Seven Strategies For Paying For College In Tough Times
CNBC Senior Commodities Correspondent & Personal Finance Correspondent
As incoming freshmen start packing up and heading off to campus and high-school seniors contemplate what they need to do to prepare applications this fall, many parents and students are asking the question: How are we going to pay for college?
Many families have no clue. In its annual study released today, Sallie Mae and Gallup found that in this economic climate, most parents -- about 70 percent of those surveyed -- say a college degree is more important than ever, yet nearly three-quarters of families admitted they have no plan for how they'll pay for it!
Families may be willing to stretch financially to pay for college, but it's important to be smart about how to make it more affordable. Costs are skyrocketing -- or at least to many families, college costs seem to be taking an even bigger financial toll. According to the SallieMae/Gallup study, the total cost of attendance including tuition, room and board and other school costs (not including financial aid) totaled $18,659 in the 2009-10 school year, a 17% jump from the previous year and up 28% from two years ago.
Double-digit percentage increases in tuition and fees at public universities in some states -- including Arizona, California, Florida, Massachusetts and New York -- may have contributed to the overall rise. Also parents may be realizing that a lot more that goes into the college costs than merely tuition and fees. The College Board has estimated other student costs averaged about $12,500 in the 2009-10 school year. Add to that the fact that many families' financial situation has declined sharply in the past few years.
But parents' response to rising college costs has been to dig deeper into every source, says Dr. Bill Diggins, Gallup's lead reseacher on the study. "Parents are using more of their own income and savings and students are borrowing more. They're also taking steps to reduce expenses," Diggins says. Half of parents in the SallieMae/Gallup survey say they're working more and two out of five students are living at home to keep costs down.
What else can they do to help foot the college bill? Here are 7 other strategies families should consider to help pay for college during these tough times:
529 College Savings Plans
These plans are tax-advantaged when used for higher education, have no income limitations, and are easily transferrable to another beneficiary if needed. This year, students can even cover the cost of a new computer out of 529 plan funds. Parents concerned about the performance of 529 plans over the past few years, particuarly in 2008, should make sure it invests very conservatively as the child gets close to college years. For a student who is 17 or older, play it safe with 15% or less of the 529 holdings in the stock market, suggests Joseph Hurley, founder of Savingforcollege.com. Many 529 plans have also added certificates of deposit and money market funds to their offerings since the recession.
Don't assume you won't qualify for any aid. Fill out the FAFSA form to be sure. Nearly one out of four families did not submit the Free Application for Federal Student Aid (FAFSA) form, according to the SallieMae/Gallup study. This is the gateway to accessing many federal and state grants and loans. It's not too late to fill out the FAFSA form now for the 2010-11 school year, though most state deadlines have already passed. Make sure you're ready as soon after January 1st as possible to complete the FAFSA for the next school year.
Don't pass up free money! Scholarships aren't only need-based -- even wealthier families can get some help. Nearly one-third of families with incomes over $150,000 a year covered costs with scholarship money, according to the SallieMae/Gallup study. Students should start to research scholarships in their sophomore and junior years in high school to find out the type of community service activities and essays that may be required. "Don't ever pay for scholarship databases," says Sandy Baum, an economist at The College Board. Free scholarship searches are available at www.fastweb.com, www.collegeboard.com and www.salliemae.com/scholarships.
Federal vs. Private Student Loans
If you need to borrow, look at federal student loans first and then consider private loans if you still have a gap. "Federal loans are cheaper, more readily available and have better repayment terms than private student loans," says Mark Kantrowitz, founder and publisher of FinAid.org, one of the most comprehensive sources of student financial aid information.
Interest rates on federal student loans are fixed at 6.8% and loan maximums range from $5,500 for freshmen (dependent students) to $7,500 for seniors. If you're eligible for a need-based federal loan, interest rates are lower this year at a 4.5% fixed rate.
Private student loan rates are often variable and not all private loans are created equally. Look around and consider the total cost over the life of the loan, Kantrowitz suggests. Also, paying all or partial interest while in school and finding a loan with a shorter-loan term can save you significantly.
Living off-campus (if not at home) can be a huge savings on room and board. Hit the books for less by renting books online at sites like Bookrenter.com and Chegg.com. Half.com (a subsidiary of eBay) offers textbooks for a fraction of their retail cost and you can sell them at the site too. Students on a meal plan should opt for one for the allows more flexibilty by covering meals for the semester, rather than a weekly allotment. And, cut back Starbucks and Jamba Juice runs for that energy boost. A $4 drink per day, five days a week, 40 weeks a year translates to a cost of $800 a year!
Don't overlook income tax credits. The Hope Scholarship Tax Credit offers a credit of up $2,500 for tuition, fees and books and supplies for the 2010 tax year. But there are income limitations -- $90,000 for single filers, $180,000 if you file a joint return. Go to www.irs.gov to see if you're eligible.
Build a Plan!
Most important, make sure your plan covers the student's entire college stay and consider what the starting salary will need to be after graduation to keep loan payments manageable. A general rule of thumb: "A student's debt at graduation should not exceed their starting salary over the first few years," Baum says.