With the pace of higher-education costs consistently on the rise faster than the general Consumer Price Index (CPI), understanding the alternatives and opportunities you and your child or grandchild may have regarding financial aid is more important than ever.
Did you know that in the 2009-2010 academic year, more than $154 billion in financial aid (grants, federal loans, federal work-study, and federal tax credits and deductions) was awarded to undergraduate students? The average amount of aid for a full-time student was $11,500, including $6,000 in grants that don't have to be repaid.*
Here are tips for getting your hands on some of that funding for your student's college education.
Start planning for aid during the student's high school years. Pay particular attention to your child's junior year of high school, and reposition assets or adjust income before that year begins. When financial-aid officers review a family's need, they analyze the family's income in the calendar year that begins in January of the student's junior year of high school.
Assume you are eligible for aid - until told otherwise. There are no specific guidelines and no rules of thumb that can accurately predict the aid you and your student may be offered. A number of factors - such as having several children in school at the same time - could increase your eligibility.
Reassess assets held by your children (in the child's name). Federal institutions expect children to contribute 20 percent of their savings toward their education costs, while parents are expected to contribute only 5.6 percent of their savings. That's why assets held in custodial accounts may reduce the aid for which the family qualifies. Assets held in Coverdell Education Savings Accounts (ESAs) and 529 plans will be factored into the parent's formula, having less effect on the aid for which the family qualifies.
Steer grandparents' gifts in the right direction. Grandparents' hearts often lead them toward gifting directly to grandchildren or paying the student's tuition expenses.
Even though payments made directly to the institution avoid gift taxes, distributions from grandparent-owned 529 plans are also considered as additional resources and assessed as student's income - which reduces the amount of eligible aid. A better idea for grandparents may be to consider gifting to a 529 plan owned by the parent or student.
The financial aid treatment of gifts to a 529 plan is generally more favorable than that for gifts made directly to the student, and grandparents may realize estate-tax and gifting benefits by using this alternative.
Assess your family's financial situation to determine the amount of funding your student will need. Gather records and begin researching available financial aid, grants, loans and scholarships. Two forms will be key to your aid application process: the Free Application for Federal Student Aid (FAFSA) and the College Scholarship Service Financial Aid Profile (PROFILE).
The FAFSA form helps you apply for federal aid, and many states also use it to determine a resident student's eligibility for state aid. You can find this form in high-school guidance offices and college financial-aid offices or online at fafsa.ed.gov.
Many institutions use the information on the PROFILE form to help determine awards for nonfederal student-aid funds. This is a financial-aid application service provided by the College Scholarship Service (CSS), a division of the College Board. You can register for this service by either completing the form online by visiting collegeboard.com or by calling the College Board at 305-829-9793.
You may find it helpful to add grants, work-study opportunities and loans to your financial support mix.
A grant is money given freely to a student with no repayment requirement.
Also, the federal work-study program may be able to offer a student a subsidized job on campus - wages that can help pay college expenses.
Finally, needs-based and non-needs-based federal loans make up 45 percent of the total aid awarded to undergraduate students each year.
You may also want to talk with your financial advisor about other education funding sources such as ESAs, 529 plans and custodial accounts.
(*Trends in Student Aid 2010. collegeboard.com, Inc. Reprinted with permission. All rights reserved).
• William J. Hertzog, CIMA, is first vice president of investments for Wells Fargo Advisors, LLC, in Ahwatukee. Reach him at (602) 952-5133 or www.TheHertzogGroup.com. Wells Fargo Advisors, LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Note: Investment and insurance products are not FDIC insured, not bank guaranteed and may lose value.