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COLLEGE SAVINGS 101

A late start on saving for college

11/07/2005

QUESTION:
Dear Joe,

My son is 16 and although I have been saving a little bit for college, I'm not even close. His grades are not the best either, so I don't know about scholarships for him. What are my options at this late stage?
-- Willie

ANSWER:
Dear Willie,

First, I want to commend you on whatever you've been able to do thus far in saving for college. Rest assured, millions of American families with the same worries as you have managed, one way or another, to get their children through college without impoverishing themselves. Where there's a will, there's usually a way, and a low level of savings should not deter you or your son.

One of the more obvious ways to handle college costs, when money is scarce, is for your son to consider a low-cost school, such as your local community college. According to a recent report from the College Board, the average total tuition and fees for the 2005-2006 school year at two-year public colleges is $2,191. This compares to $5,491 at four-year public universities and $21,235 at four-year private colleges. Enrollments at two-year colleges have been soaring, with many students planning to transfer to four-year colleges later.

Higher-education tax breaks can reduce your cost even further. The Hope credit is worth up to $1,500 per eligible student this year, increasing to $1,650 in 2006. The Lifetime Learning credit is an alternative to the Hope credit, offering up to $2,000 in annual tax savings per taxpayer. The income phase-out range for these credits is $43,000 to $53,000 in 2005 ($87,000 to $107,000 for married couples filing jointly), increasing in 2006 to $45,000 to $55,000 ($90,000 to $110,000 joint). Eligibility requirements are more fully explained in IRS Publication 970, available online at www.irs.gov.

A community college is certainly not your only option. If your family qualifies for need-based financial aid, even the highest-priced private colleges can become economical choices. Be sure to file the Free Application for Federal Student Aid, or FAFSA, in January of your son's high school graduation year. Federal aid can take the form of grants, loans and/or work-study. Grants are best, of course, because they do not have to be paid back. However, the primary source of grants -- the federal Pell Grant program -- is reserved for very low-income families.

Federal Stafford and PLUS loans are available even to families without demonstrated financial need. And beyond the federal programs, many banks offer private education loans along with home-equity loans. You can even take loans from your 401(k) plan if it is set up that way. No one likes to borrow, but surveys show that a college degree is one of the best investments possible.

I recommend that you become familiar with the financial aid process now, while your son is 16, because you may find that his eligibility can be increased by taking certain steps in managing your family income and assets between now and the time you file the FAFSA. For example, any investment assets in your son's name should be "spent down" before applying for financial aid. Student assets are assessed at a high 35-percent rate in the federal aid formula, while only 5.64 percent or less of a parent's assets are counted. You can find a number of Web sites with helpful information about financial aid, including the Department of Education's own Web site at www.ed.gov.

Encourage your son to get his grades up as high as he possibly can. He probably does not realize how important grades are, not only to the admissions decisions at selective schools, but also to the awarding of school-based scholarships. Many private colleges will offer thousands of dollars in tuition reductions to students who rank high in their high school graduating classes or have good grade-point averages.

Look at other scholarship sources as well, especially Rotary and other civic organizations in your own community. Online scholarship databases contain billions of dollars of potential awards, but be on the alert for scams. A tentative decision by your son to enter a particular field of study, or a specific profession after college graduation, can be worth a lot of money. It's amazing how many scholarships are targeted to students with an interest in teaching, just as an example.

The last option I'll mention is making adjustments to your family budget to accommodate the additional expenses for the four years or however long it may take for your son to get through college. He can contribute the earnings from a part-time job. You may sacrifice a family vacation or delay the purchase of a new car. Take some time now to identify specific steps that you and your son can take to be in the best possible financial position by the time the college bills begin to roll in.

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