How to Interpret Financial Aid Lingo
The following tips are a collection of statements financial aid offices, and not just those for online universities, will tell you while you are having difficulties applying for financial aid. Don’t get pulled into the hype. Remember, if you hear the following statements don’t worry – there is a way out!
“Our low tuition rate means less financial aid.”
Many parents who haven’t saved enough for college tell their gifted high school seniors not to consider pricey private schools. Ironically, those colleges may actually be the more affordable alternative. “The more expensive and prestigious the school,” says Bedford, Mass., financial planner Tom Brooks, “the more likely it is well endowed and can meet 100% of need,” thanks to alumni donation campaigns. “You might be sending your kid to a state school that [for you] costs more than a Harvard or an MIT or a Stanford.”
To estimate how likely it is that your preferred schools will give you substantial aid, check a few statistics with the colleges themselves or using the annual “America’s Best Colleges” survey in U.S. News & World Report, available at usnews.com for $14.95. Look for two figures: the percentage of undergraduates receiving grants meeting financial need, and the college’s average discount, which is the percentage of a student’s total costs — including tuition, room and board, and books — covered by grants. If they’re both 50% or better, you can feel assured that your needs will be fairly met.
“You’ll pay dearly for early decision.”
Early decision is a big temptation at elite colleges: Students can apply months before other applicants, as long as they promise to attend if admitted. In most cases, the college offers these applicants a better chance of acceptance. But when it comes to getting aid, early decision can backfire. Why? Your commitment to attend if accepted means you have less leverage. “If you went to an auto dealership and threw yourself across the hood of a car and told them you would do anything to have that car, you’re not in a very good negotiating position,” says Linda P. Taylor, a certified college planning specialist in Agoura Hills, Calif.
If aid is your top priority, you’re better off skipping early decision. Especially if your kid’s SAT scores and GPA are above the college median, and she excels in extracurricular activities. If she applies in the spring and gets admitted, she’ll have a better shot at negotiating a rich aid package.
“We don’t buy your pauper act.”
Every year parents are tempted to cheat the aid system by trying to look poorer on paper — by going on a spending spree, perhaps. There are, however, some perfectly acceptable ways to adjust your assets to maximize your aid potential. Step one is to trim any assets held in the child’s name — in particular, custodial accounts (UGMAs or UTMAs), up to 35% of which the aid system will say should go toward next year’s tuition. For assets in the parents’ names, the rate is a much lower 5.65%. “Technically, parents can’t touch UGMAs except for the benefit of the child, above and beyond food and clothing,” says Tom Brooks. But “you can use the UGMA to pay for things like summer camp, tutoring, school trips or a car [for the kid], thus diminishing the account.”
But if you’re looking to sock away some free-floating cash in your name, you could give up to $11,000 each — any more will trigger the gift tax — to grandparents or other relatives outside your household, who could then help pay tuition bills; aid officers can’t touch their assets. If your kid is a few years from college, be sure to contribute the maximum to 401(k)s or IRAs. Colleges won’t expect you to tap retirement savings to pay your share of tuition.
“We’ll judge you by your house . . . and your car.”
Fortunately for homeowners, the value of your house doesn’t get considered in most aid formulas. On the flip side, if you’re paying a fat mortgage or sky-high property taxes to live in an elite suburb, colleges likely won’t be too sympathetic. Here’s why: To determine aid, colleges calculate your expected family contribution from your adjusted gross income and assets. They usually don’t consider what your real disposable income is or how cash-strapped you might be after paying your stack of bills. “A moderately high-earning family spending most of its income on housing and other necessities may find that their expected family contribution is difficult or impossible to meet,” says Roger Dooley, co-owner of Web site CollegeConfidential.com.
All is not lost, however. While most colleges do not automatically factor in regional cost-of-living discrepancies, some may if you ask. When writing or speaking to an aid officer during the application process, emphasize “involuntary” costs like taxes over voluntary ones like your mortgage, Dooley suggests. Your car is normally considered an involuntary expense, but elite schools sometimes ask what cars you own and when you bought them. If they’re too new and too swank, they may be considered voluntary expenses.
“We’ll let you borrow more than you can afford.”
Vickie Hampton, an associate professor of financial planning at Texas Tech University, knows that being well educated can make you poor. A colleague of hers, she says, racked up more than $100,000 in debt while earning a Ph.D. in English. “There’s very little probability of her paying that off in her lifetime!” Hampton says.
The predicament isn’t unique, as more students take on excessive debt to finance degrees that lead to jobs in relatively low-paying fields. Unfortunately, college financial aid offices rarely discourage these decisions. While there are statutory limits on certain government loans — based on lifetime borrowing caps — there are fewer limits on loans from private lenders such as Sallie Mae, KeyBank or Citibank, three of the biggest players.
If your student must borrow, exhaust federal programs first. Perkins loans or subsidized Stafford loans — both of which you may be offered after filing a Fafsa — are best; their 5 and 5.3% rates, respectively, blow others out of the water, and interest doesn’t accrue until the borrower leaves school. The Perkins, which you pay back directly to your school, is the slightly more flexible of the two, offering longer grace periods. Beware of unsubsidized Stafford loans, which your college may offer if your family doesn’t qualify for subsidized loans. Although these loans have similar low rates, interest will accrue from the moment the loan is made, even though payments aren’t yet required. While parents may also consider a federal Parent Loan for Undergraduate Students (PLUS) — which currently carries a 6.1% rate and has a rate ceiling of 9% — a home equity line may be a better bet, as it offers more generous tax benefits. Find more information on government loans at www.studentaid.ed.gov.
This is an excerpt from a Yahoo! Financial article originally published by SmartMoney.com