Paying for college has always been a humbling endeavor. The good news: last year students collected $74 billion in financial aid, the most ever. Most families pay less than full freight. Sixty percent of public-university students and three quarters of those at private colleges receive some form of financial aid–mostly, these days, in the form of loans. But those numbers are not as encouraging as they appear for lower-income families, because schools are changing their formulas for distributing aid. Eager to boost their magazine rankings, which are based in part on the test scores of entering freshmen, they’re throwing more aid at smarter kids–whether they need it or not.
The best way to prepare is to start saving early. A new law passed last year makes that easier for some families. So-called 529 plans allow parents to sock away funds in federal-tax-free-investment accounts, as long as the money is used for “qualified education expenses” like tuition, room and board. The plans aren’t for everyone. For tax reasons, some lower- and middle-income families may be better off choosing other investments. But saving is vital. When’s the best time to start? “Sometime,” says Jack Joyce of the College Board, “between the maternity ward and middle school.”
Yet often kids reach college age and still don’t have enough put away. “America is not a saving culture,” says Milt Eisenhardt of Marlton, N.J.-based College Money. “The average family doesn’t have enough in their emergency account to do something like [a 529].” Experts suggest a “third-third-third” strategy: one third from savings, another third from current income and the rest from loans. And students should always apply for financial aid. “The biggest misconception is many families think they make too much money to qualify,” says Deborah Fox, a San Diego-based college financial planner.
Aid packages usually come in some combination of grants, loans and jobs. Colleges consider things like income, savings and other assets to determine an “expected family contribution.” If that ends up being, say, $5,000 a year, that’s likely the amount a family will end up paying–regardless of the school’s sticker price. Aid makes up the rest. These days 60 percent of all aid comes in the form of low-interest loans. All students are eligible for “unsubsidized” federal Stafford loans, which let them defer interest payments until after graduation. Students who can demonstrate need can also qualify for federal Perkins loans or “subsidized” Staffords, where the government pays the interest during school. Fortunately, this is a borrower’s market. “Interest rates are at their lowest level in the history of student loans,” says Mark Kantrowitz, publisher of Finaid. Kantrowitz expects rates to fall even further when they’re reviewed this summer.
Traditional scholarships, academic or athletic, are still a part of many families’ planning. Sara Pilzer, an Atlanta high-school senior, will probably choose to attend the University of Georgia in the fall–instead of an expensive private school like Yale–because Georgia offered her a prestigious fellowship. A straight-A student, Pilzer nabbed a full merit package–including $9,000 in travel stipends. Mack Reiter, a 17-year-old national wrestling champion, gets so many recruiting letters he throws most away. He’ll almost certainly get a free ride. Without it, “we would really be in a bind,” says his mother, Janet. For everyone else, it’s worth the effort to pick through local and national scholarship offerings, which can be found on Web sites like collegeboard.com.
What about the Harts? Her mother says Katie will get a job in college. And Tally and her husband have been saving all along. Her home state of Ohio offers a 529 plan. Last month she sent away for the application.
