[IMGCAP(1)]Gaining acceptance to a university is a long and exhausting process, but bigger challenges await.

More daunting for most, given ongoing increases in tuition and other costs, is how to pay for it all. If loans are required to help cover costs, the issue can linger for years —even decades—after graduation.

It’s important to go into the process knowing what to expect.

Applying for Aid
The starting point for those who expect to need financial help is to go online and fill out the government’s primary financial aid application, referred to as FAFSA (visit www.FAFSA.ed.gov). There you can find out about filing deadlines, aid options and requirements, and how to complete the actual application.

The FAFSA process must be completed in order to obtain federal student loans or grants and participate in federally funded work-study programs. FAFSA application information is also sometimes used for the decision process at the state and institutional level and even to qualify for certain sources of private financial aid.

While family income will have an impact in determining eligibility for financial aid, it is not the only factor.
Most families, regardless of income level, should go through the FAFSA process at least once to see what type of aid may be available. It’s the best way to ensure that all sources of potential support are explored.

Saving in Advance
Be prepared for the fact that most of the aid available may be in the form of loans. Loans are helpful, but require repayment, often after college days are done. The smaller the debt load for new graduates, particularly in a challenging job environment, the better. Having money set aside in a savings plan can make a big difference in the debt load required.

Parents should start saving early for their children, if possible. But even if college days are soon approaching, getting any kind of head start on tuition can be beneficial. One of the most popular vehicles available is a 529 college savings plan. It allows families to save a significant sum of money in an account designed specifically for college funding.

If proceeds are used to pay for qualifying higher education expenses such as tuition, books, room and board, all earnings accumulated in the account grow on a tax-free basis. Indeed, 529 plans may be one of the most effective means of saving for college because of the tax benefits and because parents, grandparents and others can contribute on behalf of specific students.

When College is Done—Now What?
Once an individual graduates, leaves school or drops below half-time enrollment, a grace period begins before repayment of loans kicks in. The timing depends on the loan program you borrowed from. For Federal Stafford Loans (Direct Loan Program or Federal Family Education Loan), the grace period is six months before the first repayment is due. For Federal Perkins Loans, the grace period extends to nine months.

Terms are different for loans categorized as PLUS Loans. The repayment period begins on the date the loan is fully disbursed, and the first payment is due within 60 days of the final disbursement. Graduate students have more flexibility. There are situations where deferments can be requested for economic hardship or for some participating in military service.

Different loan repayment plans are available; typically individuals have the option to adjust repayment terms based on their own circumstances. The options include:

• Standard Repayment – Most students repay their loans with generally equal monthly payments over a 10-year period.
• Extended Repayment – Payments can be extended up to 25 years in some circumstances
• Graduated Repayment – Payments gradually increase, a plan that some prefer under the assumption that their income will increase over time as well.
• Income-Contingent Repayment – The repayment amount is specifically tied to income, which also can allow for a longer repayment period.

Recent legislation will require borrowers who take out a federal student loan after July 1, 2014 to make payments equal to no more than 10 percent of discretionary income. After 20 years, any remaining debt will be forgiven.

For many graduates, student loans are the first significant long-term debt they carry. It is critical to be diligent about making payments on time in order to maintain and improve a personal credit rating for future borrowing needs, such as a car loan or home mortgage.

Rich Van Loan is a Financial Advisor and Chartered Retirement Planning Counselor with Ameriprise Financial Services, Inc. He can be reached at 617-337-3233 or via e-mail at Richard.r.vanloan@ampf.com.

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