With 529 plans fluctuating, financial-aid budgets getting slashed and tuition rising at an alarming rate, the landscape of college financing is changing fast. Fortunately, you still have options. Here are the best college finance tips for 2011.
10 college tips
1. Apply early
2. Save in the right name
3. Reconsider public service
4. Prioritize payments
5. Enlist help from relatives
6. Maximize your income
7. Find the right schools
8. Save early
9. Search for select scholarships
10. Compare 529 plans
Tip 1: Apply for scholarships and loans early
While private scholarships have their own specific application deadline, students can apply for federal financial aid starting Jan. 1.
"Funds are limited and you don't have to wait to get your acceptance (to a school) before starting the (scholarship) application process. Apply as early as you can," says David Feitz, executive director for the Utah Higher Education Assistant Authority in Salt Lake City.
Even if a student believes that he or she doesn't qualify for federal scholarships and grants, Feitz advises them to fill out the Free Application for Federal Student Aid, or FAFSA.
"Many universities use that FAFSA as a basis for institutional aid," says Feitz.
Tip 2: Save in the right name
Where you save can count just as much as how much you save. To make sure that your college savings aren't detracting from your family's financial aid package, Joe Hurley, founder of Savingforcollege.com, recommends that families place their assets in accounts held in the parents' names.
"The first dollar of (assets held in the student's name) will impact a family's expected contribution," says Hurley. "That can lower the financial aid package."
Savingforcollege.com reports that student assets -- any cash stored in a checking or savings account, business venture, real estate or investment in the child's name -- are assessed at a rate of 20 percent. That means that for every dollar the student saves, the federal government will subtract 20 cents of every dollar in the student's financial aid package. At 2.6 percent to 5.6 percent, the assessment rate for parental assets is much less stringent.
Tip 3: Reconsider public service professions
Students frequently shy away from public service fields like social work, public defense and law enforcement due to the sometimes crushing educational debt. Thanks to legislation passed in early 2010, those eyeing public service professions have more financial incentive.
According to the U.S. Department of Education, those in public service professions who work for the federal government or nonprofit entities are required to make 10 years' of consecutive payments on federal student loans. After that, they are eligible to have their remaining federal student-loan debt forgiven. Borrowers also can apply for the federal, income-based repayment plan, which caps monthly payments at 15 percent of discretionary income, defined as earnings greater than 150 percent of the poverty line currently set at $16,245 per year for a household of one. Borrowers who earn less than $16,245 will have a monthly payment set at zero, but will still have those free payments count toward loan forgiveness.
Tip 4: Prioritize payments
Financial aid officers will look at how much savings and other assets you have, but they won't look at how much unsecured debt you've accumulated. To make sure that you get the maximum financial aid possible, Kalman Chany, author of "Paying for College Without Going Broke," advises parents to first stash money in places that aren't part of the Free Application for Federal Student Aid.
"Let's say you have $10,000 in cash, and $10,000 in credit card debt, and $100,000 in assets," Chany says. "If you plan to use the cash to pay off the debt, but you turn in the (FAFSA) forms beforehand, you're going to be assessed for that cash. But if you pay off your debt before you turn in the form, you could be eligible for more aid."
Tip 5: Enlist help from relatives
"Grandparents can gift money to 529 accounts without having the same restrictions on gift tax that you would have on other types of financial gifts," says Darrell Canby, president of Canby Financial Advisors in Framingham, Mass.
The financial aid website FinAid.org reports that individuals can give financial gifts up to $13,000 per year per beneficiary to a 529 plan without paying a gift tax. For married couples, the benchmark is $26,000.
All 529 plans come with an additional caveat that allows donors to give a financial gift of up to five years' of funds at a time -- $65,000 for individuals, $130,000 for married couples -- without incurring gift tax as long as the total amount of the gift averages out to $13,000 per year over a five-year period. That means that if a relative donates $50,000 to your child's 529 in 2011, he can only donate $15,000 over the next four years.
Tip 6: Maximize your income
In addition to limiting post-college loan payments, there are several programs designed to help low-income borrowers make it through school. According to FinAid.org, parents with an adjusted gross income of $50,000 or less who live in households where all family members are eligible to fill out an IRS 1040A or 1040EZ form can apply for a simplified needs test, which removes assets from the federal needs formula and makes applicants eligible for more aid.
Parents who gross under $30,000 per year automatically have an expected family contribution of zero and are guaranteed to receive the full Pell Grant. Parents also can maximize their income by taking advantage of matching-grant programs available through 10 state 529 plans. To receive the match, parents kick in a certain level of savings -- usually up to $500 -- and receive some level of state contribution.
Tip 7: Find the right schools
To make paying for college a bit easier on the wallet, investigate tuition-free institutions such as the Cooper Union for the Advancement of Science and Art in New York, the Webb Institute in Glen Cove, N.Y., and Franklin W. Olin College of Engineering in Needham, Mass., as well as any of the seven work colleges through the U.S. that offer free or reduced tuition in exchange for student work.
Students can also check out "no loans" schools that promise to fulfill a student's determined financial need through grants, scholarships and work-study jobs without forcing them to take out student loans, according to the college-accessibility think tank, Project on Student Debt, in Oakland, Calif.
The golden rule of college finance still rings true for 2011: Start saving early to maximize the compound interest. According to Bankrate.com's college savings calculator, parents with children age 10, who have not yet started saving for college, will have to fork over $873 per month to finance 100 percent of their child's college costs for one year at a public, in-state school, using the College Board's estimate of $16,140 in tuition, fees and board per year for the 2010-2011 school year.
To meet the same goal of paying for 100 percent of their students' college costs, parents who start saving five years earlier will have to put away $274 less per month, though costs likely will rise, forcing parents to adjust their savings.
Tip 9: Search for select scholarships
The best way to maximize your chances for winning a scholarship is to first apply for those you're most likely to win. According to Kelly Tanabe, co-author of "The Ultimate Scholarship Book 2011," that means applying for federal aid first, hitting up your college of choice for funds, and rooting out awards offered through local organizations, clubs and professional groups.
"You're going to have a much higher likelihood of getting a scholarship that fewer people are applying for," she says.
Hurley adds that low-income families should seek income-contingent awards to lower the competition.
Tip 10: Compare 529 plans
Some plans are soaring; others are still in the dumps. To make sure your 529 plan works for you, Darrell Canby of Canby Financial Advisors tells clients to carefully evaluate several 529 plans' past performance. Also, you should consider investing some funds outside your 529 plan.
"One of the difficulties with 529s is that you're limited in your investment options," Canby says. "You can also only change your investments once per year."
Canby recommends that parents diversify their investments, placing some funds into a 529 college savings plan and investing the rest in other savings vehicles.