Thursday, January 7, 2010

Planning for College - Understand the Cost First

College is expensive! That comes as a shock to all of you, right? Of course not. Then why do so many families appear to first experience the college cost sticker shock after their child has been accepted? I’ve given some thought to this in recent days, having received calls from parents wondering if I can find them money for college after their children have been accepted.

Why are so many of us surprised to learn just how much college will cost us? Call me a cynic, but I have always been bothered by the websites, articles and other media forms that continually tell students and families that college is more affordable than we think. After all, schools give grants, the government provides grants and loans, so in the final analysis your net cost should be far less than the sticker price. There is definitely some truth to these assertions, but the problem is that the gap between the cost of attendance and what a family thinks it can reasonably afford to pay is often far greater that the financial assistance available to most middle income families. Expanded tax credits, additional federal grant money approved by the Obama administration…these are a start in helping to make college affordable. However, many families do not qualify to take advantage of these, and even for those that do, the actual benefits will likely make a small dent in the cost of a private four-year college education.

Here are the facts:
- The federal government is the single largest source of financial aid. However, to qualify for federal government grant money, your income must be less than $50,000 a year.
- Loans are available through the federal Stafford loan program even for those who don’t qualify for need-based aid. Yet the maximum amount for a college freshman is $5,500 ($6,500 for a sophomore, and $7,500 for juniors and seniors). If the school isn’t giving you merit aid, you may still need to close a $45,000 gap after borrowing up to the maximum limit. And loans, of course, must be paid back. Unsubsidized Stafford loans (non-need based) require that you pay interest while in school or capitalize it, which means that your child will graduate with a larger amount than initially borrowed.
- Education tax credits will reduce your taxes due, but not by much in the grand scheme of financing a college education. The American Opportunity Tax Credit, which the federal government recently approved to replace the Hope Tax Credit for 2009 and 2010, allows families to deduct up to $2,500 from their taxes due if they have education expenses during the tax year. Filers will receive a credit of 100% for the first $2,000 they pay in eligible college costs (tuition, fees and books paid during the tax year), and 25% of the next $1,000. The income cap, to fully take advantage of these credits, was also raised to $90,000 for single filers and $180,000 for couples that file jointly.
- Yes, the net cost at each college is less than the actual price quoted, but don’t assume that this means you won’t be paying the full amount. Net cost takes into consideration those who get need-based aid and the few who qualify for merit scholarships. At many schools, especially the highly selective ones, most students pay the full freight if they are not eligible for financial aid.
- There are numerous scholarships available to students willing to take the time to research them and to apply, which often means additional essays. However, hitting the jackpot and winning a five figure scholarship requires as much luck as work. I would never discourage students from seeking scholarships. I just want families to be aware of the effort and time involved, as well as the odds of winning one and the timing. Don’t wait until January of senior year when most of the more coveted ones have already been awarded.

My intention is not to dampen your post holiday spirit, but rather to re-visit a point I have made in the past. Do your homework and know how much you can afford to pay. Have the family conversation about affordability before the college search begins. That means looking at income, savings, possible aid, and reasonable borrowing, which of course must be repaid with interest.

This does not mean that students shouldn’t apply to expensive private colleges which may offer more robust financial aid packages. However, getting merit money generally means that the student has something special that the college wants, whether it is academic, artistic, athletic talent or diversity. If affordability is an issue, make sure your son or daughter includes a few financial safeties on the college list. Take the time to find out the types of students a college seeks and what special talents your child would add to a class. That is still the best way to find money for college.

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