Playing To Win
School days, school days; dear old golden rule days." School's back in session, and whether your child is starting first grade or looking at college catalogs, one thing is certain: You're going to have to come up with some of that precious metal to keep those golden rule days on track. Paying the bill for a college education is often as much of a challenge as getting accepted. The cost of a private college education, including room and board, can reach hundreds of thousands of dollars, and many students are on the "study now, pay later" plan. Since 1992, when government student loans became available regardless of the recipient's income, millions of new borrowers entered the system. But there are more ways to finance a college education than loans, so here are some methods for getting the most from a combination of loans, savings and scholarships to help you and your child win the college tuition game.
The answer is: "A place where you and your children can look for low-cost college loans." If your question was "What is the Federal Family Loan Education Program?" you've won the daily double. Low-cost federally backed loans provide money to about half today's college students. The three low-interest loan programs are: Perkins Loans, a need-based loan with a 5 percent interest rate (available at most four-year colleges); Stafford Loans, the most popular student loan, with an 8.25 percent repayment interest rate (available to most students regardless of financial need); and PLUS (Parents' Loans for Undergraduate Students) Loans, which carry an 8.75 percent interest rate. (All interest rates quoted were current at press time.)
If these loans sound exciting, don't jump just yet. Most federal loan programs have strict borrowing limits ($2,625 for dependent freshmen, for example), so you'll have to muster additional funds elsewhere. For more information on federal borrowing programs, call (800) 891-4595 and order the free brochure called Borrowing for College, published by Sallie Mae, a Washington, DC, financial services company that funds nearly 40 percent of all insured student loans.
To qualify for any type of financial aid, whether from government or private-sector programs, you must first prepare the Free Application for Federal Student Aid (FAFSA). Get one from a high school guidance counselor or library, or call the U.S. Department of Education at (800) 4FED-AID. This form will help determine the types of aid for which your child may be eligible, including work-study, grants, or public or private loans.
Remember the early bird that catches the worm? Well, likewise for many scholarships. Prepare your FAFSA form as soon as possible. For help with your homework, call the College Answer service at (800) 891-4599. It's a free hotline operated by Sallie Mae, which offers advice on the financial aid process.
Whatever school you select, early saving and investing can make all the difference. Parents who start saving when their child is born will need to put aside approximately $260 per month (at 8 percent interest) to raise the projected $125,000 that may be necessary by the time their child enters college. Should they wait until Junior enters high school, the tab rises to about $2,200 per month to reach the same goal.
Starting early not only decreases the amount you'll have to save each month but allows for more flexibility in your investments. By giving yourself a longer time frame, investing in higher-return investments such as common stocks can provide the best opportunity for keeping pace with rising college costs. But no matter what age your child is, prudent investors don't put all their investment eggs in one basket. Asset allocation, or spreading investments across investment classes including cash, bonds and stocks, can improve overall returns while decreasing your exposure to risk.
The Price Is Right
Before you rush out to invest your baby's shower gifts in savings bonds or commodities, consider an investment's tax consequences. While your child is learning the ABCs, learn a few new letters yourself: UGMA and UTMA. The Uniform Gift to Minors Act and the Uniform Transfer to Minors Act are state laws that define special types of accounts designed to make it easy to put securities in minors' names. Under these provisions, the minor is the owner of the securities, but an adult acts as custodian of the account, responsible for prudently investing assets until the child reaches the age of majority. (The age for termination of the custodianship varies among states, so consult your tax advisor.) Potential tax savings in these types of accounts can be substantial: The first $650 in annual investment income in a minor's account is exempt from tax, regardless of his or her age. The next $650 is taxed at the minor's rate of 15 percent. Amounts earned over $1,300 are taxed at the parents' highest marginal rate. Once the child reaches age 14, all annual investment income greater than $650 is taxed at the minor's rate.
UTMA and UGMA accounts are a great idea for some investors, but large amounts of assets built up in these accounts could interfere with your child's ability to qualify for financial aid. Rules for qualifying for aid are subject to change, but currently, schools expect students to use 35 percent of their own assets and 5 percent of their parents' assets to pay tuition before they can apply for need-based financial aid.
If you're an older parent whose children will attend college after you reach age 591|2, consider saving for their educations by fully funding your retirement accounts, through tax-deferred annuities or through real estate investments. Savings here grow without tax until withdrawal and won't be counted as part of your assets when schools look at your financial aid application. And, unlike UTMA and UGMA accounts, these assets are your property, not your child's. You still have control over them (and maybe over your kid!) when your child reaches the age of majority.
What's Your Line?
Does the idea of spending Saturdays searching thousands of pages of scholarship descriptions in your local library send you into a panic? Spend your time surfing instead--surfing the Web, that is. The Internet is an excellent source for information on scholarships and financial aid. Sallie Mae boasts an informative Web site at http://www.salliemae.com , with more than 350 pages of information on federal and private student aid programs.
FastWeb.com LLC, an Internet scholarship search company in Chicago, runs the largest scholarship service online (http://www.fastweb.com ). Mark Rothschild, director of scholarship services for FastWeb, says there are some 180,000 scholarships to search on the site. Of the more than $50 billion in financial aid doled out annually, he says, $40 billion is from state and federal sources, $8 billion from universities and $2 billion from private scholarships.
To start the FastWeb search, applicants provide a self-profile that can be used to match them to appropriate scholarships. Intended major, hobbies, religious and other affiliations, ethnic and racial background, state and county of residence, and with whom parents are employed are some of the screening criteria. Don't balk at answering these personal questions. Many providers are looking for people with different kinds of characteristics. An interest in photography or a parent's membership in the Knights of Columbus, for example, could qualify a student as a potential scholarship recipient.
After the profile is completed, the student initiates the search. Results arrive via e-mail and include the application deadline, where to apply, criteria, number of scholarships available, and the award amount. Students select scholarships of interest; at the click of an icon, a form letter is generated that can be signed and sent for more information.
What does all this information cost? Both Sallie Mae and FastWeb services are free. Beware of unscrupulous companies that require application fees, charge for otherwise free information or "guarantee" a scholarship.
Even after scholarships, savings and financial aid have been factored in, debt can mount quickly, and paying it off can take years, depending on the career at the end of the tunnel. Is the education worth the cost? If these numbers from the College Board in Washington, DC, are any indication, it doesn't take a college degree to figure it out: The lifetime earnings of a high school graduate are approximately $1.47 million, or $36,751 per year. A bachelor's degree can translate into approximately $2.2 million, or $61,700 annually. A doctorate could mean lifetime earnings of $2.99 million, or $96,935 annually. Professional degrees, such as medical or law, translate to approximately $106,000 annually. That makes your sheepskin worth its weight in gold.
Lorayne Fiorillo is first vice president of investments at Prudential Securities. She presents retirement planning and personal finance workshops worldwide. For more information, write to her in care of Entrepreneur, 2392 Morse Ave., Irvine, CA 92614.
College Board, (202) 822-5900, http://www.collegeboard.org .
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