Like it or not, budgets provide a great starting point for long term fiscal responsibility. With only a month to go until most colleges are back in session, now is the perfect time to assess where you are financially for the upcoming academic year. Hopefully you already have a firm grasp on where you stand, but if not, this week’s blog is going to walk you through a very basic financial assessment. My hope is that after constructing your budget you will know if you are fiscally ready for the upcoming academic year, or if need to make some minor adjustments like reducing your expenses, or major changes, like taking a semester off. By now, you should have a handle on what income streams you have available to you, the total cost of your attendance, and your outstanding need, if any. As with any budget, let’s begin by looking at what funding options are available to you for the upcoming year.
One of the main goals of my company, Scholarship Shepherd, is to change the funding paradigm for higher education. The graphic below illustrates one way I have chosen to illustrate the funding options available to any student. As you can see, I sort all your options into two categories: Type A and Type B Funding. These two categories are color-coded to demonstrate that there is a distinct difference between the use of funding found within these categories. Type A funding, colored in green, provides payment for your educational expenses without present or future financial consequences for you the student. Type B funding, while not necessarily discouraged, is colored in yellow, indicating that caution should be used before drawing from these options. In addition to the categorization of these funding options, there is a preferred order; options located on the left side of the page are more favorable funding options than those located on the right. The idea is to fund your education through grants and scholarships, while you want to avoid funding the majority of your education expenses through loans and the use of personal savings.
Grants: Grants are a type of financial aid given on the basis of your financial need. Grants may also be given by your school or other organizations, but are primarily given by the federal government based on the information you submit through your FAFSA. A grant differs from a loan in that a grant does not need to be repaid.
Scholarships: Scholarships are a type of financial aid, given by various organizations based on a criteria for awarding funds. This criteria varies by scholarship, but is normally predicated on one’s merit. Like grants, scholarships normally are not required to be paid back, assuming the scholarship recipient fulfills his requirements to the granting organization.
College Savings: These may be government-sponsored education accounts such as a 529 or Coverdale account, or an account setup by your grandparents or parents at a bank or brokerage firm. What matters is that these funds are set aside for the sole purpose of funding your college education. While the purpose for their creation was to use for your education, not depleting the account could also be beneficial. Depending on the account, should funds remain after graduation, the owner of the account may distribute the funds to the graduate for personal use, or if the account is in your name, you may do with the funds as you please.
Parental Contributions: Not every student has a college savings account awaiting them after graduating high school. Even if your family has not had the opportunity to set aside funds for your education, they can still play a role in your education through the giving systematic payments or gifts. Every dollar you receive is one less dollar that you have to borrow, so be grateful for anything your family can spare.
Employment: Once you have exhausted all of your “free” money, taking a part-time job is the next best option for funding. Remember, that the goal is education funding; be sure to leave yourself plenty of time to attend class and to study. Do not let your current employment undermine your future opportunities.
Loans: Sometimes loans are a necessary part of the funding equation. I urge every student to fill out their FAFSA yearly, so that in the event of a funding deficiency, you are eligible for federal loans. The amount available increases every year, so check in with the Department of Education for more information. Private loans differ from federal loans in that these loans are made by a lender; these lenders can be a bank or credit union, or your school. Normally, federal student loans provide more benefits when compared to private loans.
Personal Savings: Personal savings differs from college savings in that these funds are not specifically earmarked for college. These may be funds set aside for a future expense or used as a cushion in the event of a financial need. I place personal savings last, as students need some layer of protection, should an unforeseen expense arise. In my experience an empty savings account normally leads to a maxed out credit card.
Once you know your funding options for the upcoming year, break down break down your funding by month. Some months (August & January) will naturally be large inflow months, as these are the months where grants, scholarships, and loans are dispersed. This breakdown will be important as we move to step two, determining your educational expenses.