CHAPTER 8

PAYING FOR COLLEGE

61. I need to take out a private student loan for college. Whom can I trust? What should I look for?

 

A: I must preface this answer by throwing a question back: Are you sure you need private money? Have you exhausted all of your other options? Let’s check them off:

• Federal loans. These are the cheapest way to borrow money for college, and they come with all kinds of perks that private loans don’t have, such as deferment if you are without a job and extended repayment terms. Look into the Stafford loan and Perkins loan for yourself, and PLUS loans for your parents.
• Grants and scholarships. Free money! There is more than $3.4 billion in scholarship money available, provided you meet certain requirements. Some scholarships are distributed on the basis of need, others on the basis of merit. For more on how to find one, see Chapter 8.
• P2P loans. I talked about these loans a bit in the question “Is it safe to borrow from people whom you don’t know?” in Chapter 1, but many students are finding the money they need for college through peer-to-peer lending Web sites such as Prosper.com and LendingClub.com. So many, in fact, that there is now a service specific to college students that is worth checking out, called GreenNote.

If you’ve blown through all of these options and still need money, then yes, your last option would be a private lender. Private loans come with higher and often variable interest rates, as well as longer terms—and they’re tougher to come by during a credit crunch. That puts the onus on you to do your homework.

Start with your school’s financial aid office, which should have a list of preferred lenders. Often, lenders will provide discounted rates to certain universities, so getting your hands on this list is important. But it doesn’t mark the end of your research. You want to compare lenders, taking into consideration the following:

• The term of the loan. A low monthly payment on a 25-year loan may sound good, but not when you compare it with how much you’d save in interest if you went with a 20-year term instead.
• The interest rate. As I was writing this, interest rates on private student loans were averaging 10% to 12%.
• Any perks the lending company offers, such as a reduction in rates after you consistently pay on time for six months or a year, or a variety of repayment plans.

One note: Every time you apply for a private student loan, the lender looks at your credit history, which hurts your score a bit. Do a little homework first, both online and at your school’s financial aid office, to narrow down your options. Then apply for just the financing that ranks highest on your list.

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THE MATH

The average private student loan carries a variable interest rate of 10% to 12%. Subsidized federal Stafford loans disbursed after July 1, 2006, have a fixed rate of 6.8%, and those disbursed between July 1, 2008, and July 1, 2009, are fixed at 6%. Let’s say you borrow $20,000 over the course of college. Here’s a comparison:

 

Private loan:

Interest rate: 11%

Loan term: 20 years

Monthly payment: $206.44

Cumulative payments: $49,543.59

Total interest paid: $29,543.59

 

Subsidized federal Stafford loan:

Interest rate: 6.8%, fixed

Loan term: standard (10 years)

Monthly payment: $230.16

Cumulative payments: $27,619.31

Total interest paid: $7,619.31

 

As you can see, the difference in interest paid—$21,924.28—is huge. Wouldn’t you rather have that money in your pocket?

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I Also Need to Know…

Q: Do I need a good credit score to get a loan?

A: Federal loans aren’t based on credit score, but private loans are, so yes, you need a decent credit score. The typical lender will have five or six credit levels for scores between 650 and 850. If your score is in the 650 range, you’re looking at subprime borrowing, meaning you’ll pay more in interest and possibly even fees. The higher your score, the lower your interest rate. However, most lenders will allow a cosigner. In fact, even if you’re eligible to take out the loan on your own, you might ask a family member to help you out if he or she has a higher score. It could save you a lot of money in the long term.

 

Q: How can I get information on student loan forgiveness programs?

A: Loan forgiveness programs cancel all or part of your loan, but they are generally available only to people who work in public service, and only then for public, not private, loans. The list of jobs that may qualify includes public defenders, prosecutors, police, firefighters, teachers, and librarians. To find out more, ask your financial aid department or visit www.ed.gov, the Web site of the U.S. Department of Education.

If you don’t qualify for loan forgiveness but you’re struggling to make the payments on your loans, federal loans allow you to change the repayment plan to lower your monthly payments. For a list of repayment options, turn to Chapter 8.

And finally, if things are looking grim, federal loans also offer forbearance and deferment, which can suspend or significantly reduce your monthly loan payments for a period of time. Typically you can do this for up to a year at a time and no more than three years total.

Q: If my loan is forgiven, am I taxed?

A: You will probably be taxed on the amount forgiven, as the IRS views it as income. But there are a few nitpicky exceptions, so you want to talk to an accountant before you file your taxes in the year of the write-off. In general, the forgiven amount won’t be taxed as income if you were required to work for a set number of years in a certain profession in order to qualify.

 

62. What are the rules for consolidating student loans?

 

A: You might remember that there was a lot of buzz a few years ago about consolidating student loans, because nearly everyone had variable-rate loans, meaning that rates adjusted once a year. When that variable rate dipped lower than it had in years, borrowers rushed to consolidate and lock in the historically low rate for the life of the loan.

Now, all federal loans that originated after July 1, 2006, are fixed-rate loans, meaning that the interest will stay at 6.8% for the life of the loan. As a result, consolidating these loans isn’t necessary—in fact, doing so will increase your interest rate by 0.075%. Not much, but certainly something.

If, however, you have federal loans that originated prior to July 2006, and you haven’t consolidated, you may want to do so, provided that the interest rate you’ll receive is lower than the one you have now. Look for a consolidator that provides a couple of perks for doing the deal—the first is an automatic reduction in your interest rate for electing to have your payments electronically drafted out of your checking account. It should be one-quarter of 1%. The second is a later reduction in your interest rate—typically a full percentage point or two—for making 24, 36, or 48 payments on time. Since you can ensure your timeliness with electronic payments, this decision is a no-brainer.

As far as rules go, there aren’t many. Students and parents can consolidate education loans, although they must do it separately. The same goes if you’re married—you can’t consolidate your loans with your spouse’s loans. Student loans may be consolidated during the grace period or in repayment, but parental loans can be consolidated at any time.

I Also Need to Know…

Q: Do I need to consolidate with my current lender?

A: You don’t, and you may find that you can’t. Many student loan companies have backed away from consolidation, because it’s just not that profitable. You may need to shop around. Some lenders will require a minimum balance, generally $5,000 or more. You can also consolidate loans—federal or private—through the Federal Direct Consolidation Loan program at www.loanconsolidation.ed.gov, which is my recommendation. There is no minimum balance requirement.

 

Q: Does consolidating cost money?

A: No, and if a lender tries to charge you a fee, find a different lender.

 

Q: Why would I consolidate if I can’t lower my interest rate?

A: To reduce your monthly payments. Consolidating can extend the life of the loan. Consolidation loans—and federal student loans—offer a variety of payment plans, so you can repay your balance over 10, 20, even 30 years. The longer the loan term, the lower your monthly payments will be—but the more you’ll pay in total interest.

On the flip side, you can also prepay federal loans, just as you can prepay your mortgage, which will bring the term of your loan down and lessen the total interest. Just be sure to include a note to your lender that the payment should be applied to the loan principle, and note that you will need to continue to make monthly payments as usual.

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A BRIEF GUIDE TO FEDERAL LOAN REPAYMENT PLANS

• Standard: You pay a fixed monthly amount for up to 10 years.
• Extended: Allows you to stretch out the loan term (anywhere from 12 to 30 years, depending on your loan amount). You’ll pay less each month but more overall because of interest. This is available only for loans greater than $30,000.
• Graduated: You’ll start off with a lower monthly payment, which will gradually increase every two years. Again, the term is 12 to 30 years, and the monthly payment must be at least $25 or the amount of accrued interest each month, whichever is greater. The idea here is that as time goes on, you’ll earn a larger salary.
• Income-contingent repayment: Payments are based on your income and the total amount borrowed. Monthly payments are adjusted as your income changes, and the loan term is up to 25 years. At the end of the 25 years, any remaining balance will be forgiven. Note: That amount may be taxable.
• Income-sensitive repayment: The loan term is 10 years, and the monthly payment is a percentage of total monthly income, before taxes.
• Income-based repayment: This is new as of July 2009. It is like income-contingent repayment, but it limits the monthly payments to a lower percentage of discretionary income.

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An Example

Jimmy has $35,000 in direct Stafford loans at a fixed interest rate of 6.8%. His income is $50,000 a year. Here are his monthly payments by repayment plan:

 

Standard

• Term: 10 years
• Monthly payment: $402
• Interest paid: $13,333
• Total paid: $48,333

Extended

• Term: 25 years
• Monthly payment: $243
• Interest paid: $37,879
• Total paid: $72,879

Graduated

• Term: 10 years
• Monthly payment: starts at $279; ends at $604
• Interest paid: $15,944
• Total paid: $50,944

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63. What’s the first step in saving for college for my child?

 

A: The first step is saving for retirement for you. I know that sounds selfish, but as I often say: There is no financial aid for retirement. There is plenty of financial aid for college. Once you’ve maxed out your 401(k) or IRA or other tax-advantaged retirement savings option, saving for college can begin.

And it should begin with a savings target, which means that you need an idea of how much college is going to cost and how much of these costs you aim to cover. Most parents don’t foot the entire bill these days. But saving without a goal rarely, if ever, works.

The College Board (www.collegeboard.com) says that over the past decade, tuition and fees have risen at an average rate of 2.4 percent per year after inflation at private four-year colleges, and 4.2 percent at public four-year colleges. (You can view recent pricing trends at particular schools by doing a quick search at www.nces.ed.gov/ipeds/cool/.) Right now, one year at an in-state public college costs an average $18,326, while one year at a private college costs an average $37,390.

I have two teenagers, so I know: Those figures are scary. The reality is that most parents are not going to be able to save enough to cover the full amount, particularly if they have more than one child. If you’re looking for a general guideline, aim to save one-third before your child goes to school, figure you’ll pay one-third out of current cash flow, and that you’ll borrow the remainder. If you overshoot the mark, all the better.

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A QUICK GUIDE TO THE COMMON COLLEGE SAVINGS TOOLS

• 529 college savings plan: Plans are developed by individual states, with every state offering at least one and some states offering more. In most cases, however, you do not have to invest in the plan in your home state if it doesn’t meet your needs. However, you might get additional benefits for doing so, such as a deduction on your state income tax return. You’ll make contributions to the plan with after-tax dollars, and if you use the money to pay for college, withdrawals can be made tax free. When you use money for purposes other than education, federal law imposes a 10% penalty and income tax on earnings. There are a few exceptions, though, including if the beneficiary of the account dies or becomes disabled, or if scholarships negate the need for the money. You can also change the beneficiary to another family member, in case one child decides to pass on college.
• Coverdell Education Savings Account (ESA): You make a nondeductible contribution into an investment account (you decide how the money is invested), and the money grows tax free. There is a contribution limit of $2,000 per child per year, and the money can be used for elementary and secondary education expenses, as well as for college expenses. However, if it’s not withdrawn by the time the beneficiary reaches age 30, there will be penalties and taxes assessed. You can also no longer fund the account once the child turns 18. If the money is not used for college, the parents can’t take it back—it is automatically distributed to the child named as the beneficiary. Note that unless Congress makes changes, certain benefits of the Coverdell are set to expire in 2010, including the ability to use the money for elementary and secondary education. The contribution limit will also be cut back to $500. There are bills being put forth by Congress to make those benefits permanent, but as I was writing this, they hadn’t been passed.
• UGMA account: A product of the Uniform Gifts to Minors Act, this account contains money owned by the child—in other words, gifts from relatives and friends or money the child earns. Minors can’t open an investment account in their own name, so parents or guardians are custodian of the funds until the child reaches adulthood. When your child is old enough (18 or 21, depending on the state), he or she will have total control over the account. In the meantime, though, the parent must file a tax return on behalf of the child, and income from the UGMA account will be taxed at the child’s tax rate, often low or even zero. These assets are also considered the student’s for financial aid calculations, which means they will hurt eligibility more than parental assets would. To avoid this issue, you can convert an UGMA account into a 529, called a UGMA 529 or a custodial 529. If you do that, the assets will be assessed at the parental rate, as they are with a 529 account.
• Roth IRA: For any parents trying to straddle the college–retirement line—a Roth IRA is a no-brainer. You put after-tax money into a Roth. It then grows tax free until you pull it out in retirement (you actually never have to withdraw from a Roth, as you can leave it to future generations). But you can also pull out contributions at any time (since you’ve already paid taxes) and earnings (after 5 years, although you’ll pay taxes on the earnings if you use them for education and not retirement) and use the money for education or to buy your first house. That makes a Roth a terrific choice for anyone trying to save for college and retirement simultaneously. Annual contribution limits in 2009* are $5,000 for those younger than 50 and $6,000 for people who are older. You are allowed to make the full Roth contribution as long as you earn no more than $166,000 a year (if married, filing jointly; $105,000 if single). Once the money is in the Roth, you can invest it as you see fit. And note: In 2010, a traditional IRA can be converted to a Roth with no income restriction.

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I Also Need to Know…

Q: What do you think about savings programs such as Upromise?

A: These programs work by depositing money in a college savings plan when you shop at certain retailers or buy certain products. I think that they’re great, provided you’re getting the bonus on things you’d be buying anyway and you’re not being charged for the program itself. With most, you register your credit cards and the programs keep track of your purchases, giving you a little kickback when your spending qualifies for one. Some programs offer credit cards themselves, giving you the opportunity to earn more rewards for your daily spending (a great bonus, but worth it only if you are paying off those cards each and every month).

Does that mean that you should buy a new television because you’ll get cash back? No, but if you need a new television and one store participates in your savings program while another does not, then sure, you might as well spend your money at that first store and get a little boost for your college savings plan in the process. Check out the chart that compares a few of the bigger programs.

 

PROGRAM: Upromise: www.upromise.com

COST: None

TERMS: Register your credit or debit cards and get 1%to 25%back when you shop online through www.upromise.com; 8% back from restaurants; 1% to 3% back at the grocery store or drugstore on eligible items. You can invite your friends and family to join and contribute their rewards to you.

NUMBER OF PARTICIPATING RETAILERS: 600 online retailers through www.upromise.com; 8,000 participating restaurants; more than 21,000 participating grocery stores

 

PROGRAM: LittleGrad: www.littlegrad.com

COST: None

TERMS: You register and download a Little Grad Savings Manager that tracks your online purchases. Participating retailers give back a percentage that varies, usually 2% to 10%. You can ask friends and family to register and contribute to your account as well.

NUMBER OF PARTICIPATING RETAILERS: 2,000 online services and stores.

 

PROGRAM: BabyMint: www.babymint.com

COST: None

TERMS: Contributions range from 1%to 26%of total purchases. You can have your rebates sent to you by check, deposited into your college savings account, or applied as a payment on a student loan.

NUMBER OF PARTICIPATING RETAILERS: 500 leading merchants, in areas such as travel, apparel, restaurants, electronics, home, pharmacies, and grocery stores.

 

PROGRAM: Futuretrust: www.futuretrust.com

COST: No annual fee, but because it’s a credit card, you’ll be charged interest if you don’t pay off your balance each month. Interest rates vary depending on your credit history.

TERMS: You must apply and be approved for the Futuretrust MasterCard. Once you are, you’ll earn 1% of your purchases as a rebate into a 529 college savings account. Partner merchants offer an additional rebate, up to about 10%.

NUMBER OF PARTICIPATING RETAILERS: There are more than 500 partner merchants who offer additional rebates.

 

64. How can I figure out how much financial aid my children are likely to receive for college?

 

A: There are two tools that I’d recommend. The first is from the Department of Education itself. FAFSA4caster (www.fafsa4caster.ed.gov) allows parents to estimate eligibility early. It’s aimed at high school juniors, but you can use it at any time. In fact, if your kids are young, you can even create scenarios that are based on future earnings.

The second is the Expected Family Contribution Calculator from FinAid.org. Also an estimate, this is based on the methodology that the federal government uses in calculating aid. As a result, it’s pretty accurate. You can also run the numbers on the basis of what’s called institutional methodology, which is close to the formulas used by most private schools.

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THE FAFSA LINGO

• Cost of attendance: The total amount it will cost you to attend that college or university per year. As long as you’re attending at least half time, the cost of attendance includes the tuition and fees, room and board (or living expenses for students not living on campus), books, supplies, transportation, loan fees, an allowance for dependent care (if the student has children who need to be cared for while the student is in class), costs related to disability, and study-abroad costs, if the student participates in international study programs. But you don’t have to add these numbers up yourself—the school establishes them.
• Expected family contribution (EFC): This number is used to determine whether you’re eligible for federal student aid, and how much you will receive. It’s not, however, the amount that you will be responsible for paying. It helps a college calculate how much aid it can give you if you choose to enroll.
• Financial aid package: The college you choose to attend will wrap together all the aid you’re eligible for to meet your cost of attendance. The result is the total money offered, including federal student aid and outside sources such as scholarships or grants.
• Need analysis: This process determines how much your family can reasonably contribute toward education, on the basis of income, assets, and living expenses. The result is the EFC. Combined with the cost of attendance, this number is used by the school to award grants, campus-based aid, and loans.
• Student aid report: Once you’ve completed your FAFSA, you’ll receive this report, a summary of the information you submitted and the EFC that was calculated.

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I Also Need to Know…

Q: What is a Pell Grant?

A: A Federal Pell Grant is for undergraduate students, and unlike a loan, it doesn’t have to be repaid. These grants are need-based, and the amount awarded depends on your EFC, the cost of attending a particular school, and whether your child is attending full-or part-time. In 2009–2010, the maximum Pell Grant award is $5,350 (it was increased by $500 as part of the American Recovery and Reinvestment Act of 2009). This figure changes each year.

Once you receive a Pell Grant, that amount will be added to the EFC and any other aid you’ve received, and the total is subtracted from the school’s cost of attendance. The result represents your remaining financial need.

Q: What about work-study programs?

A: Work-study can be helpful as part of a financial aid package. The program isn’t available at every school (the Department of Education says there are approximately 3,400 participating institutions), but it is something to consider if your school offers the option. You’ll earn money through a part-time job, either on campus or at a nonprofit or public agency that relates to your degree program, that you can use to help pay for school. It’s up to the college to award work-study jobs to students on the basis of financial need. Students are paid by the hour (at least minimum wage).

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THE STATS

• $143 billion: Amount of financial aid distributed to undergraduate and graduate students in 2007–2008.
• $8,896: Average amount of financial aid received by full-time undergraduate students in 2007–2008.
• 5.4 million: The number of Pell Grant recipients in 2007–2008.

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65. Where can I find scholarships and grants for college?

 

A: Start locally, as scholarships specific to your town, state, or county automatically cut down on competition. The fewer people who qualify to apply, the greater chance you have of winning. First, make a list of your interests, strengths, extracurricular activities, intended major, and anything else that sets you apart.

Then head to your school’s guidance counselor, who can tell you about the awards for which you might be eligible. If you’ve worked or volunteered throughout high school, ask your employer or organization if it offers any money to employees or affiliates. Have your parents ask at their jobs, too.

Once you’ve maxed out the options locally, it’s time to search on a national scale. There are a number of free scholarship search services out there, but my favorites are FastWeb (www.fastweb.com) and the College Board’s search engine (www.college board.com/scholarships). These sites have upward of $3 billion worth of scholarships listed in their databases.

If you’ve already decided on a college, or you have a few in mind that you like, call the financial aid office (or offices) and see what the school itself offers. You’ll likely find a few that apply to you and your major.

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THE MATH

Is spending your time searching for scholarships worth it? Without a doubt, yes. Take this small, $1,000-a-year, $4,000 total scholarship as an example. See what it saves you in borrowing costs:

• Stafford loan: $15,000
• Interest rate: 6.8%
• Loan term: 10 years
• Monthly payment: $172.62
• Total paid: $20,714.49
• Interest paid: $5,714.49

• Stafford loan: $11,000
• Interest rate: 6.8%
• Loan term: 10 years
• Monthly payment: $126.59
• Total paid: $15,190.52
• Interest paid: $4,190.52

Savings: $1,523.97 in interest; $5,523.97 overall

• Private student loan: $20,000
• Interest rate: 9%
• Loan term: 20 years
• Monthly payment: $179.95
• Total paid: $43,184.79
• Total interest paid: $23,184.79

• Private student loan: $16,000
• Interest rate: 9%
• Loan term: 20 years
• Monthly payment: $143.96
• Total paid: $34,547.83
• Total interest paid: $18,547.83

Savings: $4,636.96 in interest; $8,636.96 overall

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I Also Need to Know…

Q: I found a scholarship-search Web site that charges a fee. Is it worth it?

A: No. Not only are there plenty of free ways to find scholarships, but if a site or scholarship charges you money, it may be a scam.

Other scholarship-related red flags from the FTC:

• “The scholarship is guaranteed or your money back.”
• “You can’t get this information anywhere else.”
• “I just need your credit card or bank account number to hold this scholarship.”
• “We’ll do all the work.”
• “The scholarship will cost some money.”
• “You’ve been selected by a ‘national foundation’ to receive a scholarship.”
• “You’re a finalist in a contest you entered to receive a scholarship.”

Q: I’m in my thirties and want to get my degree. Are there scholarships for me?

A: There are. In fact, the bulk of scholarships out there don’t have age requirements or restrictions. A recent search for awards on the College Board’s scholarship site for “returning adult student” received 74 hits. FastWeb says it lists 50 awards that have a minimum age of 30, 230 that have a minimum age of 25, and 1,800 that have no age restrictions at all. You should also check with your employer if you’re going to attend college while working part-time. Often companies offer internal scholarships, or they’ll supplement a portion of your tuition if your education will help you advance at work.

You should also know that you’re also eligible for federal student aid, which carries no age restrictions. In fact, since you’re an independent student, you can take out even more in unsubsidized Stafford loans—an additional $4,000 each year when you’re a freshman and sophomore and $5,000 a year as a junior or senior.

66. How do I pick a 529 plan?

 

A: There are two kinds of 529 plans, both labeled 529 for the section of the tax code that created them.

• A 529 college savings plan, the more popular type, works like a 401(k) or an IRA. You’ll make contributions into an account, and that money is then invested. You have control over the diversification of your investments, and your account’s value will go up or down depending on the choices you’ve made and the market’s fluctuations. Your contributions are made with after-tax dollars, but you may get a tax deduction—or some other benefit—for making your contribution, depending on the plan you choose. (More on this momentarily.) The value of the money in the account grows tax free to pay for education.
• A 529 prepaid tuition plan, however, lets you pay ahead of time either all or some of the tuition for in-state colleges. You lock into the cost of tuition at the time you pay it—which represents a large savings, considering that college tuition rates have been rising at about 6% annually during recent years. If your child decides that he or she wants to attend a private or out-of-state college, you can convert the prepaid plan so that the money goes toward that school. But depending on the plan and its rules, you may lose some or all of the growth on that money. Some colleges offer prepaid 529 plans of their own.

With both types of plans, should your child decide not to go to college, the money can be used to pay for education for another member of the family. If by the time that last family member hits age 30 it has not been used for education, you’ll have to pull it out of the account and pay a 10% penalty as well as taxes on the income at your current rate.

Once you’ve decided on a 529, you need to pick a plan itself. Picking a 529 is a lot like picking a mutual fund. Most states have more than one 529 college savings plan. You’ll want to compare and contrast the ones in your state with the ones in others across the United States regarding investment options, perks, expenses, and performance. Start with the plan(s) from your home state (they will be the only ones to offer you perks), but don’t stop there.

• Performance. Some 529s came through the market melt-down of 2007–2009 with barely a scratch. Others did not. Go to www.savingforcollege.com or www.morningstar.com for a list of the best performing 529s. Look at how they handled the assets of young children as well as how they handled those of children ages 15 and 16.
• Investment options. Any plan you consider needs a menu of investments in line with your goals. If you’re risk adverse, look for a plan that includes a CD so that at least a portion of the money that you invest is FDIC insured. If you’re aggressive, however, you probably want a 100% equity option, which isn’t offered by all states. Most likely, you’re somewhere in the middle. I recommend looking for a plan with age-based investment options, which works like the target-date retirement fund you may be using in your IRA or 401(k). When the child is young, your investments will be heavy on stocks; as he approaches college age, the plan will rebalance to be more conservative.
• Expenses. Most plans are going to charge you a percentage of your money, but the exact amount will vary by plan and state. Shop around and compare the fee tables in the disclosure materials of a few different plans to get a good sense of how much you’ll pay over time. Savingforcollege.com does an ongoing fee study comparing the lowest and highest 10-year expense totals for all direct-sold 529 savings plans. It’s worth checking out, as the costs do vary. As I was writing this, fees accumulated on a $10,000 investment over a 10-year period ranged from $2,444 (Montana Pacific Life Funds 529) to $320 (Louisiana START).
• Perks. Many states offer incentives for people who save using the state 529 plan, including tax deductions or credits for contributions made. There are a few that will extend these tax incentives to people who invest in a plan out of state (Arizona, Kansas, Maine, and Pennsylvania), but that’s more the exception than the rule.

If you find that your state’s plan isn’t up to snuff, you can go out of state and check out other plans to find one that suits your needs. Just check each plan’s rules and regulations first. Some have residency restrictions.

I Also Need to Know…

Q: Are there contribution limits or eligibility requirements for 529s that I need to be aware of?

A: As these plans are set up by each state, eligibility requirements vary. But in general, anyone can open a plan, and contribution limits are quite high—often $300,000 plus for each beneficiary. There are usually no age restrictions or income limits, but withdrawals will be subject to a 10% penalty and taxes if the money isn’t used for education.

 

Q: My parents want to save for my children’s education too. Can they contribute to a 529 plan as well?

A: They can, and in fact, that is probably the best way for them to assist you. They can open a 529 plan in their own names, or they can make a contribution to your account if your particular 529 plan allows for that (some don’t). The difference is that if they are the owner of the account, the money remains theirs, meaning that they have control over it and can change the beneficiary if they choose (Note: The money must still be used for education if they want to avoid paying taxes and penalties. But if, for instance, your children decide not to go to college or don’t need the extra help, your parents can change the beneficiary on the account so that the funds go to another grandchild). Either way, the contributions are considered a gift to the account’s beneficiary.

If they decide to give up control of the money and make contributions to your account, they’ll need to send the check directly to the plan, making sure to follow the guidelines for third-party contributions (you can find these on the plan Web site or by calling customer service), or give cash that can be deposited into the account by the parents.

67. Is a high-priced private college worth the cost?

 

A: I think that every parent—and student—has this internal debate. Do you pay the big bucks for a name like Harvard, and then spend the next 20 years working your way out from under student loan debt, or do you go to a lesser-known in-state school and walk out with little or no financial stress?

Recent research from Princeton Review and USA Today (a study called “Best Value Colleges for 2009,” found at www.usatoday.com/news/education/best-value-colleges.htm) shows that it may not be as much of an issue as we think. Ivy League schools such as Princeton and Yale come with a heck of a sticker price—more than $48,000 a year when you factor in tuition, room and board, books, and fees—but the school also gives out more than $35,000 on average in need-based grants. Ninety percent of those who request aid qualify for it, and for those who do, 100% of their need is met. You can find a list of the best-value public and private colleges on Princeton Review’s Web site at www.princetonreview.com.

The lesson? Don’t let a school’s sticker price be its defining factor. One of the worst mistakes you can make, in fact, is crossing a college or university off your list because the cost doesn’t seem feasible. There is no way to know how much assistance you’ll be eligible for until you file that FAFSA form (for more on this, turn to “How can I figure out how much financial aid my children are likely to receive for college?” in Chapter 8) and apply to the school.

That said, once you’ve been accepted to a few schools and you have the financial aid packages in hand, you do need to start making judgments. If the options are all workable financially, schedule a few visits. Not only do you want to look around campus and get a feel for the students, the landscape, the dorms, and whether you’d fit in, but you also want to spend some time with administrators and current students and ask questions:

1. Do they have the major you’re interested in—or at least one that is similar? If not, there is no point in going further.
2. Do they have a study-abroad program? Even if the thought of a semester in a different country is overwhelming at this point, your interests may change over time. Having the option is valuable.
3. Are there clubs or activities you can see yourself participating in? If you play a sport, would you be able to join a team, either on the college level or through an intramural program?
4. Are the class sizes and structures conducive to the way you learn best?
5. Where are the school’s graduates working?
6. How soon after graduation are they able to find jobs?
7. What graduate programs are graduates attending?

I Also Need to Know…

Q: Is there a way to find out about a college’s typical financial aid packages before I apply?

A: Yes. You can find 200 schools in the study I mentioned earlier, “Best Value Colleges for 2009” from Princeton Review; see www.usatoday.com/news/education/best-value-colleges.htm and www.princetonreview.com/best-value-colleges.aspx. It’s a small group, though, and if your school didn’t make the cut, you’ll have to take matters into your own hands. For initial research, there are about 2,000 additional schools listed on the Princeton Review Web site (www.princetonreview.com). If that doesn’t satisfy your needs, call the school directly or schedule an on-campus visit. Financial aid representatives there should be able to tell you the average aid package over the last few years.

 

Q: I’ve heard that I should save my money on my undergraduate years and then shell out for the big names for grad school. Is this good advice?

A: The idea behind this advice is that a graduate degree tends to overshadow an undergraduate degree on your résumé. A potential employer may put more stock in the advanced degree and in the college or university where you earned it. This is true, but keep in mind one thing: You have to get accepted to a graduate school first, and your undergrad grades and where you earned them are integral to that process.

I’d pick a grad school exactly the same way I’d pick undergrad—by evaluating financial aid packages, looking at programs, and asking questions about the success and career paths of previous graduates. Of course you want to make sure that the program you enter is well respected, but there are thousands of prestigious programs throughout the United States offered by schools you may never have heard of. It’s worth it to do a little digging and see what you can come up with. If you’re happy at the school, you’ll likely do better.

Q: What about online degree programs?

A: They can be great if you’re balancing a family and work or you want to save some cash. But you must make sure that the school you choose is legitimate; otherwise, it’s a waste of money. A few points to check out:

• Accreditation. If the school isn’t recognized as a legitimate institution by regional or national accrediting agencies, find another option. It won’t help your résumé, and if you decide to transfer to a traditional school after a few classes, they likely won’t take your credits. You may also have trouble getting financial aid.
• Value. People often assume that these online programs are less expensive than community colleges or local universities, and that may not be the case. Compare costs, and keep in mind that many traditional universities offer online classes now as well.
• Customer service. Someone should be a phone call away if something goes wrong and you need technical support. If no one is, or if the program won’t give you a refund if you have to drop a class because of technical difficulties, that’s a problem.
• Interaction. Learning at home without other students around and a professor looking over your shoulder may sound great, but you’d be surprised how much you learn by asking questions and interacting with other students. Try to sign up for a program that either has chat rooms—make sure they’re active—or in-person meetings a few times a month.

Resources

Associations

College Savings Plan Network

www.collegesavings.org

A national nonprofit association dedicated to making college more affordable for families; access information about 529 plans, compare plans from many U.S. locales, and estimate costs with a college cost calculator.

 

Books

Best 368 Colleges, 2009 edition, by Prince ton Review (2008)

A report on the top 20 schools in 62 categories based on ratings from students.

 

The Best Way to Save for College: A Complete Guide to 529 Plans, by Joe Hurley (2008)

Detailed information on 529 plans, includes a state-by-state comparison of all 529 programs.

 

The College Board Guide to Getting Financial Aid 2008, by the College Board (2007)

A step-by-step guide explaining how to get financial aid; includes explanations of key financial aid terms and assistance with filling out the FAFSA (Free Application for Federal Student Aid).

 

The College Board Scholarship Handbook 2008, by the College Board

Information for undergraduates on more than 2,100 scholarship, internship, and loan programs, also includes a planning worksheet to keep track of applications.

 

FastWeb College Gold: The Step-by-Step Guide to Paying for College, by Mark Kantrowitz and Doug Hardy (2006)

Learn how to develop a plan to pay for college, apply for loans, find scholarships and grants, and steer clear of financing scams.

 

Fiske Guide to the Colleges, by Edward B. Fiske (2008)

A guide to more than 300 colleges in which each college’s listing is accompanied by an essay with information from students, administrators, and independent research; also includes a list of the 40-plus schools that deliver the best value for the cost.

 

Paying for College Without Going Broke, by Kal Chany (2008)

Advice on how to pay for college; includes the most recent financial aid forms, lists annual changes in tax laws, shows how to calculate your aid eligibility, and gives advice on how to negotiate with financial aid offices and information for those in special circumstances (single parents, in dependent students, etc.).

 

Government Organizations

FAFSA4caster

www.fafsa4caster.ed.gov

1-800-433-3243

Helps you estimate your eligibility for federal aid and provides advice on the financial aid process.

 

Federal Direct Consolidation Loan Program

www.loanconsolidation.ed.gov

Information from the government on how to consolidate your student loans.

 

Federal Student Aid

www.studentaid.ed.gov

1-800-433-3243

U.S. Department of Education’s site for free information, with resources for preparing for and paying for college; features tools such as a college savings calculator.

 

Free Application for Federal Student Aid (FAFSA)

www.fafsa.ed.gov

1-800-433-3243

Detailed information on the Free Application for Federal Student Aid; provides instructions on how to complete the form and allows you to fill out the FAFSA form online.

 

Federal Trade Commission

202-326-2222

Information for parents and students on how to avoid scholarship scams.

 

United States Department of Education

www.ed.gov

1-800-872-5327

Information about loan-forgiveness programs and on federal student aid.

 

U.S. Securities and Exchange Commission

www.sec.gov/investor/pubs/intro529.htm

1-888-732-6585

An introduction to 529 plans, with answers to FAQs.

 

Alternative Lenders

GreenNote

www.greennote.com

1-866-711-5620

Students can connect with those in their social network to ask for small student loans, and for a fee (2% of the total loan amount), GreenNote will formalize the transaction.

 

Web sites

College Board

www.collegeboard.com

1-866-630-9305

Information for parents on how to help pay for college; articles, information, and tips on how to find scholarships and aid; college savings calculators; and information on the pros and cons of college savings plans.

 

College Savings Plan Network

www.collegesavings.org

A national nonprofit association dedicated to making college more affordable for families; access information about 529 plans, compare plans from around the United States, and estimate costs with a college cost calculator.

 

FastWeb

www.fastweb.com

Information on millions of scholarships.

 

FinAid

www.finaid.org

Detailed information on student aid, including information on consolidation, answers to FAQs, a scholarship search, a loan consolidation calculator, the Expected Family Contribution calculator, a calculator of prepaid tuition and of 529 college savings plans, and tips on saving for college.

 

Prince ton Review

www.princetonreview.com

A wealth of information on undergraduate and graduate schools; includes free college test prep tools, a best-fit college search, information on choosing a major, rankings and lists, a scholarship search, a guide to financial aid, information on study abroad, and information on applying for college.

 

Savingforcollege.com

www.savingforcollege.com

Information on how to best prepare for college costs; includes information, tools, calculators, and a detailed guide to understanding 529 plans, including resources for comparing 529 plans and reviewing your state’s plan.

 

SimpleTuition

www.simpletuition.com

Search for a student loan that meets your needs; the site includes recent industry news, a student loan glossary, and tips for planning, saving, and paying for college.

 

Student Loan Borrower Assistance

www.studentloanborrowerassistance.org

617-482-0850

The National Consumer Law Center’s Student Loan Borrower Assistance project offers information for people who already have student loans and want to know more about their rights and options.

 

USA Today’s “Best Value Colleges for 2009”

www.usatoday.com/news/education/best-value-colleges.htm

USA Today and Princeton Review joined forces to bring forth a list of the 100 best value colleges for 2009; includes information on each school, statistics, and why it’s a great value.