the interest you are charged will be listed each month on the loan account statements you are sent by the bank or credit union, and fully amortized loans will always cover the interest costs plus enough principal to pay off what you owe by the end of the loan term.
The two most common loans on which people get stuck paying compounding interest are credit cards and student loans. Paying the minimum payment each month on a credit card will just barely cover the interest charged that month, while anything you buy with the credit card will begin to accrue interest on the day you make the purchase. Since credit cards charge interest daily, you’ll begin paying interest on the interest immediately, starting the compound interest snowball working against you. When you get a credit card, always pay the credit card balance down to $0 each month to avoid the compound interest trap.
Student loans are another way you can be caught in the compound interest trap. When you have an unsubsidized student loan or put your loans into deferment, the interest continues to rack up on the loans. Again, you’ll be charged interest on the interest, not just on the original loan amount, forcing you to pay compound interest on the loan.
How Much Good Debt to Take On
During college and for the first few years after graduation, most students should only have two loans: student loans and possibly a car loan. We’ve already discussed your student loans, which should be equal to or less than your first year’s expected salary after graduation.
When you get a car, you should keep your car payment to between 10 and 20 percent of your monthly take-home pay. This means if your paycheck is $200 per week, your car payment should be no more than $80 - $160 each month. In total, you want your debt payments (plus rent if you are renting) to be no more than 44 percent of your take-home pay. If you are planning to build wealth, however, you want to cap it at 30 percent of take-home pay.
Signs You Have Too Much Debt
You can consider yourself in too much debt if you have any of the following situations:
- You cannot make your minimum credit card payments.
- Your money is gone before your next paycheck.
- Bill collectors are contacting you.
- You are unable to get a loan.
- Your paycheck is being garnished by creditor.
- You are considering a debt consolidation loan with extra fees added.
- Your items are repossessed.
- You do not know your debt or financial situation.
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Credit Cards and Other Debt” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-4-credit-cards-and-other-debt
Educational Debt
As you progress through your college experience, the cost of college can add up rapidly. Worse, your anxiety about the cost of college may rise faster as you hear about the rising costs of college and horror stories regarding the “student loan crisis.” It is important to remember that you are in control of your choices and the cost of your college experience, and you do not have to be a sad statistic.
Education Choices
Education is vital to living. Education starts at the beginning of our life, and as we grow, we learn language, sharing, and to look both ways before crossing the street. We also generally pursue a secular or public education that often ends at high school graduation. After that, we have many choices, including getting a job and stopping our formal education, working at a trade or business started by our parents and bypassing additional schooling, earning a certificate from a community college or four-year college or university, earning a two-year or associate degree from one of the same schools, and completing a bachelor’s or advanced degree at a college or university. We can choose to attend a public or private school. We can live at home or on a campus.
Each of these choices impacts our debt, happiness, and earning power. The average income goes up with an increase in education, but that is not an absolute rule. The New York Federal Reserve Bank reported in 2017 that approximately 34 percent of college graduates worked in a job that did not require a college degree (Cooper, 2017), and in 2013, CNN Money reported on a study from Georgetown University’s Center on Education and the Workforce showing that nearly 30 percent of Americans with two-year degrees are now earning more than graduates with bachelor’s degrees (Chen, 2019). Of course, many well-paying occupations do require a bachelor’s or master’s degree. You have started on a path that may be perfect for you, but you may also choose to make adjustments.
College success from a financial perspective means that you must:
- Know the total cost of the education
- Consider job market trends
- Work hard at school during the education
- Pursue ways to reduce costs
Sample College Costs
While costs vary from student to student, answering the questions below may assist with estimating your cost of attendance for one semester at SHSU.
https://www.shsu.edu/dept/cashiers/cost/
Please note: These estimations are for planning purposes only and do not reflect possible financial aid awards including scholarships, grants, or student loans. To learn more about financing an education, visit the SHSU Financial Aid and Scholarships website.
Figure 5. Sam Houston State University Cost Calculator.
(Credit Sam Houston State University / Flickr / Attribution 2.0 Generic (CC-BY 2.0))
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Banking and Emergency Funds” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-5-education-debt-paying-for-college
Types of Financial Aid: How to Pay for College
The true cost of college may be more than you expected, but you can make an effort to make the cost less than many might think. While the price tag for a school might say $40,000, the net cost of college may be significantly less. The net price for a college is the true cost a family will pay when grants, scholarships, and education tax benefits are factored in.
Grants and Scholarships
Grants and scholarships are free money you can use to pay for college. Unlike loans, you never have to pay back a grant or a scholarship. All you have to do is go to school. And you don’t have to be a straight-A student to get grants and scholarships. There is so much free money, in fact, that billions of dollars go unclaimed every year (Imam, 2015).
While some grants and scholarships are based on a student’s academic record, many are given to average students based on their major, ethnic background, gender, religion, or other factors. There are likely dozens or hundreds of scholarships and grants available to you personally if you look for them.
Federal Grants.
Federal Pell Grants are awarded to students based on financial need, although there is no income or wealth limit on the grant program. The Pell Grant can give you more than $6,000 per year in free money toward tuition, fees, and living expenses (Federal Student Aid, 2021). If you qualify for a Pell Grant based on your financial need, you will automatically get the money.
Federal Supplemental Educational Opportunity Grants (FSEOGs) are additional free money available to students with financial need. Through the FSEOG program, you can receive up to an additional $4,000 in free money. These grants are distributed through your school’s financial aid department on a first-come, first-served basis, so pay close attention to deadlines.
Teacher Education Assistance for College and Higher Education (TEACH) Grants are designed to help students who plan to go into the teaching profession. You can receive up to $4,000 per year through the TEACH Grant. To be eligible for a TEACH Grant, you must take specific classes and majors and must hold a qualifying teaching job for at least four years after graduation. If you do not fulfill these obligations, your TEACH Grant will be converted to a loan, which you will have to pay back with both interest and back interest. There are numerous other grants available through individual states, employers, colleges, and private organizations.
State Grants. Most states also have grant programs for their residents, often based on financial need. Eleven states have even implemented free college tuition programs for residents who plan to continue to live in the state. Even some medical schools are beginning to be tuition free. Check your school’s financial aid office and your state’s department of education for details.
College/University Grants and Scholarships. Most colleges and universities have their own scholarships and grants. These are distributed through a wide variety of sources, including the school’s financial aid office, the school’s endowment fund, individual departments, and clubs on campus.
Private Organization Grants and Scholarships. A wide variety of grants and scholarships and are awarded by foundations, civic groups, companies, religious groups, professional organizations, and charities. Most are small awards under $4,000, but multiple awards can add up to large amounts of money each year. Your financial aid office can help you find these opportunities.
Employer Grants and Scholarships. Many employers also offer free money to help employees go to school. A common work benefit is a tuition reimbursement program, where employers will pay students extra money to cover the cost of tuition once they’ve earned a passing grade in a college class. And some companies are going even further, offering to pay 100 percent of college costs for employees. Check to see whether your employer offers any kind of educational support.
Additional Federal Support. The federal government offers a handful of additional options for college students to find financial support.
Education Tax Credits. The IRS gives out free money to students and their parents through two tax credits, although you will have to choose between them. The American opportunity tax credit (AOTC) will refund up to $2,500 of qualifying education expenses per eligible student, while the lifetime learning credit (LLC) refunds up to $2,000 per year regardless of the number of qualifying students. The IRS warns taxpayers to be careful when claiming the credits. There are potential penalties for incorrectly claiming the credits, and you or your family should consult a tax professional or financial adviser when claiming these credits.
The Federal Work-Study Program provides part-time jobs through colleges and universities to students who are enrolled in the school. The program offers students the opportunity to work in their field, for their school, or for a nonprofit or civic organization to help pay for the cost of college. If your school participates in the program, it will be offered through your school’s financial aid office.
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Education Debt” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-5-education-debt-paying-for-college
References
Chen, G. (2019, September 27). Studies show community colleges may offer superious ROI to some four-year schools. Community College Review.
Cooper, P. (2017, July 13). New York fed highlights underemployment among college graduates. Forbes. https://www.forbes.com/sites/prestoncooper2/2017/07/13/new-york-fed-highlights-underemployment-among-college-graduates/#55be172f40d8
Federal Student Aid. (2021). Federal Pell grants. U.S. Department of Education. https://studentaid.gov/understand-aid/types/grants/pell
Imam, M. (2015, January 20). $2.9 billion unused federal grant awards in last academic year. USA Today. https://www.usatoday.com/story/college/2015/01/20/29-billion-unused-federal-grant-awards-in-last-academic-year/37399897/
Student Loans
Federal student loans are offered through the US Department of Education and are designed to give easy and inexpensive access to loans for school. You don’t have to make payments on the loans while you are in school, and the interest on the loans is tax deductible for most people. Direct Loans, also called Federal Stafford Loans, have a competitive fixed interest rate and don’t require a credit check or cosigner.
Direct Subsidized Loans
Direct Subsidized Loans are federal student loans on which the government pays the interest while you are in school. Direct Subsidized Loans are made based on financial need as calculated from the information you provide in your application. Qualifying students can get up to $3,500 in subsidized loans in their first year, $4,500 in their second year, and $5,500 in later years of their college education.
Direct Unsubsidized Loans
Direct Unsubsidized Loans are federal loans on which you are charged interest while you are in school. If you don’t make interest payments while in school, the interest will be added to the loan amount each year and will result in a larger student loan balance when you graduate. The amount you can borrow each year depends on numerous factors, with a maximum of $12,500 annually for undergraduates and $20,500 annually for professional or graduate students. There are also aggregate loan limits that apply to put a maximum cap on the total amount you can borrow for student loans.
Direct PLUS Loans
Direct PLUS Loans are additional loans a parent, grandparent, or graduate student can take out to help pay for additional costs of college. PLUS loans require a credit check and have higher interest rates, but the interest is still tax deductible. The maximum PLUS loan you can receive is the remaining cost of attending the school.
Parents and other family members should be careful when taking out PLUS loans on behalf of a child. Whoever is on the loan is responsible for the loan forever, and the loan generally cannot be forgiven in bankruptcy. The government can also take Social Security benefits should the loan not be repaid.
Private Loans
Private loans are also available for students who need them from banks, credit unions, private investors, and even predatory lenders. But with all the other resources for paying for college, a private loan is generally unnecessary and unwise. Private loans will require a credit check and potentially a cosigner, they will likely have higher interest rates, and the interest is not tax deductible. As a general rule, you should be wary of private student loans or avoid them altogether.
Applying for Financial Aid, FAFSA, and Everything Else
Take this first step - you will need to do it. The federal government offers a standard form called the Free Application for Federal Student Aid (FAFSA), which qualifies you for federal financial aid and also opens the door for nearly all other financial aid. Most grants and scholarships require you to fill out the FAFSA, and they base their decisions on the information in the application.
The FAFSA only requests financial aid for the specific year you file your application. This means you will need to file a FAFSA for each year you are in college. Since your financial needs will change over time, you may qualify for financial aid even if you did not qualify before.
You can apply for the FAFSA through your college’s financial aid office or at studentaid.gov if you don’t have access to a financial aid office. Once you file a FAFSA, any college can gain access to the information (with your approval), so you can shop around for financial aid offers from colleges.
In addition to the federal financial aid, foreign students or non-citizen may also be eligible to be classified as a resident for tuition purposes in some states. You may also be eligible to receive state financial aid. The Texas Application for State Financial Aid (TASFA) is a financial aid application for students who ARE Texas residents, but NOT United States citizens or eligible for Federal Aid. The TASFA must be completed each year beginning October 1st. More information about the TASFA can be found at the College for All Texans website: http://www.collegeforalltexans.com/index.cfm?objectid=A3119543-CBF8-C202-F1B0EEFD5F4B9805.
Attributions
Content on this page is a derivative of “Understanding Financial Literacy: Education Debt” by Amy Baldwin and is licensed CC BY 4.0.
Access for free at https://openstax.org/books/college-success/pages/10-5-education-debt-paying-for-college