On The Money Trail
Choices abound on how best to pay for college
For parents who struggle like Sisyphus to overcome mountainous college expenses, only to be frustrated by the system, a bit of relief may be in sight.
No, college costs aren't coming down. Not even close-private schools are projected to raise tuition and fees about 5
But while the cost of an education keeps growing at a significantly faster clip than inflation, the tools parents can use to cover these expenses are also starting to improve.
SCHOLARSHIPS
Politicians of all stripes are wooing voters by helping them to pay down tuition with free money. Many of the new scholarships are small and require serious hoop-jumping. But they may represent a reversal of the long erosion of the best financial aid-grants or scholarships that don't have to be repaid.
The single biggest pot of free money, the federal government's Pell grant program, just got a little bigger and may soon become even more generous. Congressional Democrats and Republicans joined together earlier this year to raise the Pell grant, which goes to students from low-income families, by $260 to a maximum of $4,310. That's the first increase in four years.
One controversial program is also one of the newest. Starting last fall, low-income high school students who get good grades and take tough courses have been eligible for $750 freshman-year Academic Competitiveness Grants. Low-income upperclassmen who get good grades and major in certain sciences or languages can also now qualify for up to $4,000 in Smart Grants (http://www.studentaid.ed.gov/PORTALSWebApp/students/english/NewPrograms.jsp).
President Bush has proposed increasing the size of these grants. But Education Secretary Margaret Spellings recently noted that while 40 percent of high school seniors were eligible for Pell grants, only 4 percent had the grades and courses needed to qualify for ACGs and that only half of the appropriated ACG money had been distributed.
Meanwhile, others are sending students even more money. Wyoming, for instance, is in its first year of giving grants of up to $3,200 to any student with good grades, and even more to needy students with good grades (http://www.hathawayscholarships.com/).And Delaware is in its first year of offering two years' worth of in-state tuition to high schoolers with at least a C-plus grade-point average (http://seedscholarship.delaware.gov/index.html).
High school seniors still have a few chances to raise cash, if they act quickly. Those who haven't filled out the Free Application for Federal Student Aid, or FAFSA (http://www.fafsa.ed.gov/), should do so as soon as possible, since many colleges hand out aid on a first-come, first-served basis. At this late date, one of the best hopes for students feeling priced out of their favorite college is to file an appeal with a college's aid office before sending in a deposit.
Last spring, Kevin Smith of Chesapeake, Va., sent detailed family budgets to the top college choices of his oldest daughter, Shannon. "A lot of people seem to be too embarrassed to let people know their personal situation," he says. But he was not ashamed to show how his middle-class family of five couldn't afford to lay out almost $30,000 for college costs. The result: Shannon's eventual choice, Amherst, awarded the family an additional $4,000 in need-based aid.
529 PLANS
For most families, the safest strategy is to start saving for college as early as possible. "We think a great time to start saving is when your child is graduating from day care," says Jeff Coghan of Hartford Financial Services Group. That way, parents can redirect dollars that had been going to child care.
Perhaps the best move is to open a 529 savings plan. These state-sponsored accounts-named for the section of the tax code that gave birth to them-allow families to invest college money in a tax-deferred account, much like an individual retirement account. And money can be withdrawn tax free from a 529, so long as it is used to pay for qualified educational expenses.
Last year, the federal government made this tax-free-withdrawal provision permanent (it was set to expire at the end of 2010). As a result, 529 assets are growing, jumping last year alone from $68.4 billion to $90.7 billion, according to Financial Research Corp.
It's not surprising. The plans allow families to stuff huge amounts of money away for college-in many cases, more than $300,000. And this growing popularity is having a beneficial effect: Thanks to new economies of scale, 529 plan fees are coming down.
For example, Iowa's 529, which is managed by Vanguard, last year trimmed its all-inclusive annual management fee from 0.65 percent to 0.62 percent of assets. At the same time, Maryland's college investment plan, run by T. Rowe Price, dropped its administrative fee from 0.38 percent to 0.28 percent. And T. Rowe Price says it will lower this fee even more once the plan attracts more than $2 billion in assets. T. Rowe Price also did away with a $75 enrollment fee.
Expect fees to continue to drop thanks to another trend. As contracts with financial services providers are starting to expire, states are putting their 529 plans out to bid. The competition on Wall Street to get this business is pushing fees even lower.
Take California's direct-sold 529. The plan used to be managed by TIAA-Cref, but last year Fidelity won the contract. Fidelity has since expanded the investment options and included a low-cost index-fund option that charges just 0.5 percent in annual management fees.
There's at least one other favorable trend that's brewing in the 529 world. For years, many states have offered their residents a tax deduction for contributing money to their home-state plan. But last year, three states-Kansas, Maine, and Pennsylvania-expanded this tax break to contributions made by residents to any 529 plan.
It's too soon to tell if other states will follow suit. But David Pearlman, chairman of the College Savings Foundation, notes that bills have been introduced in several state legislatures to offer similar tax parity. Those states include Arkansas, California, Connecticut, Indiana, Iowa, Massachusetts, Michigan, Missouri, Montana, North Carolina, and West Virginia.
Loans
If you haven't saved enough for college through a 529 or other plan, your last-chance option may be a loan. But loans have gotten much more expensive recently-and sometimes unfairly so, according to allegations by prosecutors.
Last week, New York's attorney general reached settlements with 35 schools to make it more difficult for financial aid offices to steer students to unnecessarily expensive loans. And Congress is debating bills that could slash the interest rates on federally backed education loans.
The evolving rules make it especially important for students and parents to shop carefully for loans. Choosing the right loan and lender could mean a savings of thousands of dollars.
Perkins loans are the best deal, charging just 5 percent interest, but they are available only to low-income students, and only in amounts of $4,000 a year or less.
Stafford loans are students' next best deal. They now charge 6.8 percent. But the House of Representatives has passed a bill that would cut the interest rate in half next semester. Private lenders are fighting that bill, which would reduce their profits, so its fate is uncertain.
Nearly any student can get an unsubsidized Stafford loan. Lenders don't send out bills for these loans while the student is in school, but they quietly add the interest to the total debt. A freshman who borrows $3,500 would actually owe more than $4,500 by the time the bills start arriving after graduation.
Parents with good credit can borrow the full net cost of a child's college education (the cost after other financial aid has been subtracted) through the federal PLUS program. But John Nametz, director of financial aid at the University of Arizona, says his staffers can help most parents fix credit problems enough to qualify. "If they are motivated, we can help them," often by advising them to find a friend or relative to cosign a loan.
Choosing the right loan is only half the battle, however. Choosing the right lender can also save thousands of dollars. New York Attorney General Andrew Cuomo announced last week that the State University of New York's 29 campuses and six other schools would reimburse students a total of $3.3 million that the colleges were paid by lenders for loan business. The schools, denying any wrongdoing, also agreed not to accept payments for putting companies on "preferred lender" lists. Citibank, one of the biggest lenders, agreed not to pay schools for loans and to contribute $2 million to a fund to educate families about student loans. A separate investigation by the New America Foundation revealed last week that financial aid officers at three prominent universities held shares of a student loan company that was on each of the schools' preferred-lenders list.
About 20 percent of schools require students to borrow directly from the federal government. But any school that allows students to shop should accept a loan from any government-approved lender. One way to find lower-cost loans is to search among nonprofit lenders at www.efc.org.
This story appears in the April 16, 2007 print edition of U.S. News & World Report.