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.
Until now, families had to do a fair amount of digging to try to figure out what they might actually pay. They had to gather the "sticker price" cost of various schools, get an idea of their "expected family contribution" from calculators such as the one at Kantrowitz's FinAid.org, and then try to get some idea if their student was likely to get merit aid that might reduce the total cost.
Too many don't do this research, with potentially disastrous results.
"It's reckless to apply blindly and hope in the spring you'll get good news," O'Shaughnessy said. "What if you don't and you've missed the deadline for other schools?"
Fortunately, starting in October, all colleges that offer financial aid are supposed to post "net price calculators" on their websites, O'Shaughnessy said. These calculators will allow people to input various factors, including income, assets, the student's grades and test scores, to get an estimate of the net cost of the education there.
The calculators aren't perfect. Some don't include merit aid, which schools can use to significantly reduce costs for students they're trying to attract. So families will still need to do some research.
Fox recommended that families use the federal Education Department's College Navigator to figure out which schools are most likely to want their kids. Under the "admissions" tab for each school, you'll find SAT scores for the 25th and 75th percentile of students attending there. If your student's SAT scores match or exceed the 75th percentile number, "that significantly improves the chances they will offer a better financial-aid package," Fox said.
Schools may also try to recruit students for particular majors or who have particular skills (the band may need a trombone player, for example). Ferreting out that information may require a call to the admissions office. Fox attends college fairs, which are often held in large-city convention centers, to talk to admissions officials about what types of students their schools are trying to recruit.
A well-connected high school guidance counselor can be another source of leads, although you're more likely to find those in a private high school than in many public schools, where guidance counseling is frequently subject to budget cuts.
Myth No. 3: "A public school will be cheaper than a private college."
Reality: You could end up paying less for a private-school education.
"Many private colleges will offer a need-based financial-aid package or a merit-based package that brings the net price either close to or even below the cost of a public school," Fox said. "At public colleges, the financial-aid packages are much more loan-heavy, with a lower percentage of grants and scholarships."
You also need to factor in how much time it will take to graduate. Far fewer students manage to graduate from public schools in four years (29.9%), compared with private schools (51%). If you wind up paying for an additional year or two, that could dramatically increase the overall cost of a public-school education.
Those statistics are for people who started college in 2002, the latest available data from the U.S. Department of Education's National Center for Education Statistics. Since then, the situation at many public schools has gotten worse as strapped state governments have slashed education budgets.
"Students can't get the classes they need, or they're not being offered every semester," Fox said. "Parents should factor in the cost of at least an extra year when they're comparing public schools to private."
Of course, their child may be the exception, Fox said. A kid who knows what he wants to do, who is proactive enough to plan out the courses he needs, and who's first in line at registration has a shot at getting through a public college in four years.
Other kids may flail around, sometimes for years, trying to decide what they want to do. Again, private schools may have the advantage here, since they offer more guidance -- "handholding," Fox called it -- to help students settle on their majors.
A commonly recommended strategy is for students to attend a cheaper two-year college first and then transfer to a four-year college. This can work well for motivated students. Less motivated students, though, might attend only part time and never complete a degree at all. Without a degree, all the money paid for education is essentially cash down the drain.
Community college "can be like a sand trap," O'Shaughnessy warned. "You may not get out of it."
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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