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When your child is ready for college, will you be ready to pay for it? That's the question you're probably going to face, even if you've been actively investing in a college fund since your son or daughter was small. Financial aid may provide the extra funding you need. But to get it, you must provide detailed information about your family's finances on the Free Application for Federal Student Aid form (www.fafsa.ed.gov). This will determine whether you qualify for federally funded assistance and what you'll be required to contribute. You may also have to file an application for state-sponsored aid, and some colleges require individual applications in addition to the federal form.
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FACTORS THAT DETERMINE ELIGIBILITY FOR AID
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- Income
- Family assets, including all savings and investments
- Number of other students in the family also paying tuition
- Family expenses, both ordinary and unusual
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FACTORS THAT INFLUENCE WHAT YOU GET
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- Financial resources of the college or university
- Needs of other students
- Special interest in your child
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FOUR YEARS' WORTH
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When a college offers a financial aid package, it's usually for one year at a time. The amount can be -- and often is -- less after the first year, even if the student does well. Ask the college to make a four-year commitment as long as your child meets academic requirements. You've got nothing to lose. Colleges are sometimes willing to negotiate.
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PREPAID TUITION AND SAVINGS PLANS
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Since the cost of a college education continues to grow faster than the rate of inflation, you might want to use one of the innovative approaches that have been introduced to help families plan ahead. You may choose to prepay tuition, or you may decide put money into a state-sponsored college savings plan, commonly known as a 529 Plan.
Today, millions of people are using prepayment plans. Although the details differ, all of the plans let you pay future tuition at today's rates. You prepay that amount either in a one-time lump sum or in monthly installments during the year with the rates you want to lock in. The programs promise to pay tuition when your child enrolls in an eligible school. Most plans have been offered by individual states, but the alternatives are expanding.
All states offer or are preparing to offer the increasingly popular tax-free savings plans, which allow you to put money into a special college savings account on behalf of a designated beneficiary's higher education expenses. What you have to spend when the child enrolls is based on the amount you contribute, the child's age when you begin to participate, and the investments that the plan makes.
Because the plans vary from state to state, you should contact the College Savings Plan Network at 877-277-6496, or at www.collegesavings.org. You may find that using the plan that your home state sponsors has additional tax advantages, but you are eligible to enroll in most state plans no matter where you or the beneficiary live. That allows you to compare costs and investment options.
Not everyone agrees that using these plans is the best way to cover college expenses. Some financial experts suggest that you may realize a stronger return by putting your money into individual stocks or mutual funds because you control how the money is invested. But the opportunity for tax-free withdrawals is a significant advantage.
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LINING UP THE MONEY
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When you're borrowing to help pay for your child's tuition, it's smart to apply early. If you wait until August, when the first semester's bill is due, you could get caught short. It can take six weeks or more to get action on applications for government sponsored loan programs
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SPREADING THE PAIN
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You might look into the year-round payment options some colleges offer. They let you divide the year's cost into ten or more equal payments, usually for a small fee. Your money may earn enough in interest or dividends to offset the charge--and then some.
| Stafford Loans |
- U.S. provides money for direct loans or guarantees loans from other lenders
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- Total amount of loan can be up to $23,000 for undergraduates
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- There is a six-month grace period for repayment from the date of graduation
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- Unsubsidized loans are available regardless of family income, but subsidized loan awards are available if your family's income is below a certain amount.
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| Perkins Loans |
- Money is a combination of government and school funding
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- Total amount of loan can be up to $20,000 for undergraduates
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- There is a nine-month grace period for repayment from the date of graduation
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| Parent Loan for Undergraduate Students (PLUS) |
- Federally funded and guaranteed loans are provided through local banks, credit unions, and S&Ls
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- Interest rates are variable and loan insurance is required
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- Repayment begins immediately
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- Total loan amount is equal to cost of college minus financial aid
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| Home Equity Loan |
- Interest on loan is usually tax deductible
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- Can typically borrow up to 80% of home equity
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WHERE TO GO FOR MORE INFORMATION
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- Information about college costs and financial aid is available in libraries, high school guidance offices, and online
- Financial aid offices publicize their own programs as well as government loan and work/study programs
- The U.S. Department of Education has regional offices -- listed in the phone book -- and a website (www.ed.gov) for information on state scholarships, grants, and work programs
- High school guidance offices should know about local scholarships, and your employer, service club, or religious organization will know about the ones they sponsor
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(c) 2005 by Lightbulb Press, Inc. All Rights Reserved.
Disclaimer:
This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.
Lightbulb Press, Inc.
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New York, New York 10016
Tel: 212-485-8800
www.lightbulbpress.com
