8/20/2012 2:15 PM ET|
3 college myths that will cost you
Certain misconceptions about financial aid and the price of higher education are all too frequent. The facts show why they're not to be taken seriously.
In "Should your kid skip college?" I tackled the biggest myth about college -- that a degree isn't worth what it used to be. In reality, it's worth more.
But there are many other commonly held beliefs about college that just don't hold up under investigation. Here are the three that I hear most often, followed by the truth.
Myth No. 1: "Saving for college will hurt my child's chances of getting financial aid."
Reality: If you can save for college, you should.
The federal student-aid formula is much more heavily weighted toward income than assets. Translated: What you manage to save doesn't count against you as much as you might think, particularly if you save it in the right ways.
If you a have a decent income and don't save, however, you could be in a world of hurt. That's because the formula assumes you have been saving money all along, even if you haven't.
Since a lot of financial aid these days consists of loans, rather than scholarships or grants, your savings essentially reduce your (or your child's) future debt.
"Despite the slight reduction in aid eligibility, families who save for college are in a much better position than families who do not," said financial-aid expert Mark Kantrowitz, the publisher of Fastweb.com and FinAid.org, and the author of "Secrets to Winning a Scholarship." "Saving for college provides you with more flexibility in your choice of college. Also, every dollar you save is about a dollar less you will have to borrow, helping you to avoid borrowing too much."
And you'll wind up paying less overall if you save rather than borrow. Kantrowitz offered the example of a parent who saves $200 a month for 10 years in an account that earns 6.8% on average. She would accumulate $34,400. Borrowing the same amount at 6.8% (the current fixed rate for federal Stafford student loans), "you'd have to pay $396 a month for 10 years, almost twice as much," he noted.
"The difference is that when you save, you earn the interest, while when you borrow, you pay the interest," Kantrowitz said.
Of course, it matters where you save. Generally speaking, you don't want to save in the child's name -- and beware of advice that tells you to hide money in a grandparent's name. Here is Kantrowitz's advice:
- Saving in a custodial account generally isn't a good idea if you hope to get any financial aid. Savings in UTMA or UGMA accounts, for example, reduce your child's aid eligibility by 20% of the accounts' value.
- If you save in the parents' names, by contrast, the impact is minimal. "Less than 4% of dependent students have any impact on aid eligibility from parent assets, because most parent assets are sheltered," Kantrowitz explained. "Even if the money counts against you, the worst-case impact is a reduction in aid eligibility by at most 5.64% of the asset value. That means every $10,000 in parent assets reduces aid eligibility by at most $564. That still leaves you with $9,436 to spend on your child's education."
- Money in a 529 college savings plan, regardless of whether the student or the parent is the account owner, is treated as though it were a parent asset on the Free Application for Federal Student Aid, or FAFSA. That's good.
- But don't put the 529 plan in a grandparent's name, Kantrowitz said. That may initially keep it off the radar screen for financial-aid calculations, but as soon as any money is withdrawn, you'll pay the price. "Although such a plan is not reported as an asset on the FAFSA, since it is owned by neither the student nor the parent, any distributions from the plan count as untaxed income to the beneficiary," Kantrowitz said. That's very bad. Withdrawals from a grandparent-owned 529 can reduce a child's eligibility for aid by as much as 50% of the amount withdrawn.
Myth No. 2: "College costs too much."
Reality: A college education's cost may be a lot less than you think -- and prices are about to become much more transparent.
"The price tag of any college is meaningless," said Lynn O'Shaughnessy, who blogs at The College Solution and is the author of the book "Shrinking the Cost of College." "It's like airline tickets -- everybody pays a different cost."
Some students, particularly those whose parents haven't gone to college, might not realize that or understand how to navigate the financial-aid process, said Deborah Fox, the founder of Fox College Funding, a college planning company.
"The students that would qualify for the most financial aid often don't know they can get it," she said.
The big danger is that some young adults won't go to college -- trapping themselves into lower earnings and higher unemployment risks for life, when for relatively small investments they could significantly improve their financial futures.
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