Paying for college: 5 top mistakes

orange book with money and an apple on top
  • Forty-one percent of undergrads didn't apply for federal aid in 2007-2008.
  • Private loans are quick and easy but usually cost more.
  • Home equity loan rates are now higher than federal loans.

Paying for college is a problem that can keep parents awake at night, given the spiraling cost of tuition, dwindling stock market returns and stagnant home values. It's no small task, and like any major expense, there are right and wrong ways to do it.

Avoid these common mistakes, and you might find paying for college is something you can handle without wrecking your budget.

Mistake No. 1: Not filling out the Free Application for Federal Student Aid

The absolute biggest mistake parents make when paying for college is not filling out the FAFSA, or Free Application for Federal Student Aid.

The FAFSA is the key to grants, work-study programs and gift aid from a college's financial aid office. It's also required for federal student loans, such as subsidized and unsubsidized Stafford loans, and PLUS loans for parents.

The U.S. Department of Education says 41 percent of undergraduates didn't apply for federal financial aid in the 2007-2008 school year, and 2.3 million students who would have qualified for a Pell grant didn't bother to fill out the FAFSA. Why? Because it can take two to three hours, or they assume they won't qualify, says Mark Kantrowitz, publisher of "But the formula changes each year, so it's worthwhile to apply every year, even if you didn't qualify for aid in the past."

Mistake No. 2: Choosing a school that costs too much

It's important to do a real apples-to-apples cost calculation of all the colleges your child is considering. This comparison isn't as simple as deducting the financial aid package from the school's sticker price because the aid package usually includes student loans.

"You have to look at two cost comparison points -- how much is the cost minus gift aid such as grants and scholarships, then how much is the total cost with loans," says Tally Hart, senior adviser of economic access at Ohio State University. "Compare the total debt you will have to take on to graduate from each school."

The true price of paying for college is what you're paying now plus the debt you must take on over the four or five years until graduation, Hart says.

Mistake No. 3: Taking out private loans instead of federal student loans

Parents should use all available federal loans before borrowing from private lenders, Kantrowitz says. But in the 2007-2008 school year, 26 percent of private-loan borrowers didn't take out any federal Stafford loans, and 14 percent didn't apply for federal financial aid at all, according to the Project on Student Debt, a California-based nonprofit group.

Private student loans can be tempting, thanks to almost instant approval and quick, easy online forms. But they usually have less favorable repayment terms and higher interest rates than federal loans. Unlike federal loans, private student loans are based on the borrower's credit score, and have variable interest rates that can reset monthly.


Private loans had interest rates as high as 18 percent in 2008. At the same time, interest rates on the federal Stafford loan were capped at 6.8 percent, and at 8.5 percent for parent PLUS loans.


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