I’d like to share a couple of thoughts having been in the college planning business since 1995.

The biggest mistake families make is approaching the application and financial aid process separately. 

You can’t separate the two processes.  They affect each other.   Merit assistance, based on the qualities the student, is almost always a part of the application process.  So the college application is not only critical because it determines acceptance, it also determines merit assistance. 

On the need-based side, looking at schools without knowing your EFC (Expected Family Contribution) provides no financial basis on which to screen your list of desired institutions.                                     

These circumstances demand that planning is done ahead of the application process and the financial aid filing.  An analysis of the family’s finances with regard to the EFC calculation should be accomplished prior to January of the junior year of high school.  The base year for need-based eligibility is in part based on prior year’s taxes. 

This allows for better planning, looking at the cost of institutions vs the family’s fair share and any potential adjustments to the family’s finances which might improve the outcome of the EFC Calculation.

The shopping aspect of the college process is still the most important, but must include both financial and application considerations.

Lastly, families need to be careful of taking advice from private financial aid consultants without first checking out their credentials.   Financial aid, tax and investment strategies are not compatible.  One must understand more than just the EFC calculation to properly advise a family on their finances.  Your college consultant should have a background in the financial sector as well. 

Parents and students have two tuition tax credits programs provided by the Federal Government: the Hope/American Opportunity and the Lifetime Learning. They can qualify for a reduction on their federal income tax bill if they meet certain conditions,  but, they may only claim one credit for the same student in the same year.

A tax credit allows parents(or student) to subtract, on a dollar-for-dollar basis, the amount of the credit from your total federal income tax liability as a opposed to an income tax deduction, which is subtracted from income before taxes are calculated. Thus a tax credit normally results in greater tax savings.

The American Recovery and Reinvestment Act of 2009 (ARRA) or the Stimulus Bill, expanded the existing Hope tax credit and changed the name to the American Opportunity Credit. The expanded credit applies to tax years 2009 and 2010. Previously the Hope Credit could be applied to two years of postsecondary education, the expanded credit can be claimed for four years.  It also expands income eligibility.

To claim this credit, the student must be enrolled at least half-time in a program leading to an undergraduate degree or other legitimate education credential.  

The maximum yearly credit per eligible student is $2,500.

The American Opportunity Credit is partially refundable, which means up to $1,000 could be paid back to lower-income taxpayers when the credit exceeds their total tax bill.

There is no limit on how many family members can receive the credit.

The amount of the credit begins to phase out if your modified adjusted gross income (AGI) is between $80,000 and $90,000 or more for a single return and between $160,000 and $180,000 or more for a joint return.

For parents or guardians to claim a Hope credit for their child’s college expenses, the student must be listed as a dependent on the tax form. If the student is not listed as a dependent on another person’s tax form, he or she can claim the credit.

For exact directions for claiming the American Opportunity credit, and information about a further credit available to students in specified Midwestern disaster areas, consult IRS Publication 970, Tax Benefits for Education.

The Lifetime Learning Credit is available for all years of postsecondary education and for courses (even a single course) that is required or improves job skills.

The Lifetime Learning credit can only be used for tuition and fees. The credit can be claimed for 20 percent of the amount you pay (see maximum limits below).

A taxpayer may claim a tax credit for 20% of up to $10,000 in a combination of tuition and fees. This equates to a $2,000 tax credit in 2008 and 2009.

The amount of the credit begins to phase out if your AGI is between $50,000 and $60,000 for a single return and between $100,000 and $120,000 for a joint return.

Consult IRS Publication 970 for specific rules on eligibility and claiming this tax credit.

Student financial aid is money given by the Federal and State governments and the colleges to help students pay for the cost of a college education.

There are two basic types of financial aid:

1)      Self-Help aid which consists of interest subsidized loans and work study; and,

2)      Gift Aid, which consists of grants and scholarships.

The amount and type of financial aid is based on two factors:

1)      The merit of the student ( scholastic, athletic, musical, etc.); and,

2)      The financial need of the student. By far, this is the most important factor in determining financial aid. Most of the financial aid given by the Federal and State governments is based on the financial need of the student. Also, most of the financial aid given by colleges is need-based.

NOTE: The Ivy league colleges and other highly selective private colleges base almost all of their grants and scholarships on the financial need of the student and not the student’s merit.

So how is the financial need of a student calculated?

            NEEDS ANALYSIS is the process of determining the financial need of the student. It is calculated using the following formula:

                              COST OF ATTENDANCE (COA)

-          EXPECTED FAMILY CONTRIBUTION (EFC)

=    FINANCIAL NEED

-          RESOURCES OF THE STUDENT

=   ADJUSTED FINANCIAL NEED

EXAMPLE: If the ‘cost of attendance’ at a particular college was $12,000 and the ‘expected family  contribution’ was calculated to be $4, 000, the ‘Financial need” of the student would be $8, 000. In this case the student would be eligible to receive $8,000 in financial aid. Whether he receives a financial aid award for the entire $8,000 is up to the discretion of the individual college. Nonetheless the financial aid eligibility of the student is directly related to the financial need. If the student, had other resources to help pay for the college cost, the financial need would be reduced on a dollar-for-dollar basis for these resources. In this example assume the student had received a $1,000 private scholarship from the local Chamber of Commerce.  Since private scholarships (scholarships which are not given by the college), are considered a resource, the  $1,000 scholarship would reduce the financial need down to’$7,000. This means the student would now be eligible for only $7,000 in financial aid from the college.

This is a great article to put in perspective the misconception that one must attend a prestigious college or university in order to be successful. 

by Carol Hymowitz
Provided by CareerJournal.com

The college diplomas of the nation’s top executives tell an intriguing story: Getting to the corner office has more to do with leadership talent and a drive for success than it does with having an undergraduate degree from a prestigious university.

Most CEOs of the biggest corporations didn’t attend Ivy League or other highly selective colleges. They went to state universities, big and small, or to less-known private colleges.

Wal-Mart Stores CEO H. Lee Scott, for example, went to Pittsburg State University in Kansas, Intel CEO Paul Otellini to the University of San Francisco, and Costco Wholesale CEO James Sinegal to San Diego City College.

This information should help allay the anxieties of parents and their college-bound children who believe admission to a top-ranked school with a powerful alumni network is a prerequisite to success in the upper echelons of business management. Today’s crop of chief executives are, of course, at least a generation older than current college students, but they are in the position to hire and say they don’t favor job candidates with certain degrees.

“I don’t care where someone went to school, and that never caused me to hire anyone or buy a business,” says Warren Buffett, CEO of Berkshire Hathaway, who graduated from the University of Nebraska-Lincoln.

What counts most, CEOs say, is a person’s capacity to seize opportunities. As students, they recall immersing themselves in their interests, becoming campus leaders and forging strong relationships with teachers. And at state and lesser-known schools, where many were the first in their families to attend college, they sought challenges and mixed with students from diverse backgrounds–experiences that helped them later in their corporate climbs.

Bill Green, CEO of Accenture, never planned to go to college. The son of a plumber, he took a construction job when he graduated from high school in western Massachusetts because he didn’t think he had the ability to pursue more education. He changed his mind when he visited friends at Dean College, a two-year community school near Boston.

“Walking around campus, listening to my friends talk, I realized they were being exposed to a big world–and I had a chance to take another shot at learning,” he says.

At Dean, he got help from faculty members who devoted themselves to their students, not “doing research and writing books like professors at four-year schools,” he says. Rather than post student-meeting times on their office doors, they posted their class schedules. “All the other time, they were available to any student who needed help,” says Mr. Green, who worked part-time to pay for part of his tuition.

Inspired by an economics professor who made the subject “fun and relevant,” Mr. Green went on to Babson College to earn his bachelor’s and M.B.A. degrees. But he credits Dean with teaching him to think analytically, to gain confidence in his abilities, and to learn to work with people.

“You can go to a top-end school and end up dramatically underperforming, or you can go to a place that cares and blow away what everyone thinks,” says Mr. Green, who still stays in touch with his economics professor, Charlie Kramer. A trustee at Dean, he feels angry when he encounters “parents who are afraid or ashamed to say their son or daughter is attending a community college,” he says.

Some 10 percent of CEOs currently heading the top 500 companies received undergraduate degrees from Ivy League colleges, according to a survey by executive recruiter Spencer Stuart. But more received their undergraduate degrees from the University of Wisconsin than from Harvard, the most represented Ivy school.

Harvard’s nine current CEOs include United Technologies’ George David and Microsoft’s Steve Ballmer. Among Wisconsin’s ten current CEOs are Pitney Bowes’s Michael Critelli, Kimberly-Clark’s Thomas Falk, and Halliburton’s David Lesar. Carol Bartz, chairman and former CEO of Autodesk, majored in computer science at Wisconsin and used a scholarship she’d won for women gifted in math to help pay her tuition.

Some non-Ivy League schools have long been training grounds for particular industries. The University of Texas-Austin, the alma mater of Exxon Mobil CEO Rex Tillerson, has churned out numerous oil executives. Carnegie Mellon University, Pittsburgh, is known for its computer-science graduates. But some of today’s most successful CEOs got their start on small, isolated campuses.

A. G. Lafley, Procter & Gamble’s CEO, chose Hamilton College in Clinton, N.Y., because he wanted a solid liberal-arts education and to be assured a spot on the intercollegiate basketball team. A history major who graduated in 1969, he was elected president of his sophomore class, became a fraternity officer, and spent his junior year studying in France.

“I learned to think, to communicate, to lead, to get things done,” he says, adding that those qualities are what he seeks in job candidates at his company. “Any college will do.”

Berkshire Hathaway’s Mr. Buffett didn’t even want to go to college. He enrolled at the University of Pennsylvania’s Wharton School as an undergraduate at his father’s behest. He stayed just two years, then returned home to Omaha and graduated from Nebraska within a year.

At his father’s urging again, Mr. Buffett applied to Harvard Business School, which rejected him as too young, he says. By then, he was devouring the books by investors David Dodd and Benjamin Graham, who advocated investing in companies that had “intrinsic business value”–a view that became Mr. Buffett’s guiding investment principal.

When he learned the two men were teaching at Columbia University’s business school, he wrote to them to ask if he could attend their lectures. He earned a master’s degree in economics at Columbia in 1951. “But I didn’t go there for a degree, I went for those two teachers, who were already my heroes,” he says.

One reason more Ivy League alumni aren’t CEOs may be that many have traditionally chosen careers in investment banks and at big law firms, where they could earn big sums quickly and wouldn’t have to start in entry-level management jobs.

“A lot of people who earn degrees from tier-one universities and business schools aren’t willing to start at the bottom of a huge company” and spend years scaling layers of management and hoping to reach the top, says Richard Tedlow, a business historian at Harvard Business School.

The exceptions are some founders of high-tech companies who never completed college. They found their classroom studies less compelling than their own ideas. Bill Gates quit Harvard to start Microsoft, Michael Dell quit the University of Texas-Austin to start Dell Computer, and Steve Jobs quit Reed College in Portland, Ore., to work at Atari and then found Apple Computer. None ever returned to college to complete a formal degree.

What do they think about this decision today–and would they advise young people to copy them? In a graduation speech at Stanford last year, Mr. Jobs said college, like any life decision, is up to each individual. “You have to trust your gut,” he said.

His decision to quit Reed after one semester was “pretty scary” but ultimately “one of the best decisions I ever made,” because instead of taking required courses that didn’t interest him he spent the next 18 months auditing classes that did.

A calligraphy course he audited strongly influenced his design of the Macintosh computer ten years later. “If I’d never dropped in on that single course, the Mac would never have had multiple typefaces or proportionally spaced fonts,” he said.

Quitting college also eased his guilt about spending his adoptive working-class parents’ savings “when I still had no idea what I wanted to do with my life and no idea how college was going to help me figure that out,” he said. But dropping out “wasn’t romantic,” he warned. “I didn’t have a dorm room so I slept on the floor of friends’ rooms and returned Coke bottles…to buy food.”

Thomas Neff, chairman of recruitment firm Spencer Stuart U.S., warns: “It’s the exceptionally inventive person who can do this. If you have a big, big new idea, you can get venture financing–and if you wait to graduate someone else may capitalize on your idea first,” he says.

But for everyone else who wants a professional or management job at a big company, a college degree is a necessity–including for jobs at Apple, Microsoft, and Dell. And increasingly, employers also expect graduate degrees for management-track candidates. Close to two-thirds of top CEOs have either an M.B.A., law, or other advanced degree, according to Spencer Stuart’s survey–and some executives who didn’t go to Ivy League colleges got Ivy credentials as graduate students. P&G’s Mr. Lafley has a Harvard M.B.A.

Robert Iger, CEO at Walt Disney Co., decided in high school that he wanted to work in television and attended Ithaca College in upstate New York because he felt its strong communications program would nurture his career dreams. “I was in a place that supported creativity and individuality with a focus on what I was most interested in,” says Mr. Iger, who took liberal-arts and hands-on broadcast courses. After college, he got a job working for ABC-TV, now a unit of Disney.

Anyway, by the time someone has been working for a few years, or held one or two jobs, their employment record counts more than their educational background, recruiters say. And companies seeking to fill CEO and other senior jobs rarely consider candidates’ degrees. “It’s what you’ve accomplished that matters,” says Mr. Neff, “not what you were doing at 21.”

“If you ask 100 people to name their major sources of stress, most likely they will include “finances” or “money”.  And it is no wonder.  Prices are rising, jobs are uncertain and college and retirement costs are increasing every year.”  This according to the experts at the Excedrin Headache Resource Center, sponsored by the Bristol – Myers, Squibb Company.  The American Institute of Stress, Yonkers, NY, states, “Job stress is estimated to cost US Industry $300 billion annually, as assessed by absenteeism, diminished productivity, employee turnover, direct medical, legal and insurance fees, etc.” The most recent terrorist events and the impact on jobs, personal net worth and consumer confidence have magnified the problem.

E. Thomas Garman is a Fellow and Professor at Virginia Tech, home of the National Institute for Personal Finance Employee Education (NIPFEE), an organization dedicated to improving employees’ financial wellness. Researchers from Virginia Tech decided to find out if there is a relationship between personal finance and individual health? Well-educated, high-income, white-collar workers were recruited for the study. Participants were offered a financial education program at the work site and a private, one-on-one financial advice session. Workers were surveyed before and after their participation. The study shows that financial education and advice positively impacts individual money behaviors and attitudes, as well as, their health and work performance. In addition, compared to employees who have higher financial wellness, workers who were less satisfied with their personal finances were found to have poorer health.

Doctor Garman points out in his paper, ‘The Whole Story of NIPFEE in Eight Paragraphs,’ that, “Approximately 15 percent of workers in the United States are currently experiencing stress from poor financial behaviors to the extent that it negatively impacts their productivity.  At some work sites the proportion is as high as 40 to 50 percent.  It is estimated that perhaps one-half of workers with personal financial problems also are likely to be performing poorly on the job, and this negatively impacts their employers.  The cost to the Department of Defense is about $1 billion annually.”

The Sallie Mae Education Institute provided the following results of a survey of parents with college bound children. “The importance placed on their child’s education was corroborated when almost one-third of the parents (31%) said their child’s college education was their highest priority.  This was second only to the 38% of parents who indicated their everyday budget was their first financial priority and almost twice the percentage of parents who named retirement (17%) as their first priority.  In addition, a college education was among the top three financial priorities for nine in ten respondents.”

According to the General Accounting Office (GAO) as reported in Parents News,   “a recent report found that during the past 15 years, tuition increases have outpaced household income gains by a 3 to 1 margin.  The report went on to say, “the average tuition for undergraduate students at public four-year colleges has increased 234 percent since 1980, while the average household income rose only 82%.” 

A direct result of increased costs–increased debt.  “Student loans have risen from 41% of all student aid in 1980-81 to 58% during 1998-99, while grants have fallen off from 55% to 40% of all financial aid for the same time period.”  The College Board, Trends in Student Aid. 

Obviously, an alternative is for parents to reach into their IRA’s or pension plans.  Like trying to put a fire out with gasoline, stripping retirement savings to pay for college only deepens financial concerns and stress. 

Doctor Garman states in ‘The Whole Story of NIPFEE in Eight Paragraphs,’  “Smart employers realize that good financial wellness and key measures of productivity are positively related.  Such employers know that spending money to give workers comprehensive personal finance education will provide a positive return on investment for every single dollar invested.”   Employee financial education is effective in reducing stress. 

Providing unique and effective employee financial education to enhance the corporate benefits plan also impacts the critical issue of retaining valued employees.

The American Management Association reported in HR Focus that “The US Department of Labor estimates that it costs a company one-third of it’s new hire’s annual salary to replace an employee.”  According to Positive Directions, Inc., a Florida-based management consulting firm, “Employee turnover can have a devastating effect on pretax income.  Some experts feel it is a major contributor to lagging US productivity and the failure of US industries to compete effectively.  In the US there is a 30% turnover in all front line jobs.”

Business Psychology News, reports on a study that supports enhanced benefit programs to increase employee retention. “Another study on worker retention by Sibson and Company of New Jersey found that focused incentive programs aimed at core workers kept good people and improved productivity.”  The results of a 1999 employee retention survey conducted by Thomas Staffing, which provides staffing solutions to employers in Southern California, concluded, “To retain new hires, almost 30% of respondents say they offer additional employee benefits at the start of employment.”   

The ability to handle college costs is basic to financial wellness, the importance of which is only going to increase over the next decade. According to the College Board, “The number of high school graduates will increase by 13% between 1999 and 2009.

College enrollment figures for 18-24 year olds will grow from 8,200,000 this year to 9,600,000 by the year 2009.”   College planning will become critical not only from a numbers perspective but also from an income perspective.  “The gap between disposable Per Capita Income and college costs is narrowing.”  The College Board, Trends in College Pricing.

Here is the critical issue, effective college planning involves much more than simply deciding how much and where to invest.  Financial aid planning encompasses a myriad of options and considerations outside of private scholarship searches.  Many investment decisions made by well-intentioned parents, in the absence of any knowledge of the student financial aid system, ultimately could end up costing them more than they ever achieved in savings over the years.   Every financial decision a family makes will effect investment return, tax liability and financial aid eligibility in some way.      

In today’s aggressive college environment, colleges and universities are competing to meet their bottom line or attain brighter, larger or more diverse student population.  This has caused the financial aid and the admissions processes to become more and more entwined in order to facilitate this shift toward “enrollment management.”  Increasing amounts of financial assistance are finding their way to middle and upper-income families.  Yet at the same time, the rationale for this “strategic packaging” becomes more and more evasive. 

Parents need not only understand how financial aid works and how it impacts other financial considerations, they also have to be able to wind their way through a maze of information.  The major challenge in college planning today is not finding information. We’re drowning in it.  If you go on the Internet and searched for college planning or scholarships, page after page of matches come up.  It would take weeks to screen all the matching entries. The challenge is not the availability of information, but rather what to do with it once you’ve got it.  How do parents manage that information, bring a focus to it and make it meaningful to their student? How do they use it to make good educational and financial decisions? 

They must also be involved–involved in the information management process, involved in every aspect of the process.  They cannot afford to let the system take its own course.  There are too many variables and too little information flowing between families and colleges.  You have to be involved to insure that everything goes according to design; that the right things are being done at the right time, in the right way.

This involved process encompasses exploration and discovery, shopping and analysis, facilitation and negotiation.   Through exploring the student’s skills and personality in conjunction with potential job and career opportunities, the student will discover the proper educational direction to support that career.  Required education along with the student’s scholastic profile, personal and family preferences, provides parameters by which they can screen the pool of colleges and universities.   Coupled with available information on those institutions’ historical financial aid performance and internally controlled scholarships and grants, allow the student and family to analysis them for “best value.”  Once the field is narrowed to those colleges and universities they wish to apply to, applications and supporting documents must be facilitated for maximum effect and financial aid award letters analyzed and if appropriate, discussed with the school. 

Corporate benefit plans must address these issues and provide parents assistance with college planning to precluded being blind-sided by decreasing productivity and loss of  key personnel.

There are a growing number of financial professionals who are specializing in college and financial aid planning.  Their services go far beyond the “college planning” module of most financial firms’ offering of pension management and education.  These modules simply provide for the traditional college cost calculations, normally resulting in a depressingly high, required investment figure.  ‘True’ college and financial aid planning services address the process of attaining admission to college, the financial assistance to help pay for it and establishing options to handle the family’s costs after aid is awarded.  

College planning professionals can provide seminars, workshops and hands-on consultation for your employees. 

CEOs and their Human Resource Directors may confidently pat themselves on the back for having met ERISA 404C fiduciary responsibilities, but ponder whether the limited financial education provided employees is effectively addressing the critical issues causing stress-related productivity loss.  Adhering to ERISA guidelines may be a legal catch-22 with potential employee litigation for non-compliance or over-compliance, but being pro-active in reducing employee stress and improving productivity is a win/win situation, impacting directly the corporate bottom line.     

This time of year, students and families are pondering the loan question.  The fact of the matter is, most students will have to finance some or all of their education.  The College Board provides the following tips when considering student loans. 

1. Look at your child’s award letter and figure out which need-based loans your family has been given and for what amounts.
2. After you look at your family’s full financial picture—education cost, awarded aid, and family share—settle on the amount you or your child actually need to borrow.
3. Never borrow more than you need. Remember, you are not required to borrow the full amount of loan aid your child has been offered or to borrow the maximum loan amount.
4. Don’t forget about student employment as an alternative for borrowing. Although working at a job can seem like an extra burden for your child, so is struggling with high loan repayments after college.
5. Apply for your loans right away. You want to make sure that the loan is approved and the money paid to the college before your family has to make your child’s first student account payment.
6. Follow the loan application instructions carefully. Any mistakes you or your child make will delay receipt of the funds.
7. For a Stafford Loan, be prepared for the amount that is paid to the college to be less than the amount for which your child signed. An origination fee, guaranty fee, or both, may be subtracted from the loan before the check is sent to your child’s college.
8. If you will be taking out parent loans, start to keep track of your “loan tab”—the amount your monthly repayment will be—once you know the amount that you are borrowing.
9. If you feel your family needs to borrow more than the amount that’s been offered in your child’s award letter, talk with a financial aid counselor before taking on an additional loan.
10. If you or your child does take on an additional, unsubsidized loan, consider making interest payments while your child is in school. They won’t be much and will save you money—you’ll end up having to pay back significantly less than if you delay (and capitalize) the interest payments.

In these uncertain times, when family assets are devalued, yet the cost of education has not followed suite, it may be that we have to reorder our priorities and ask more of our college-bound children. It should also be apparent that spending four or five years to receive a degree in some soft major will not hold the graduate in good stead when looking for that first job.  Practicality is the current watch word.        

Our founding fathers eloquently stated in the Declaration of Independence, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.” 

That one sentence displays such keen wisdom, yet most overlook its subtle intent.  The statement so precise, it’s very interesting to note that the authors framed our last right to be the pursuit of happiness, not happiness itself.  As the well-known adage states, “no one promised you a rose a garden,” yet today we, as a culture, have come to expect happiness.  Simply the right to pursue our dreams is no longer adequate.  We must have our dreams, our happiness, served up on a silver platter.  Anything less and we feel slighted, or at least unfulfilled.  As well, we’ve past this attitude on to the younger generations.  Somewhere along the line we decided as a society that we are owed happiness, whatever size shape or color we believe it to be.           

After many years of providing college and financial aid planning services for families and students, certain trends have become evident and troublesome.  The majority of parents believe that they owe their children a college education and their children aren’t about argue the contrary.  Without blinking an eye, parents are prepared to give up their life savings to serve up a college education on a silver platter.  Whether or not their child is prepared to effectively attend an institution of higher learning has no bearing on their rush

to sacrifice their retirement.  Suggested options of attending a community college, pursuing technical training, or even working for a year or two before going on to college are treated as heresy. 

The fact of the matter is, in many cases, both parents and students would be better served to look at the alternatives.  How many unhappy freshman have returned home to seek another school or decide a different path.  Had options been entertained initially, how much time, energy and money might have been saved?  The emotionality that surrounds the college selection process cripples most families.  Whether it’s due to the unrealistic expectations of the parents or the less than practical desires of the student, poor decisions are made.  In our blind haste to serve up happiness, we end up dropping the plate. 

It has been said that the sportsman finds exhilaration in the hunt.  The kill is ante climatic.  So it is with happiness.  It is the pursuit of it that brings joy, the attainment is often times disappointing, at a minimum fleeting.  Do not deprive your child of the pursuit.  Ownership in the process makes the result that much sweeter. 

That being said, you should consider the student taking on some or a majority of the financial responsibility for their own education.  That responsibility doesn’t necessarily need to be cold hard cash, but a financial commitment on the part of the student.  If the student can’t excel academically or participate in extracurricular pursuits, which may result in scholarship assistance, then they need to step up and be willing to compromise on the college or university they attend or the path they take to get there.  A focused commitment to the application process with all its administrative requirements can have positive financial results. Taking on the responsibility for educational loans, holding down a part-time job, or even living at home and attending a local college for a year or two are other ways students can help financially, yet achieve their educational goals.                   

Hopefully, around April of the senior year of high school, your student will have been accepted to three or four colleges and received financial aid award letters from each stipulating what assistance is being offered. It is important to compare these offers as each will surely be different, and those that provide the most dollar assistance may, in fact, cost the family more in the long run.

It is important to remember that this letter only constitutes an “offering.”  The student does not have to accept it.  He or she can accept only certain parts of the aid being offered or even request a review and negotiate for a better package (more on that later).

Let’s work with an example.  Our EFC is $9,000, for a private college and determined through Institutional Methodology. Assuming that the total cost of attendance at this private college is $25,000 a year, our student has established $16,000 in need. Since most private colleges cover 100% of the established need, the resulting aid package should be $16,000. About 60-70% of this amount should be in grants and scholarships  (money the student doesn’t have to pay back), 21% will be in the form of a subsidized Stafford Loan (the student doesn’t make payments until after graduation), and the remainder will be covered by work/study (the student holds down a part time job and uses the pay to cover books and miscellaneous expense).  Be aware that some schools may back off on the amount of grant and scholarship money and pad the award offering with a federal parent loan (PLUS Loan) . 

At a public institution, because there is less private endowment and scholarship money to assist the student, less than 100% of the established need is normally met. In our example the Federal Methodology said the student’s EFC was $7,500. Let’s assume now that the student applies to a less expensive public university, which uses the federally determined EFC. The cost of this university is assumed to be $13,500 a year. The established need is now only $6,000. But the college can only cover 75% of the need, or $4,500. This now creates an out-of-pocket expense for the family of $2,500 ($6,000-$4,500), making the total cost $10,000 ($7,500+$2,500).

There’s another difference. For the same reason that less of the established need is covered, the percentage of loans and work/study received in the aid package is noticeably higher than the amount of grants and scholarships. So in our example, the $4,500 would be covered by a loan first ($3,500 is the maximum for a Stafford loan for Freshman). The majority of the remainder would be provided in the form of a work/study program.

In this situation then, the student could go to a more prestigious private college for less than what it would cost the Family at a less expensive public institution.  Keep in mind each circumstance is different, and each college and university has different policies on financial aid distribution and eligibility.  But it is critical that this type of information is evaluated along with the scholastic benefits of the institutions the student is interested in attending. In that way the family can be assured of the best dollar value.

If the college is making full disclosure of out-of-pocket expenses, their letter will reflect the total cost of attendance.  Then they will deduct the student’s EFC from the cost and show the difference as “financial aid eligibility,” or “demonstrated financial need.”  A breakdown will then be given of the aid offered—grants, scholarships, loans, and college work/study.

On the other hand, colleges that want to keep financial aid a bit more mysterious will simply send a very upbeat letter with a listing of aid awards.  The student has no clue as to the true cost to their family.  A call to the college to get a copy of the “on-campus budget for 2007-2008” will provide the missing information with which to determine the real out-of-pocket expense.

A fair comparison of award letters can then be made.  Check the EFC used by the school against the EFC reflected on the Student Aid Report.  If the school is using Institutional Methodology to determine the EFC, then add about 5.6% of the family’s home equity to the federally calculated EFC.  The two figures should be fairly close.  Next look at how close the schools come to meeting your established need (the difference between what it costs and the student’s EFC).  Also, compare the amount of loans necessary to complete the package.  Remember, additional loans such as the PLUS for parents may be necessary to handle all or a portion of the family’s out-of-pocket expense. 

Do a thorough analysis of the debt circumstance.  How much debt can the family tolerate on the other end of four or five years of college?  Is there a second student in the picture in the near future?  

Another easy trap to fall into is college work/study.  This money is not a gift.  The student must earn it.  If the student does not work, the family pays that amount as well.

Here is a list of tips to use in comparing packages:

1  Compare the debt first by adding up all the loans being offered.

2  Compare unmet need and the family contribution–the more need met may mean more family debt, the more gift aid may mean a larger family contribution.

3  Make sure books and miscellaneous are expenses are included in the cost the college used to figure the family’s need.

4  Consider travel costs if institutions are some distance away.

5  Determine if any outside scholarships are renewable and if the college will allow self-help portions of the package to be reduced by them.

6  Compare the terms of any loans included–what the payments will be and the real cost to the family once they’re paid off.

7  Check what aid is provided to upperclassmen—Freshmen award packages are often better.

8  Write it all down and look at the numbers–don’t just guess which package will be less expensive.

9  Last, compare the economic benefit of your future career with the need to incur substantial debt.  It may well be worth it.  After all, that’s what it’s really all about—what are you willing to pay and what level of debt are you willing to endure to achieve a college education?

This Wall Street Journal Article addresses the dire straights that 529 Plans are in and how it is affecting families’ abilities to cope with college costs.

EDUCATION

• OCTOBER 16, 2008

College Savers Stuck in Stocks as Market Falls

IRS Rule on 529 Plans Allows Just One Portfolio Shift a Year; Weighing a Cheaper School

By JANE J. KIM

A rule designed to protect investors in 529 college-savings plans is having the unintended side effect of preventing them from shifting to more-conservative investments as the stock market swoons.

When Charles Strawbridge of Ashtabula, Ohio, got nervous about the markets this past spring, he wanted to boost the bond allocations in the 529 plans he had set up for his 16- and 19-year-old sons. But because he and his adviser, Matt Olver of Cleveland, had already changed his investment mix in January, he had to keep his current allocation of 20% and 25% in equities for his older and younger sons, respectively.

Now, after watching the accounts drop in recent weeks, he’s telling his older son — who is in the process of transferring colleges — to consider less-expensive schools. “We do have to keep in mind the downturn that the market has had on his available funds,” says Mr. Strawbridge, a 55-year-old accountant. “It was unfortunate that we couldn’t have made the move. It takes a little bit off the table.”

With 529 plans, investors put after-tax dollars into an account that typically offers a range of mutual funds and other investments. Distributions and earnings are tax-free, as long as they’re used for higher education. The plans have grown in popularity in recent years — they held about $110 billion in assets at the end of the second quarter — although the pace of net new investments into the plans has started to slow, according to Citigroup Inc.’s Financial Research Corp..

Amid the current market turmoil, more investors like Mr. Strawbridge are running into one of the quirkier restrictions of these state-sponsored plans: an Internal Revenue Service rule that limits investors to one investment change per calendar year. The rule is intended to keep people from making knee-jerk reactions to market moves, but some investors and financial advisers say it makes the plans overly restrictive. Indeed, the College Savings Plan Network, a membership organization of state 529 officials, investment firms, program managers and others, is considering asking the Treasury Department to raise that limit to four times a year.

But that’s not the only feature of 529 plans that’s causing investors grief right now. Many investors use age-based portfolios that automatically shift to more conservative investments as the child nears college. Yet some of these conservative portfolios may actually hold a high percentage in stocks. North Carolina’s National College Savings Program has an age-based portfolio that can hold just over 50% in stocks, including real-estate securities, just one year before the child starts college. That portfolio, which is part of the state’s CollegeHorizonFunds managed by J.&W. Seligman & Co., was down 15.7% for the 12 months ended Sept. 30. Given the big market drops this month, the plan has likely posted additional losses.

Seligman’s age-based portfolios were designed to create “the opportunity for capital appreciation” while becoming “extremely conservative” in college, says Charles Kadlec, the firm’s managing director. The CollegeHorizonFunds move to 100% cash in the last two years of college, he says.

Other plans with more-aggressive portfolios include Nebraska’s broker-sold AIM College Savings Plan, which can have as much as 40% in equities when the child is one to three years away from college, and South Carolina’s Future Scholars direct-sold plan, which can have up to 33% in equities with college enrollment one to two years away.

Keeping Pace With Tuition

Such equity exposure may help investors keep pace with tuition increases, some investment managers say. “If you’re a senior in high school, you still have five years before you hit your senior year of college,” says Tom Kazmierczak, senior product manager for T. Rowe Price Group Inc.’s 529 unit, whose portfolios for students starting college in 2009 can hold up to 28% in stocks and up to 20% while the child is in college.

Now more than ever, spending the time and effort to plan correctly for college is critical.  Analyzing the family financial circumstance as it relates to the calculation of the Expected Family Contribution (EFC), which drives need-based assistance, shopping for the right college in terms of the student’s academic, financial and personal needs, maximizing the student’s achievements, and exploring alternative payment and financing options, are so important to increase the potential to receive a value education.

Choices become more limited and planning becomes paramount.

Deciding which loans are best for the family depends on these different factors:

1  Who will repay the loan

2  Repayment terms

3  Tax bracket

4  Cost of getting the loan

There are two loans the dependent student is legally obligated to repay: the Stafford and the Perkins loans. Any other loans are the parents’ responsibility unless they have jointly co-signed a private loan from a commercial lender.

Federal Loan Programs

These are the Perkins, Stafford, and PLUS loans, all of which have very good repayment terms and interest caps. Currently the repayment period for federal loans is 10 years.

Here is what the monthly payments would look like:

Besides the standard payments available, there are other repayment options available. The family can consolidate loans and stretch payments out over 20 years. There are graduated repayment plans which have smaller payments in the earlier years and gradually increase over time (these have higher interest costs).  Income contingent plans base the amount of payment on the level of income of the student after graduation. As income rises or falls so does the amount of payment.

Home Equity

Another viable alternative is a home equity line of credit where the family borrows only what they need, when they need it, paying interest only on the amount that’s borrowed. There is a minimum monthly payment, and the interest is normally tax deductible, but also variable.

*Make sure to compare the benefit of a federal loan vs. a home equity line of credit.  For example, a federal loan at 6% is equal to an equity line at 8.3% for someone in the 28% tax bracket because of the tax deductible nature of the equity line interest.

Second Mortgage

With a second mortgage a fixed amount is borrowed, and there is generally a fixed interest rate and repayment schedule. While it provides for a more consistent budget plan, the family is paying interest on money before it’s needed and have higher payments before it’s necessary.

401(k)

In some cases borrowing from the parents 401(k) retirement account is

possible. There are federal limits on the amount that can be borrowed.  Also,

the loan must be repaid in 5 years or stiff tax penalties apply as it becomes reportable as a premature distribution if the owner is under 59 ½ years of age.

Life Insurance Policy

Borrowing against the cash value of life insurance policies is another option. The repayment terms are often very lenient and may provide the option to only repay the interest. The loan may affect the death benefit and the interest rate earned by the remaining cash value.

*Remember that with every loan there are processing fees. These charges should be considered as well when comparing loans.