College Cash: A Study Guide

Financial planners have plenty of long-range investment suggestions for parents whose kids will start college in 10 or 15 years. But what if your child is among the 10 million who are already 16, 17, or 18 years old, with high school graduation just around the corner? For many families stuck in today's sluggish economy, the cost of higher learning--about $6,000 a year at a state school, $20,000 at a private one--can be daunting. Luckily, Uncle Sam has just loosened the purse strings on financial aid.

Before President Bush signed an amended version of the 1965 Higher Education Act dn July 23, most federally sponsored loans and grants were unavailable to many middle-income parents of collegians. A primary reason: Even if a family was strapped for cash, the mathematical formula used by lenders to determine need counted any equity in a home or family farm as a liquid asset.

The new formula eliminates that obstacle. "It's a major change that opens up the possibility of aid to many more thousands of families," says Joseph Re, executive vice-president of Octameron Associates, publisher of Don't Miss Out, an annual guide to meeting educational costs. Other helpful rule changes:

-- More money. Next year's freshmen can borrow up to $23,000 over four years, vs. $17,250 previously, in federally guaranteed loans. And students who continue toward a graduate degree can borrow up to $65,000, vs. $54,750.

-- Lower interest. Long called guaranteed student loans, or GSLs, and now Stafford loans, in honor of retired Senator Robert Stafford, the borrowed sums have carried an 8% interest rate that rose to 10% in the fifth year of repayment. After Oct. 1, the rate will be variable: the three-month Treasury bill rate plus 3.1%, with a 9% cap.

-- More loans. For families whose income levels are too high to qualify for Stafford loans, a new program provides the same sums--with one difference. On regular Staffords, the government pays the annual interest while students are in school; then, starting six months after graduation, students can repay interest and principal over a period of 5 to 10 years. With the new "unsubsidized Stafford," the student must pay interest from the outset.

At the Student Loan Marketing Assn. (Sallie Mae), the Washington (D.C.) corporation that provides lenders with funds, Senior Vice-President Lydia Marshall notes that the new rules phase in over the next year. But don't let that confuse you. "The important thing," she warns, "is that all students who need financial aid--even if they doubt they'll qualify for it--should apply for it early." That means parents of high school seniors aiming for college in fall, 1993, should immediately familiarize themselves with the alphabet soup that is part of the process.

The journey begins with a financial aid form (FAF) or family financial statement (FFS). Students can usually obtain them in November from high school guidance counselors or any college financial aid office. But because it calls for current-year data on a family's income, taxes, and assets, the form cannot be signed or submitted for processing until after Jan. 1.Answers to 75 or so questions give the government, lenders, and colleges a firm idea of how much you and your child can pay toward his or her education. Octameron's Anna Leider, who co-authors the company's guides, says some people mistakenly ignore these forms "because they don't consider themselves among the needy, as the word is commonly used." She cites surveys showing that 33% of respondents think financial aid goes only to minority students, and nearly 50% believe aid isn't available for an expensive private school if a family can afford a state school. Both assumptions are false.

The amount of need will vary with the choice of school and the family's and student's contributions. Often, part of the need will be met by the school, which may give a student an athletic scholarship or a grant for academic study. Or it may offer a work-study program to let the student earn cash by working in the admissions office, library, or other campus facility.

OUTSIDE AUDIT. If additional aid is required, the data on the financial aid form help determine whether a student qualifies for a low-interest Stafford loan. They're obtained by applying to a local bank, savings and loan, credit union, or other lender, but potential borrowers must first demonstrate need. One of a handful of companies that serve colleges in different parts of the country analyzes the financial aid form figures and sends a report to the student's family. Copies are also sent to financial aid officers at the schools the student hopes to attend.

From the data, the financial aid officer at each school puts together a budget that shows how expenses can be met through the student's and family's contributions, plus grants, scholarships, and loans. The plan comes in the form of an award letter, which sets a deadline for the student's acceptance. Don't let your child hold off replying so you can compare offers from different schools, warns Leider. Accepting a plan does not commit the student to attend the school, and it avoids the risk that the award will be canceled so the college can accommodate other students.

It's also an error to ignore a line on the aid form that asks whether a student wants to apply for a Pell grant. A basic layer of federal financial aid, these grants are outright contributions, not loans, from Uncle Sam. Next year, a Pell can provide $400 to $2,300 to a student--but rarely in cases where a family can contribute more than $2,200 toward college costs. Odds are that you can pay more, so why apply? Because, says Octameron's Re, financial aid officers won't consider students eligible for other awards unless they have first been turned down by Uncle Sam.

Even if your child qualifies for a number of types of aid, there can still be a gap between the available funds and the cost of tuition and room and board. Here, other changes in what is officially known as the Federal Family Educational Loan Program (FFELP) may help.

EARLY INTEREST. The PLUS program (for parent loans to undergraduate students) now lets creditworthy parents borrow any additional amount needed to fund a child's education. Previously, the limit was $4,000 a year, $20,000 altogether. And some freshmen who are turned down for both a Pell and a Stafford may qualify for funds under the supplemental loans for students (SLS) program, which can provide up to $4,000 a year. The interest rate on a PLUS or SLS loan is that of a one-year Treasury bill plus 3.1%, with a 10% cap (vs. 12% previously).

Unlike repayment of a Stafford loan, which is deferred until a student graduates, payment of interest and principal on a PLUS or SLS loan is scheduled to begin within 60 days. Sallie Mae's Marshall says a few SLS lenders will postpone repayment while students are in school if the parents assume responsibility for the interest. Or the lender may add deferred interest to the amount of the loan on a one-time, annual, or quarterly basis. "It's smart to compare different lenders' methods," she notes. The less frequently the interest is capitalized, the lower the total costs over the life of the loan.

Helpful as the new funding rules may be, some things look better on paper than in reality. For example, the revised act authorizes an increase in the maximum Pell grant to $3,700 next year, from $2,300. But no additional funding was appropriated for the program, so the most Uncle Sam can pay out remains $2,300. And that's despite some extra money that might be in the kitty as a result of another change: Incarcerated students who are on death row or serving a life sentence are no longer eligible for a Pell.

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