Posted Monday, January 25, 2010
Students who borrow to pay for college owe an average of $23,000 by time they pick up their diplomas. But financial aid pros say strategic planning can keep a college dream from turning into a debt nightmare. Monday morning at 9, Plain Dealer consumer affairs columnist Sheryl Harris hosts a conversation with college financial aid experts about exactly how to land aid and save money on tuition.
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My son is currently living with his dad in NC - graduating in June. He will be moving back to Cleveland to live with me and my husband shortly after graduating, and attending Tri-C in the fall.
Your guest said that the parent who the child has been living with needs to put their information on the FAFSA app, but his father won’t fill it out because he believes his income is too high and they will not get any aid.
I know that we will be paying out-of-state tuition for the first year, and his father’s income is definitely higher, so I am wondering if it makes sense to wait until after he is living with us for a year before filling out the FAFSA, in order to use our income.
Our child will be a freshman in the fall. Tuition, room and board will be about $36,000 per year. She has been given a generous merit scholarship by the university which will cover about 1/2 of her tuition, decreasing our cost by about $13,500 per year. We have about $18,000 saved in our child’s name. We have filled out the FAFSA and because of our income (not our savings or assets) and we are not eligible for any need based aid. Should we use the $18,000 in our child’s name the first year so that it does not need to be put on the FAFSA as an asset next year? or not use that money the first year as it is in mutual funds which may earn money over the year.
Your son’s father is the person who should fill ot the FAFSA for this year, since he lived with him more. Next year you can you can fill it out if your son is living with you.
You should try to exlplain to his father that he should fill out the FAFSA. If your son needs to borrow student loans the FAFSA must be completed and you can tell your son’s father that he will not be responsible for those loans taken out in your son’s name.
I hope this helps,
Manager of Financial Aid
Cleveland Scholarship Programs
The decision to use mutual funds or cash to pay for tuition is tricky. If you have the cash on hand to pay the schools fees that could be benficial since the mutual funds could gain interest. Only a small portion of the assets of a parent are counted in the FAFSA calculation so the interest earned could be more valuable.
There is the danger of the mutual funds losing value which must be considered. You should talk to a financial advisor and look at possibly moving those funds into a 529 Plan so you can take advantage of the tax incentives of those programs.
I listened to the podcast, and it sounds like you do a lot to help families. But I have to take issue with you about the perceived benefit/value of using 529 plans for college savings. I work with many parents who have been advised to put money into 529s, and the actual tax benefit is often minimal compared to what the 529s can cost in financial aid. What the 529 programs fail to mention, is that FAFSA and PROFILES will count ALL 529 plans owned by the parents - including those set up for younger siblings. At a 5.65% asset assessment, the lost need-based aid eligibility is often much more than what they may save in Federal and and State tax benefits. Of course, the FED tax breaks are only on the gains, which is often misunderstood by parents - especially with values being reduced due to low market performance for bonds and stocks. No gains - no tax benefit - however, the asset will still be assessed, even though the values may be reduced.
I believe that saving is always important when it comes to paying for college. While having assets could affect the amount of need based aid you may receive, often that need based aid is in the form of loans and often the savings has no affect on the aid received. I believe that gambling on the idea that you will receive more need based aid than the amount of money you could have saved is a dangerous way to plan for college costs. Like Mr. Kantrowitz from www.finaid.org states on his website “It is always cheaper to save now than to borrow later”.
Here is a nice write up by Mr. Kantrowitz on the myths of saving for college.
If your bigger concern is the downside of 529 Plans please share alternatives for saving that you would recommend.
Manager of Financial Aid
Cleveland Scholarship Programs
I agree that saving is still necessary - and using private alternative loans should be avoided, due to high costs and interest rates. Alternatives to 529 plans could include several options - but they should allow for liquidity and flexibility. Roth IRAs also work well, since parents can pull out their cost basis anytime with no tax consequences. I’ve also seen properly structured life insurance products work well for savings purposes - IF they are properly structured to allow for liquidity and low cost. There are others, but the general idea should be to save $$ within the FAFSA rules without having the savings reduce your financial aid offers from schools. Personally, if a school is offering my student mostly loans and little gift aid, then I think it’s a good reason to look at another school. Free websites like collegeboard.org also do a pretty good job of identifying the average (historical) aid awards from most schools in the country. Better to try to match the school to our budget than match our budget to the school.
Thanks for the discussion.
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