These Days You Need A College Degree, To Learn How To Pay For A College Degree!

If you have a child planning to attend college sometime in the future and you want to pay the lowest price possible, you may need to hit the books even more than them. The problem is the cost of a college education is rising faster than the rate of inflation and the confusing financial aid rules make the income tax system look like simple grade-school math.

You may be aware of several tax breaks you can receive when you send your child to college. These range from tax deductions and credits, to tax-free withdrawals from 529 Plans and Education IRA’s.

But these various tax breaks will not come close to covering the full cost of your child’s education. If you hope to pay less than the “full sticker price” of a college education, you’ll need to learn how to navigate the complex financial aid system.

You will need to learn terms such as “FAFSA”, “Expected Family Contribution” (EFC), “Financial Aid Leveraging”, “Early Decision”, and “Student Aid Report“(SAR) and how they can affect the amount of financial aid you receive.

First, let’s discuss the two basic forms of financial aid: Need-Based and Merit-Based.

Merit-Based Aid tends to receive most of the attention from the media. However the vast majority of aid given by the schools and Government is Need-Based. Therefore no matter how strong your child’s academic record, it’s important to learn how to get your fair share of this huge pile of money.

Merit-Based Aid (as the name implies) is awarded on the performance, abilities, heritage, and various other qualities of your child. Some merit aid requires a specific form or application, but most is given by the individual colleges based on your admissions application. The stories you hear that “millions of scholarship dollars go unclaimed every year”, is largely a myth.

If you want to know where the BIG money is, it’s in Need-Based Aid. The name “Need-Based Aid” can be a little confusing because this aid is NOT really awarded based on what you need, but on how needy you appear at one point in time. Your actual wealth (or lack of it) may have little to do with how the colleges evaluate your situation. Also, what YOU think you need and what the colleges think you need will be completely different amounts.

Welcome to the wacky world of financial aid!

Americans like to complain about the IRS and income taxes, but our tax system is basically “fair” because the “rules of the game” (i.e. tax laws) are known and published.  So as confusing as the laws may seem, our Government actually wants you to know exactly how much to pay and when.

Unfortunately, the colleges don’t want to give you that much information. The less you know about what they do, the better for them.

Here’s a little secret most colleges hope you never learn: Let’s say two students apply to the same university. They have equal grades and abilities, plus their family’s income and assets are roughly the same. But…the colleges may charge them drastically different prices by offering more need-based financial aid to one student rather than the other.

Why?

More than likely the price difference is because one family may “look” poorer to the financial aid officers; although both families have similar financial resources. While this doesn’t seem fair, those families who know how the financial aid system works will tend to pay less. The key to unlocking the financial aid money is in knowing how the college financial aid officers “see” your family’s ability to pay.  

Let’s look at a simple example of how the price can be so different.

Both families have been diligent and each saved $10,000 to cover some of the education costs.  However they invested the money in different financial instruments.

One family saved their assets in a bank Certificate of Deposit (CD) in the child’s name; and the other saved it in their home equity by paying down their mortgage.

Well, it shouldn’t make a big difference because a $10,000 asset is still $10,000, right?

Wrong.

Unfortunately, to the financial aid officer it’s a HUGE difference where the money is saved and they’re the ones distributing the money.

Not taking any other information into account (and the colleges usually take EVERYTHING into account), the family that saved the money in the child’s name will be expected to come up with $2,000 MORE in the first year than the family that had the money in their home equity.

Now if you think that’s unfair, it can get worse!

If the family leaves the $10,000 in the CD in child’s name during all four years of college and doesn’t spend it down, the college will reduce the total financial aid offered by $8,000 (four years x $2,000 per year = $8,000), effectively charging them $8,000 MORE than the other family!

It’s shocking that a $10,000 savings in one place could cost you $8,000 in lost aid but that’s how the financial aid rules can work against you if you don’t know what you’re doing.

Before you believe that it’s ALWAYS bad to save money in a kid’s name during the college years, it’s NOT. Sometimes it makes good financial sense to put MORE money in a child’s name but you must be aware that everything depends on your family’s situation and the colleges your child is considering.  Unlike the income tax system, there are exceptions to every rule in the world of college funding. If you have any questions about the tax benefits available to college students or how to make the financial aid process work for you, call PRO-TAX at 1-800-809-2829 x4480.

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