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You Asked, We Answered...Where Can I Find Financial Aid to Help Me Pay for My Kids’ College?
By Elizabeth Lewin
ere’s a typical parental nightmare: Your teens are taking their SAT’s and making short lists of the colleges they’d like to attend. You’re taking aspirin and crunching numbers trying to figure out how to pay the tuition. With the tech crash of the last year, many college nest eggs have taken a dive in value, and parents are scrambling to make up the difference. At the same time, college costs have been rising faster than inflation. The good news is that financial aid is available to those who need it.
There are more than 700,000 scholarships available from more than 25,000 providers annually, The New York Times recently reported. Add to that aid available in the form of loans and tax credits and the picture begins to look less bleak. Still, getting your hands on some of that money takes careful planning and good timing. It’s more readily available if you know how, when, and where to apply. Here’s a course on college aid to help get you started.
Plan Ahead
The key to getting financial aid is to start planning early. Your student’s sophomore year of high school is not too soon. In fact, knowing all the in’s and out’s of eligibility rules will help you determine how best to make the most of the money you have, and you can put that knowledge to good use while your child is still in elementary school.
When your scholar is in 10th or 11th grade, schedule a visit with the guidance counselor for information about what’s available, based on your circumstances and your student’s scholastic and/or athletic record. Next, do some research at the school library, the public library and on the Internet. Some sites to check out: www.ed.gov, www.salliemae.com, www.Wiredscholar.com, Collegeboard.com, Scholarships.com, and FastWeb.com. Don’t forget to look into any scholarship funds that might be available through your employer, or through trade organizations or unions you might belong to.
When researching scholarship sources online, beware of for-profit companies that promise you the moon. Anything that sounds too good to be true probably is. In the last six years, the Federal Trade Commission (FTC) has sued nine companies for making fraudulent claims about their ability to secure scholarship money for clients. Their names are posted at www.ftc.gov. You’re better off sticking to the free resources online that provide you with the information you need to scout for funds on your own.
Rules You Need to Know to Win This Money Game* The family contribution is based on the income of the family unit and its available assets. In a divorce situation, the family unit is usually the mother and the child.
* Any money that you have saved outside retirement accounts, including money in the child’s name, is counted as an asset and reduces your eligibility for financial aid.
* Save money in your own name if you expect to apply for financial aid. Colleges will use up to 35 percent of money in your child’s name (custodial accounts) annually for college costs, but they will count only about 6 percent of the money in your name in their calculations, when determining how much aid you are eligible for.
* If you are divorced and looking for financial aid, it is in the best interest of your child to live with the parent with the lesser income. Some private schools will ask for a financial statement of the non-custodial parent as well.
* If the divorce agreement specifies that the father is to contribute $5,000 to his child’s education, that figure is considered part of the family contribution, whether he pays it or not.
* If the mother remarries, the stepfather's income will be included as money available for the family contribution. In some situations, it is wise not to remarry until your children are educated.
Tax Credits
Recently, two tax credits were enacted-—the Hope Scholarship and the Lifetime Learning credits. Parents who earn more than $100,000, filing jointly ($50,000 if single), are not eligible for these credits. The credit applies to each student in the household.
The Hope Scholarship Credit applies to qualified educational expenses incurred by you or your dependent during the first two years of college. The credit totals $1,500 per year—100 percent of the first $1,000 and 50 percent of the next $1,000. That’s enough for a qualifying student to attend a community college for almost nothing.
The Lifetime Learning Credit applies to the next two years of college. It allows a maximum credit per taxpayer (not per student) of 20 percent of the first $5,000 in expenses, or $1,000. The credit increases to $2,000, or 20 percent of the first $10,000, in 2003.
Note:
For each
qualifying student, you must choose to claim either the Hope Scholarship
Credit or the Lifetime Learning Credit. You don’t qualify in a
year that you take money out of
Government Grants
A grant is free money that does not have to be repaid. The largest source of grants is the Government's Federal Pell Grants. These pay out a minimum of $400 up to a maximum of $3,750 for the lowest-income undergraduates. If your income goes up, the grant is reduced.
Federal Supplemental Educational Opportunity Grants (FSEOG’s) are also available to low-income students, who can't get funds anywhere else.
Go to www.ed.gov for more information about applying to either of these.
States provide grants to some residents, and colleges provide grants in the form of scholarships for exceptional students. Employers, churches, and service organizations (Rotary Club, etc.), and national funding organizations, such as the United Negro College Fund, are other good sources of scholarship money.
Loans
If a college says you do not qualify for need-based grants and loans, you can borrow money from other sources-—providing you pass a credit check. Among the possibilities:
Stafford Loans are offered by the U.S. Department of Education are either subsidized or unsubsidized, depending on income. First-year students may receive up to $2,625 annually; second-year students, $3,500; third- and fourth-year students, $5,500 if the loan is subsidized by the Government. The rate equals the 91-day Treasury bill plus 1.7 percentage points, adjusted annually with a cap of 8.25 percent. Repayment begins six months after the student leaves school, with the government covering the interest in the interim. F
The unsubsidized version of the Stafford loan is available to all families, whether or not they meet the Government’s qualifications for aid. The terms are similar, except that borrowers may choose to either begin interest payments immediately or defer them until after graduation.
PLUS (Parent Loan for Undergraduate Students) permits you to borrow the cost of tuition less the amount of financial aid your child is to receive from the school. You are not allowed to defer the interest payments until a later date. You do not have to demonstrate financial need, but you do need to have a good credit history. You begin to repay 60 days after the final loan is made.
Note: Interest on student loans that is repaid during the first 60 months after payments begin will be partially tax-deductible.
Borrowing from Yourself
Failing all else, you might want to consider borrowing against the equity
in your home. A home-equity loan is a line of credit secured by a
mortgage on your property. You borrow as you need the funds, by simply
writing a check. The interest rate is variable, usually based on the
prime rate, plus a margin. The chief advantage of the home-equity loan is
that up to $100,000 of interest is tax-
One more source of financial aid for college? Your retirement funds. Most 401(k) plans permit you to borrow up to one-half of your balance, up to a maximum of $50,000. The downside: The interest you pay is not tax-deductible, and the loan must be repaid within five years. If you should lose your job or quit while the loan is outstanding, you could be in trouble, because the debt is considered a distribution from the plan. That means the money is taxable as income to you and, if you are under age 59 1/2, it is subject to a 10-percent penalty for early withdrawal. And, remember, you are taking money away from your retirement funds.
Some Final Financial Lessons
In the years approaching your student’s matriculation, make a point of keeping on top of financial aid and tax changes that might affect your child’s college savings. Don’t wait until she or he is a high school senior to investigate your options. The most important lesson: never give up. There are many resources available to you, and if you are determined enough, you will find them. The payoff: with a college education, your son or daughter will stand a better chance of making mo’ money and someday, maybe he or she will pay you back. _________________________
Financial planner Elizabeth Lewin is the co-author of the recently published book “Family Finance” (Dearborn Trade). She is also the author of “Your Personal Financial Fitness Program,” “Financial Fitness for Living Together,” and “Kiss the Rat Race Good-bye.” Elizabeth has written articles for Redbook and Reader’s Digest’s New Choices, among other magazines, and she has appeared on numerous national radio and television talk shows. She is a member of the Editorial Advisory Board of MAKING BREAD Magazine. |
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