FINANCIAL AID ANSWERS: HOW TO PAY FOR COLLEGE

All through high school, Danielle Donelan was interested in only one school: Transylvania University in Lexington, Ky. She fell in love with the tiny private institution (student population: 1,075) while attending basketball camp on its leafy campus in the late '90s. With a 3.8 GPA, Donelan stood a good chance of admission. But the $24,000 price tag stood in the way. "It was scary," says Danielle's mother, Becky, who makes $50,000 a year marketing Pampers, while father Bob hasn't been making much lately as a home remodeler. So in Danielle's sophomore year the Donelans began an exhaustive search for financial aid, scouring the Web and working with high-school guidance counselors and Transylvania's admissions officer. Danielle filled out 16 scholarship applications. The result: she is now attending Transy with the help of $16,136 in grants, scholarships and loans. Her parents pay $7,644 to cover the rest, but they're still fretting. Says Becky: "The apprehension about how to pay for college is going to continue all four years."

Gaining admission to a college might stress students. But for parents, the biggest worry is paying for it. And their fears have never been more legitimate. Over the last decade average tuition and fees at public and private universities ballooned by 38 percent, while median family income grew by only 8 percent, according to the College Board. As the economy wavers and states slash budgets, tuition is soaring at public universities, which educate 80 percent of American students and were once thought of as thrifty alternatives to pricey private schools. Tuition, fees, room and board at four-year public colleges rose 7.5 percent in the 2002-03 academic year to $9,663. The increases for the 2003-04 academic year are even steeper at some state schools: tuition is up 27 percent at the University of California, 40 percent at Arizona State, and Indiana University freshmen are getting a 23 percent hike (upperclassmen pay just 4 percent more). Private schools, too, are jacking up prices. Tuition and fees at private universities increased 5.8 percent in 2002-03 to $18,273. Add on room and board, and the private-school tab is $25,052. How to pay for all this? The good news is that a record $90 billion in financial aid was handed out in 2002, up 11.5 percent from the year before. Moreover, those shocking tuition rates are not always what they appear. Tuition discounting is common at both public and private schools. (Indeed, nearly half of all private-college students receive grants.) "Compare the bottom line, not the sticker price," says financial-aid expert Mark Kantrowitz, who created and runs the finaid.org Web site, a helpful guide to the array of aid out there. To get the best possible deal, the financial pros advise you to stay calm, start early and shop around. Here's a road map:

Before your first campus visit, try to have a financial-aid meeting with a high-school guidance counselor. A good one can help you decode complicated forms, as well as find scholarships, grants and loans from state, federal and private sources. Then, as you begin strolling the ivy-covered buildings, make sure to stop by the financial-aid office. You should begin aid discussions with universities as early as a student's sophomore year of high school. Don't wait until the fat envelope, with its offer of admission, arrives. By then, others will already be lapping up the aid. Never assume you're too wealthy to qualify for aid. Skidmore economics professor Sandy Baum has kids on financial aid at Cornell and Northwestern. "Anyone who thinks financing college will be diffi-cult should apply for financial aid," she says. "Need doesn't mean you're poor." The key to unlocking the financial-aid treasure chest is proving "need." That's determined by a federal form known as the Free Application for Federal Student Aid (FAFSA). Many private colleges also require The Profile, an aid form administered by the College Board. The Feds use a complicated formula that looks at income, assets and liabilities to decide how much parents can afford to pay. Many schools don't require the forms until March 1, but the experts say not to wait that long. Instead, use the annual income info from your most recent year-end pay stub to fill out the FAFSA, and file it as soon as you can after Jan. 1 of a child's senior year. Three to six weeks later, you'll receive a Student Aid Report that explains whether your child qualifies for a Pell grant, which is given to low-income families. (In the summer of 2003, the Feds were considering a FAFSA formula change that would cut Pell grants by $270 million, but lawmakers were trying to block it.) About two weeks after that, you'll get financial-aid letters from the colleges you're considering. Those letters will detail all elements of aid and parental payment required. All this can be done before your child has even been admitted to college.

But this is where it gets interesting. Financial-aid officers won't tell you this--and most discourage it--but you can negotiate, pitting one school's financial-aid offer against another. This is particularly true if your child has a high GPA or is a student leader--the kind of kid who burnishes enrollment statistics. For example, in 2001 Parisa Baharian squeezed more financial aid out of the University of California, San Diego, for a Washington internship.

The reality, though, is that there's just not as much free money to go around anymore. A decade ago grants accounted for half of all student aid. Today loans make up 54 percent, while grants have fallen to 39 percent. That's why the average undergraduate now shoulders $18,900 in debt, up 66 percent since 1997, according to loan provider Nellie Mae. The best source of free money now is scholarships. And students can start writing those scholarship essays before sen-ior year. There are hundreds of private scholarships offered by companies, and civic and fraternal organizations. For a list, go to scholarshipamerica.org, a nonprofit clearinghouse for private scholarships.

But for most students, loans are as necessary as books. The good news is that falling interest rates have made loans a bargain. Federal Stafford loans now carry a record low rate of 2.82 percent for current college students and a 3.42 percent rate for freshmen. Better yet is the subsidized Stafford, which the Feds pay interest on while your child is in school and for six months after gradu-ation. Both kinds of Staffords require no payments until six months after graduation, but loan amounts are limited to $2,625 for freshmen, $3,500 for sophomores and $5,500 a year for juniors and seniors.

One more choice is a federal Perkins loan, which has a 5 percent rate but no lending limits, and payments don't begin until nine months after graduation. For more money, parents can share the burden with federal PLUS loans with a 4.22 percent rate. The downside: Mom and Dad must begin paying 60 days after the loan is issued. For information on all these loans, go to salliemae.com. The best way to dodge big college debts is to start saving early. To avoid being overwhelmed, the pros advise breaking the cost of college into thirds. One third comes from savings, one third from financial aid or current income and the final third from future income (loans). Then you really have to save only one third of college costs--still plenty, but not quite so daunting.

So where to start saving? The best options are tax-free: state-sponsored 529 savings plans and federal Coverdell Education Savings Accounts. The 529 plans allow parents to sock away as much as $305,000 per child (in total, with no annual limit), with the earnings on that money tax-exempt if spent for college. Contrary to some public perception, contributions to 529s are not deductible on the federal level, but 26 states do offer tax breaks on contributions invested in those college funds. Like the rest of the market, 529s have lost value in recent years. Another possibility: IRA-like Coverdell accounts, which are offered by banks, brokers and mutual-fund companies, and allow an investment of $2,000 a year per child. But that money can be used, tax-free, for both college and K-12 private school. One more option is state-run 529 prepaid tuition plans, which are guaranteed to cover the cost of in-state public-college tuition no matter how the stock market turns. But the cost of prepaid tuition plans is rising rapidly as states scramble to keep pace with tuition. Details on all these plans are at savingforcollege.com, a Web site created by CPA Joe Hurley, a 529 expert.

The Donelans have discovered how hard it is to keep up with education inflation. That's why they are already hunting for financial aid for their 10-year-old son Jack. "He wants to go to Notre Dame," his father, Bob, says wearily. "I know that's expensive." When it comes to paying for college, it's never too early to get started.

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