CURRENT ISSUE :: MARCH 2004:: YOUR MONEY

Secrets of Paying for College

Ten Things the Financial-Aid Office Won't Tell You

By David Weliver
SmartMoney

1. 'YOU WAITED UNTIL APRIL? SORRY, WE GAVE YOUR MONEY AWAY.' According to the College Board, students received over $105 billion in aid last year for undergraduate and graduate study; more than $70 billion came from the federal government alone. But the bewildering aid-application process stumps thousands of families each year, leaving many to pay more tuition than they have to.

Lots of students miss out on aid because of the confusing deadlines for the Free Application for Federal Student Aid (Fafsa), which everybody must complete to be considered for government grants and subsidized loans. The forms, which are available from colleges and at www.fafsa.ed.gov, are reviewed first by the government and then by your prospective school. While the deadline on the form is June 30, many schools' individual aid deadlines-listed in the colleges' materials but not on the Fafsa forms-are as early as February.

When you're a high school senior, make sure your parents have a list of all the schools' different deadlines. To play it safe, though, apply for aid as soon as any admissions applications are in the mail. "Families need to submit their financial aid info as soon as they can after Jan. 1 preceding the student's freshman year," says Barry Simmons, aid director at Virginia Tech. While the forms typically ask for your parents' previous year's tax information-a common reason parents postpone applying until April-it's completely legit to estimate tax figures based on last year's return and update them later.

2.'YOUR ERROR, YOUR PROBLEM.' If you fail to fill in some key parts of your Fafsa, the central processor will reject your form, sending it back to you and not to the prospective schools, resulting in a potentially costly delay. One error that parents make: putting their income and tax information in the student section or vice versa. As a safeguard, Ohio State aid director Tally Hart recommends using the online form at fafsa.ed.gov; it will alert you if you leave questions blank and can even recognize some obvious errors, such as household income of $50,000 combined with a $5 million mortgage. Of course, there are many circumstances that can't be fully explained on a Fafsa form-say, if a family member was recently laid off. In that case, officers recommend writing a letter to the aid office stating your family's financial situation and mailing it at the same time as your Fafsa. Just make sure the letter goes directly to the college. Too many people "send a letter with the Fafsa [to the government office], and it's just destroyed," says Mark Lindenmeyer, aid director at Loyola College in Maryland.

3. 'OUR LOW TUITION RATE MEANS LESS 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 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 use the annual "America's Best Colleges" survey in U.S. News & World Report. 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.

4. '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.

If aid is your top priority, you're better off skipping early decision, especially if your SAT scores and GPA are above the college median, and you excel in extracurricular activities. If you apply for spring decision and get admitted, you'll have a better shot at securing a rich aid package.

5. 'DON'T BOTHER PLAYING THE PAUPER.' 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 for them to adjust their assets to maximize your aid potential. Step one is to trim any assets held in the child's name-in particular, custodial accounts, 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%.

But if your parents are looking to sock away some free-floating cash in their name, they 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.

6. 'WE'LL JUDGE YOU BY YOUR HOUSE…AND YOUR CAR.' The value of your family's house doesn't get considered in most aid formulas. On the flip side, if your family is 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 the expected family contribution from your family's adjusted gross income and assets. They usually don't consider what their real disposable income is or how cash-strapped they might be after paying their 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.

However, while most colleges do not automatically factor in regional cost-of-living differences, some may if you ask. When writing or speaking to an aid officer during the application process, your parents should emphasize "involuntary" costs like taxes over voluntary ones like the mortgage, Mr. Dooley suggests. A 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 fancy they may be considered voluntary expenses.

7. '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." Ms. 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.

If you 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 3.42% 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.

You can find more information on federal-government loans at www.studentaid.ed.gov.

8. 'OUTSIDE SCHOLARSHIPS HELP US, NOT YOU.' Sure, you're proud of the five scholarships you won from community groups, but don't be relieved. Unless you weren't counting on any financial aid at all, those scholarships won't make a dent in how much your family has to pay. "Many parents mistakenly think their cost will be diminished and then are disappointed to learn that it will actually be the grant [from the school] that is diminished, thus saving the college money and not the family," says Anne Macleod Weeks, director of college guidance at the Oldfields School in Glencoe, Md. Federal guidelines mandate that outside scholarship money be considered a resource in meeting financial need. This means you can't use the scholarship dollars toward your expected family contribution, and the college gets to reduce the amount of aid coming your way.

Even so, applying for outside awards can help you, especially if you're looking at an aid package that features more loans than grants. Ask your college if it can reduce the loans first, says Jim Eddy, aid director at Willamette University. "Secondly, it [can] reduce work-study." In that case, a few scholarships could still save thousands of dollars in interest and let you study more and flip burgers less.

9. 'WE WON'T NEGOTIATE, BUT WE WILL REVIEW.' College financial aid guides have long urged parents to negotiate with aid offices, often suggesting that they bring a better aid offer from a "competing" school to shame them into giving you more money. Tread lightly. Many aid directors hate this tactic. Some schools have strict no-negotiation policies, while others are only a little more approachable.

So how do you request a "review"? When contacting your aid office to discuss your aid package, start by avoiding such words as "negotiate" or "bargain," says Virginia Tech's Mr. Simmons, and don't throw another school's aid award in an officer's face. Instead, thank the officer for his hard work and the school's generosity, then follow up by expressing doubt at being able to meet your family's contribution. If you haven't already done so in writing, explain any special circumstances your family has, such as recent unemployment, a death in the family or medical bills. Then, directly but politely, ask if there's anything the aid office can do to help.

Once you've established a rapport with the officer, try casually mentioning that you have a competing offer and where else you have been admitted. At the very least, aid officers may refer you to outside borrowing opportunities or payment plans. Whatever the response, don't push it. Remember, you'll be relying on this person's award decisions for the next three years.

10. 'YOU THOUGHT FRESHMAN YEAR WAS EXPENSIVE? WAIT TILL SENIOR YEAR.' You just got your award letter and scored a fat four-year aid package covering most of your tuition, with a small loan for the rest. You're set, right?

Not necessarily. Two problems: First, the amount of federally subsidized loans a student can borrow increases slightly each year; as a result, your college may expand the loans it offers in subsequent years and downsize grants. Second, many parents and students assume that four-year merit-based awards will keep pace with tuition increases. "Very few schools are that generous," warns Willamette's Mr. Eddy. Nationwide, the average private school price tag jumped 6% from last year, with the average cost for resident students now just over $29,500. Assuming a steady 6% annual price increase and a constant $25,000 in aid each year, the $4,500 family contribution for freshman year could grow to $10,135 by senior year.

If you receive merit-based aid, ask whether the college can adjust it for tuition inflation. Regardless, make sure you keep hitting the books. A mediocre GPA can put a quick end to a merit scholarship.