Tuesday, May 5, 2009

We've Deposited...Now How Do We Pay?

I am just back from college tours and an Independent Educational Consultants Association (IECA) conference in San Francisco. My college visits took me to Stanford University, Menlo College, University of San Francisco, Mills College, St. Mary’s College, Cal Berkeley and Santa Clara University, a rather eclectic grouping of schools. These trips always reinforce for me the benefits of the college visit experience, where one can truly get a feel for the campus and academic life, as well as the character of the student body. College visits are the only way to experience a school firsthand. There is no near substitute. When students make a judgment about whether they click with a particular school it is rarely cerebral. Fit is generally about feel: how well can I envision myself here?

But before I get ahead of myself talking about fit for the juniors just beginning this process, I want to continue with a topic that has been tops on the minds of many with high school seniors: how to pay for college, especially now that the May 1 deposit date has come and gone and students have committed to a school.

Myth #1: Families who do not qualify for need-based aid are the fortunate ones since they can afford to pay for college.

The opposite is often true. Middle income families are among the ones most affected by the economy and the rising cost of attending a four year school. Unless your child receives merit aid, he or she will not have access to outside resources such as federal or institutional grants that would help defray some of the costs. Even those families that were disciplined about saving for college are finding that the 529 plans have come up short. For many of us, closing the gap with income is a stretch.

If paying for college is a concern (you are not alone!), you hopefully gave serious consideration to all of these factors prior to putting down the May 1 deposit. Taking a more practical and realistic approach to financing a college education has motivated some to decide in favor of the more affordable option. The role that the financial factor will play this year has been the wildcard that has had colleges on edge about their enrollment numbers for the fall matriculating class. Some schools, perhaps in panic, even went to their waitlists prior to the May 1 deposit deadline, previously unheard of!

Whether your son or daughter is attending a state or expensive private college, you still want to consider all of your options for financing these four years. Scholarships are one route, but your student must be willing to devote the time and energy to filling out more applications and writing essays. Amounts tend to be in the $500 to $1,000 range, but with any luck, he or she will be able to win one or two that will make a dent in the cost. Good websites for scholarship searches include http://www.fastweb.com and http://www.collegenet.com/mach25/app, and some scholarship donors are still accepting applicants. Additionally, you may want to inquire in your guidance department to see if there are local scholarships that remain unclaimed. Don’t be alarmed if you have to register at a scholarship site, but you should never have to pay, so move on to another if they ask for money.

If savings, available income and scholarships still do not cover the cost, your option is to borrow, and unsubsidized federal Stafford student loans are the best priced loans for those not eligible for need-based awards. Students who do not demonstrate need can borrow up to $5,500 at 6.8% in their freshman year under this program. The amount goes up by $1,000 each of the next two years, maxing out at $7,500 for juniors and seniors, a borrowing total for all four years of $27,000. Though 6.8% is high based upon today’s interest rates, the loans are fixed so they hedge the risk of a rate rise. These loans are unsubsidized which means that the student is responsible for paying the interest on the loans while in school. Otherwise interest will be capitalized, or added to the principal. Principal repayment begins 6 months after graduation.

Other borrowing options include the PLUS (Parent Loan for Undergraduate Students), which is also part of the federal loan program. Unlike the Stafford loan, where the student is the borrower, PLUS loans are taken out by the parents and have no specific dollar limit. Parents who qualify (there is a credit evaluation) can borrow up to the full amount of the difference between the total cost of attendance and the student’s financial aid (grants, scholarships, Stafford loans, work-study). The rate is 8.5% if borrowed from a bank or 7.9% if the federal government is the lender. Unfortunately you have no control over the rate. The college determines in which program it will participate. Don’t forget that many of these loans will have to be repaid in 10 years, so before you start loading up on debt, check out one of the many student loan calculators to estimate your aggregate monthly payments after four years of borrowing. My favorite site for this purpose is http://www.mappingyourfuture.org. I plan to discuss reasonable debt load in an upcoming post so stay tuned.

Tapping home equity, if there is still any in your home, is another way to go. Families can take the mortgage interest deduction. However, equity lines of credit are generally adjustable rate. While the rate might be attractive today, expect that it will go up as the economy recovers, though anyone’s guess is when that will be.

In my view, two last resorts for borrowing are private loans, which are also adjustable rates, subject to rate increases, and retirement funds. Many banks have pulled out of the private loan market given difficulties over the past year and a half in securing funding for these loans. Banks that continue to offer private student loans will continue to do so only if the business remains profitable (i.e., the spread between the interest earned on the loans and cost of funding them is positive). Sallie Mae, the largest private student lender, recently changed its lending terms such that the private student loans it offers will now begin to amortize while the student is still in school. This is clearly an additional financial burden on a family that is paying for college at the same time. Lastly, your 401(k) is sacrosanct so do not touch it! Early withdrawals will result in a 10% penalty. Even borrowing against your retirement fund has its drawback. The money is no longer working for you and you must pay it back with after tax dollars, not a good strategy since the money you initially invested was pre-tax. Also keep in mind that you can borrow for college. You can’t borrow to fund your retirement so don’t raid this account!

One last thought on paying for college with borrowing and this is perhaps the most important point! You must fill out the Free Application for Federal Student Aid or FAFSA if your student is going to apply for unsubsidized Stafford loans, despite the fact that they are not need-based. To fill out the FAFSA you will need a pin number for you and your student (http://www.pin.ed.gov) which is used to sign the form. The FAFSA can be accessed at http://www.fafsa.ed.gov. The other primary reason to complete the FAFSA is that situations change: a parent loses a job or perhaps becomes sick. The last thing you want to do is have to scramble to complete yet another form if that were to occur. A situation change might even be a new family member or an additional student in college. These are factors that will directly affect your aid eligibility. Lastly, FAFSA rules do change from year to year, so your eligibility for financial aid may change as a result of an adjustment to the federal methodology. These are reasons why I advise all families to fill out the FAFSA form each year, regardless of their financial situation.

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