Sending Junior off to college? Save and do your homework
By HELEN HUNTLEY
Published August 17, 2003
If college bills are in your family's future, it's time to start doing your homework.
For middle class families especially, learning smart ways to save can pay off handsomely when the college years roll around. When you take your capital gains and where you stash the family savings can make thousands of dollars of difference in financial aid awards.
And it still pays to save, no matter what you might have heard to the contrary.
"People need to get a sense of what the rules of the game are so that they don't do something stupid like go out and buy a new Suburban because they read that you can make yourself look poor and get financial aid," college consultant Tom McGrath said. "You'll not only make yourself look poor, you'll be poor."
Paying for college has gotten so complicated and expensive that some people turn to consultants like McGrath, who works with Strategies for College in Rutland, Vt., to sort things out. However, just getting a grasp of the basics can get you started.
Failing to save has big consequences. The first casualty is often college choice.
Sherie Strout of Safety Harbor said her daughter, Jessica, had her heart set on going to Ball State University in Indiana when she graduated from Countryside High School this year. Then the family got a reality check: Going to Ball State as an out-of state student would cost $23,400 a year, about $10,000 a year more than going to the University of South Florida. Both schools offered a package of student and parent loans, but neither offered Jessica any free money.
"No matter how many times I tried to explain to her that it wasn't feasible to go to Ball State, it wasn't until she got her financial aid statement back that she realized it," Strout said. "We should have been saving money all along for her education, but when you're trying to raise three children, it's hard to sock away a lot of money. I said, "We can help you with your car payments and your insurance or we can help you with college, but we can't do both.' "
Jessica will be going to USF, taking out a student loan and working to help pay her expenses.
But even USF isn't exactly cheap. The tab for four years at today's prices is $54,000, and many students will spend more because they will take five years or longer to graduate. At private colleges, the four-year tab is likely to be more than $100,000.
The good news is that most students - close to 90 percent at some colleges - get some form of financial aid. The bad news is that most of that aid comes in the form of loans that have to be paid back.
"The amount of money going to need-based programs is just not keeping pace with the amount of money that's needed and the increase in the number of students applying for aid," said Leonard Gude, USF financial aid director.
If you are hoping your child will be one of the winners when it comes to financial aid, here are some tips:
* Good grades and test scores pay off.
Middle-class families love Florida's Bright Futures scholarships for good reason. These state awards are handed out on the basis of grades and test scores, without regard to need. The higher-level scholarship pays 100 percent of tuition and fees with a $600 annual stipend for books. The lower level pays 75 percent of tuition.
At some Florida colleges, both public and private, qualifying for Bright Futures makes you eligible for one of the college's own merit awards. At Eckerd College in St. Petersburg, a higher-level Bright Futures student receives $8,000 worth of state and college grants before demonstrating any financial need.
But Bright Futures and related awards are not just merit awards; they are substitutes for need-based awards. At most colleges, scholarships reduce financial need dollar-for-dollar. Middle-class families whose children attend state universities with a Bright Futures scholarship might get other merit scholarships, but any need-based awards they get are likely to be loans.
Need-based grants are a stronger possibility at private colleges simply because higher costs translate into greater financial need. But the grants do not necessarily go to the neediest students. Many colleges use grades and test scores to determine whether a student's need-based award package will be mostly grants or mostly loans.
The moral for families: It pays to encourage academic achievement. It also pays for students to apply to colleges where they will rank among the academic stars rather than at the bottom of the admission pool.
* Income counts the most.
Before fretting too much over where to put your savings, consider whether income alone will disqualify your student for need-based financial aid.
If it looks like you might be eligible, avoid doing anything to bump up your income during the college years. The first crucial year is the one that begins the January of your child's junior year in high school.
Do not turn down a raise, but do carefully time any big bonuses or lump sum payouts from retirement plans. Avoid capital gains during the key years, or if they cannot be avoided, match gains against losses. If you have a big loss in a security, consider realizing it during your child's junior or senior year of high school, carrying forward most of the loss and using it to reduce future income at the rate of $3,000 a year.
If your income is less than $50,000, you might try to arrange your financial affairs so you can file an IRS Form 1040A or 1040EZ. In most instances, that means you will be able to avoid scrutiny of your assets.
If you are divorced, think twice about remarrying just before your child goes off to college. If the child lives with you, the step-parent's income and assets will be counted.
Putting your children to work can backfire. As much as half their income and 35 percent of their savings will be counted in the financial aid formula. Most would be better off spending their time hitting the books instead.
* Watch where you put those assets.
All savings are not treated equally. Some of the most tax-savvy strategies, such as buying a Florida Prepaid College Plan or keeping money in a custodial account using the student's Social Security number, are punished the most.
The accompanying stories offer savings strategies based on your likely financial aid status. If you aren't sure what to do, save in the parents' names while you are making up your mind.
Congress will be tinkering with the federal financial aid rules next year, with the changes most likely taking effect for the application forms being filled out in January 2005. State treasurers will be lobbying for more favorable treatment for prepaid tuition plans, and there could be changes in the treatment of some other assets.
"People definitely should be saving; it's a question of where they put the money," said Kalman Chany, author of Paying for College Without Going Broke. The last time Congress tinkered with the formula "they kept talking about treating student and parent assets the same way, but when all was said and done, they kept it the way it was."
He said parents should keep abreast of changes so there are no nasty surprises when college time arrives.
* Sob stories sometimes work.
Lots of families are shocked when they find out how much they are expected to contribute to college costs. Many plead their cases with financial aid officials, claiming their circumstances warrant special consideration.
"We listen to a lot of those stories," said Richard Hallin, dean of admissions and financial aid at Eckerd College. "Some of them are quite compelling. There can be loss of jobs. Divorce. Grandparents moving into the house."
He said the size of a family's expected contribution often is reduced as a result.
"I wish more parents knew this is a legitimate step," he said.
* You don't have to be needy to get a federal loan.
If you think you might have to borrow for college expenses, plan to fill out the financial aid application no matter how wealthy you are. Only needy students get subsidized loans, but even unsubsidized loans are a great deal these days. Freshmen can get a Stafford Loan of up to $2,625 at a current interest rate of just 2.82 percent with no credit requirements. Parents can borrow up to the entire cost of college, minus any financial aid, through a Parent Loan for Undergraduate Students, currently at a rate of 4.22 percent.
"We have many more students applying for loans because it's cheap," said Barbara Strickler, vice president for enrollment at the University of Tampa. "Families are more willing to go that route than in the past."
* Don't even think about cheating.
The numbers on the financial aid application should match those on your income tax return. Some colleges check all applications against income tax returns, while others do spot checks. They look for unreported income and for interest and dividend income that might be a sign of unreported assets.
"We found a student whose family's total income was $28,000, but they had $85,000 in a bank account that they hadn't reported accurately," said USF's Leonard Gude. "They went from being eligible for everything to being eligible for very little."
If you use estimated numbers on the application, be sure to update them when you file your actual return. And make sure student and parent names match those on file with the Social Security Administration or your aid award could be delayed.
