If your parents are high earners, you might assume you won’t get any financial aid to help pay for college. But that’s not necessarily the case. The Department of Education doesn’t have an official income cutoff to qualify for federal financial aid. So, even if you think your parents’ income is too high, it’s still worth applying (it’s also free to do so).
Read on to learn how to get financial aid for college when you think your parents make too much money, as well as how to pay for college costs if you don’t qualify for financial aid.
It All Starts With the FAFSA
The first step to knowing whether or not you qualify for any financial aid is to fill out the Free Application for Federal Student Aid (FAFSA). Even if you think your parents make too much to qualify for financial aid, it’s a smart idea to fill out and submit this form.
For one reason, there’s no income cutoff for federal student aid, so you may be surprised by what you are able to qualify for. For another, the FAFSA gives you access to non-need-based aid, such as Direct Unsubsidized Loans and institutional merit aid.
(Learn more: Personal Loan Calculator)
Who Determines Aid Amount and Type?
The financial aid office at your chosen college or career school will determine how much financial aid you are eligible to receive. Here’s a look at what goes into the decision.
- The first factor considered is the cost of attendance (COA), or what it costs a typical student to attend a particular college or university for one academic year. Cost of attendance includes tuition and fees, as well as books, lodging, food, transportation, loan fees, and eligible study-abroad programs.
- Then the school considers your Student Aid Index, or SAI (formerly called Expected Family Contribution, or EFC). Your SAI is an eligibility index number that results from the information that you provide in your FAFSA.
- To determine how much need-based aid you can get, the school will subtract your SAI from the COA. Need-based aid includes Pell Grants, Direct Subsidized Loans, and federal work-study.
- To determine how much non-need-based aid you qualify for, the school takes the COA and subtracts any financial aid you’ve already been awarded. Federal non-need-based aid includes Direct Unsubsidized Loans, Direct PLUS Loans, and TEACH Grants.
One big difference between subsidized and unsubsidized loans is when interest accrual starts. Because subsidized loans are need-based, the government covers any interest that accrues until loan repayment starts (typically six months after graduation). With unsubsidized loans, the interest starts to accrue from day one (though you don’t need to start making loan payments until six months after graduation).
You can estimate your eligibility for federal student aid by using either the Federal Student Aid Estimator or your school’s net price calculator (which you can find using the Department of Education’s search tool).
What Are Rules on Dependency, Divorce?
A student’s dependency status can make a big difference on their SAI. Not living with parents or being claimed on their taxes, however, does make you an independent student. To be considered independent for federal financial aid, a student must be at least 24 years of age, married, on active duty in the U.S. Armed Forces, financially supporting dependent children, an orphan (both parents deceased), a ward of the court, or an emancipated minor.
The rules regarding financial aid and divorce are changing for the 2024 – 2025 school year. The new FAFSA rules require the parent who provided the most financial support in the “prior-prior” tax year to complete the FAFSA application instead of the custodial parent. Prior-prior refers to the tax year two years ago from the beginning of the college semester. For the 2024 – 2025 award year, FAFSA would be looking at the 2022 tax year for this determination.
Other Routes to Meeting All Needs
The government isn’t the only path to money for school. Here are several other options you may want to consider.
Scholarships
The best thing about scholarships? You don’t need to pay them back. The second best thing is that they’re most often based on merit, not need.
So even if your parents make a good living, you may still be eligible. While many are awarded solely on academics, others are given for athletic talent, specific interests, or being a member of a specific group.
There are numerous college scholarships out there, offered by schools, employers, individuals, private companies, nonprofits, communities, religious groups, and professional and social organizations. To suss out scholarship opportunities you might be eligible for, talk to your high school guidance counselor, your college’s financial aid office, and/or check out one of the many online scholarships search tools.
An Appeal of Your SAI
If your financial aid offer is less than you need to be able to afford college, you are within your rights to appeal to the school’s financial aid director.
You might want to be prepared to back up your request with detailed information such as your SAI, the amount you’ll need to successfully attend school, or a change in circumstances that will affect your family’s actual ability to pay, such as a parent’s job loss.
Parent Loans
Parents can apply for a Parent Plus Loan through the Department of Education. These loans are available to parents regardless of income, provided they do not have an adverse credit history. For loans disbursed on or after July 1, 2023, and before July 1, 2024, the interest rate is 8.05%. This is a fixed interest rate for the life of the loan. There is also an origination fee of 4.228%, which is deducted from each loan disbursement.
Some private lenders also offer parent student loans. You can apply for a private parent student loan directly with the lender. Before signing up for a private parent loan, it’s a good idea to shop around to find the lowest student loan interest rate you qualify for. Some lenders have a pre-qualification process that allows you to see a personalized rate before the lender does a hard credit pull.
Both federal and private parent loans can be used to cover any gaps left over after scholarships, grants, and other financial aid have been applied, up to the full cost of attendance.
Private Student Loans
Private student loans are also available to students to help them cover the costs of higher education, and they could be a good Plan B if there’s a gap between the aid you received (including federal student loans) and the cost of attendance.
Private student loans don’t have federal benefits like income-driven repayment plans and forgiveness programs, and interest rates are typically higher than undergraduate federal student loans. However, unlike federal student loans, you can apply for them at any time of the year. Plus, you can typically borrow up the full cost of attendance, which gives you more borrowing power than you get with federal student loans.
Private student loans can have either a fixed or variable interest rate; rates are determined by the lender. Qualifying for a private student loan is based on the borrower’s creditworthiness rather than need.
The Takeaway
What happens if your parents make too much money to qualify for financial aid? You may have to shift course a little bit, but there are other ways to get help paying for all of the expenses of college, including merit-based scholarships, non-need-based federal student loans, and private student loans.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Can I use a 529 to pay off student loan debt?
A 529 plan is an investment account that’s mainly used to pay for college and other educational expenses. You can also use 529 plan funds to pay off student loans, thanks to a law that was signed in 2019. More specifically, you’re allowed to use up to $10,000 per beneficiary on student loan repayment.
Read on to learn more about 529 plans and what you can (and can’t) spend 529 savings on.
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A 529 plan is a tax-advantaged investment account that was created in the 1990s to help people save for college. Parents often open 529 savings plans on behalf of their children to save for their postsecondary education expenses.
There are two types of 529 plans: savings plans and prepaid tuition plans. Savings plans allow you to make tax-free investments and withdrawals, as long as you’re using the money to pay for qualified educational expenses.
529 savings plans work like a Roth IRA, since you submit after-tax dollars and invest them in mutual funds or similar investments. Your savings may increase or decrease depending on the performance of your investments.
Prepaid tuition plans, on the other hand, let you prepay tuition at participating public colleges at today’s rates. You won’t have to pay more in the future, even if tuition increases by the time your child attends.
Every state offers its own 529 plan, but you’re not limited to the plan offered by your state of residence. You can choose another state’s plan if you prefer it. That said, opting for your own state’s plan could make you eligible for certain tax deductions or credits.
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Although 529 plans are primarily used for college expenses, they can now also be used to pay off a certain amount of student loan debt. Thanks to the 2019 SECURE Act, 529 plan owners are now allowed to use their funds to pay off up to $10,000 in student loans for the account’s beneficiary.
That $10,000 limit applies to each beneficiary, not each account. If you have remaining funds in the account, for instance, you could change the beneficiary to the student’s sibling to help them pay off student loans. Parents with PLUS loans could also make themselves the beneficiary and put $10,000 toward their own loans.
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Besides paying student loans, you must use 529 plan funds on qualified educational expenses. If you withdraw the money for non-qualified expenses, you could be subject to income taxes and a penalty.
Here are some common expenses to use 529 funds on:
- Tuition and fees
- Books and supplies
- Housing
- Meal plans
- Computers
As part of the Tax Cuts and Jobs Act of 2017, 529 plan owners can also use 529 funds to pay for private school tuition for kindergarten through 12th grade. The maximum you can use on K-12 tuition is $10,000 per year.
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You might have some additional school expenses that don’t count as qualified education expenses. Here are some things you can’t use 529 plan funds for:
- College application fees
- Testing fees, such as the SAT or ACT
- Transportation
- Health insurance, unless the fee is an official requirement for enrollment and attendance
- Extracurricular activities, such as sports and clubs
- Dues for fraternities and sororities
- Room and board costs that exceed the school’s official cost of attendance
If you use 529 plan funds on non-qualified expenses, you’ll have to pay income taxes and a 10% penalty.
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Now that you know the answer to the question “can a 529 be used to pay student loans?” is yes, let’s talk about what that means.
If you’d like to use a 529 to pay student loans, there are both benefits and drawbacks to consider. Here are some pros and cons to keep in mind before you move forward with this strategy.
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- Tax benefits: Your 529 savings can grow tax-free, as long as you spend the funds on qualified expenses. Some states also offer tax deductions or credits on your 529 contributions, leading to additional savings.
- Option to change beneficiaries: You can change the beneficiary on your 529 plan account, allowing you to withdraw up to $10,000 for the primary student, their siblings, or even yourself to use toward student loans.
- Flexibility: You can contribute to or take distributions from a 529 plan at any age, meaning you could contribute to an account even after a student has graduated from college and use the funds toward student loans.
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- Limit of $10,000 per beneficiary: The maximum amount of 529 funds you can use toward student loan repayment per beneficiary is $10,000, which may be only a small portion of a borrower’s total student loan debt.
- May make you ineligible for the student loan interest tax deduction: Since the 529 plan already comes with tax benefits, the IRS doesn’t let you simultaneously claim the $2,500 student loan interest tax deduction when you use a 529 plan to make student loan payments.
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Even if you use a 529 plan to pay off $10,000 of your student loans, you might have additional debt left over. Here are some strategies to help you pay it off:
- Explore your repayment plan options. Federal student loans are eligible for a variety of repayment plans, including graduated repayment and income-driven repayment. If you need to reduce your monthly bills, consider applying for one of these plans.
- Set up biweekly payments. Instead of paying your loan payments once a month, pay half the monthly payment every two weeks. This strategy adds up to an additional one month’s payment per year. This extra payment could cut down on interest charges and reduce how long it takes to pay off student loans.
- Pursue student loan forgiveness. There are various forgiveness and loan repayment assistance programs that will forgive part or all of your debt in exchange for qualifying service. Some companies also offer student loan assistance benefits to employees. Learn more about employer student loan repayment opportunities, plus other options so that your student loans are forgiven.
- Look into refinancing your student loans. If you owe high-interest loans, it could be worth refinancing your student loans for better rates and new repayment terms. Just be careful about refinancing federal loans with a private lender, as doing so means forfeiting access to federal protections.
Finally, if you can afford to pay your loans off ahead of schedule, consider making extra payments toward your principal amount. Use a student loan calculator to see how much you’d need to pay to shave a year or two off your repayment timeline and how much interest you could save. By getting rid of your debt early, you could shift your focus to other financial priorities.
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- Refinancing your student loan can lower your monthly payments and help you adjust your loan term. Compare student loan refinancing rates to find a loan that works for you.
- Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.)
- One pain-free way to pay down your student loan sooner: send in your tax refund to put against the principal balance. Since it’s money that has already been taken out of your pay, you won’t miss it.
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Nearly 43 million Americans owe $1.745 trillion in student loans, with the average student loan debt adding up to $37,787 in federal loans per borrower, according to the Education Data Initiative.
Using a 529 plan to make student loan payments can be a savvy financial move, since your contributions and withdrawals will be tax-free as long as you don’t spend more than $10,000 per beneficiary.
At the same time, using savings from a 529 plan on student loans means you can’t simultaneously claim the student loan interest tax deduction. Given the tax implications, it could be worth speaking with a financial advisor to determine the best move for your specific situation.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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