One of the basic lessons of financial aid is that when comparing financial aid award letters, make sure the college or university is using the “total cost” of education, which should include transportation and miscellaneous expenses.  These estimates are provided by the College Board on their web site.  But keep in mind that these are estimates and depending on your family and your student, the costs could be much more.  Liz Pulliam Weston, in her article “The hidden cost of college,” she sheds light on just how much those miscellaneous cost can be.   http://articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/TheHiddenCostsOfCollege.aspx

The following link is to a Richmond Times Dispatch article detailing VCU’s approved 24% tuition hike.  In dollars it means that in-state students will be paying $1,700 more next year.

http://www2.timesdispatch.com/rtd/news/local/education/article/VCUU30_20100429-221804/341099/

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.

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.