If you're confused about what makes Pell different from Stafford, Perkins, PLUS and everything in between, you're not alone.
A new study finds -- not surprisingly -- that most parents don't understand the terms of their children's financial-aid packages for college. More than three-quarters of those surveyed by branding firm Siegel+Gale didn't know there is a big cost difference between subsidized loans and private loans, which come with higher interest rates.
A healthy portion of working-class families eligible for Pell grants -- 40% -- was also unaware that those don't have to be repaid.
"Parents really don't understand the true cost of college and the financial help that is available," says Peter Cohl, leader of Siegel+Gale's higher education division, "nor do they understand the difference between loans, grants, scholarships and work-study funds."
Some of this comes down to ignorance on the part of the borrowers, who tend to avoid reading the fine print and asking questions before accepting a financial-aid package. The Department of Education admits that these packages can be overly complex and is
and the application process, though colleges, state agencies and private lenders play a part in the confusion as well.
For instance, Siegel+Gale notes that each entity can use separate "jargon, acronyms and definitions" to refer to the same thing. As a result, parents and students -- especially those who are going through the tricky process of education financing for the first time -- are left befuddled.
Cohl suggests that confused parents call or visit the school's financial aid office to clarify terms of the aid package. He also stresses that, as with any major investment of time and cash, students and parents start planning years before college to save cash and scout out scholarship opportunities.
"Like everything today, you want to avoid the debt as much as you can," he says.
Siegel+Gale also argues that universities ought to do a better job of simplifying the language in award letters. But until the process and terminology is simplified, here are some tips to keep in mind before agreeing to an aid package.
1. Grants, scholarships and work-study awards do not have to be repaid.
That includes federal Pell grants, which are based on financial need, as well as private scholarships and grants from the state or the school.
2. Government loans are cheaper than those offered directly by private lenders.
Stafford loans come with a declining fixed interest rate, which currently starts at 6% and drops to 3.4% over the next four years. Perkins loans are offered to families with "exceptional" financial need and come with an even lower 5% rate with no fees and a longer grace period. PLUS loans -- an acronym for Parent Loan for Undergraduate Students -- are offered to parents and come at a higher rate of 7.9% if funds come from the government or 8.5% if they come from a private lender. Those rates can still be much lower loans offered directly by a private lender, particularly if the borrower has a weak credit history.
3.Bad credit scores won't disqualify you from receiving financial aid.
Not every loan requires a credit check, but those with weak credit scores should be wary of private lenders offering too-good-to-be-true deals. Government loans are intended to expand educational opportunities, not limit them for those whose parents have imperfect credit histories, and their rates don't vary based on credit score. Private lenders that offer cash for subprime borrowers often charge high interest rates or variable rates that can balloon if a payment is late or missed.
4. Work-study funds are taxable income.
But while students must report the income as such, most full-time students -- who are not generating a significant salary outside of class -- will receive a refund.
5. Prioritize your aid.
First cash in on the funds you won't have to pay back, like scholarships, grants and work-study offerings. Then move on to government loans, starting with the lowest-interest debt available. Use private loans to fill in the gaps, and shop around for those with the most competitive rates available.