Easing the Worry of College Tuition

With a yearly price tag of $30,000 for private colleges and up to $15,000 for public universities, there is no way for many families to cover the cost with savings.

So how can people actually afford to send their children to college?

That ugly question pops up in the minds of most parents as the dinner table talk shifts to the array of college choices facing their bright teenagers.

A recent survey showed that the rising cost of college was one of parents’ top worries, second only to their children using illegal drugs.

Yet experts caution that students and parents need not fall victim to sticker shock--recoiling in horror over the rising costs of tuition, fees, books, room and board.

About 81% of students qualify for some sort of help with college bills. Even some families with six-figure incomes can get need-based aid, including federally subsidized loans and a variety of tax breaks.

So don’t automatically dismiss the notion of financial aid. Eligibility varies widely with circumstances, such as if the family faces the steep burden of private college tuition, has a couple of children in college at the same time or has separated parents who maintain different households.

Experts recommend performing a needs analysis by filling out federal forms, checking with a financial aid advisor or running the numbers through one of a smattering of Web sites that offer such financial calculators. (See Online Help in the box at bottom.)

The most important thing, experts say, is to plan ahead.

But even if you didn’t open a college savings account when your budding collegian was in diapers, there are steps you can take to play the student aid game.

Maximizing Your Eligibility

Many of the strategies involve positioning your finances to maximize your family’s eligibility for aid. They tend to fall into two categories--sheltering assets and reducing income.

That’s not to say hiding assets or underreporting income.

Such cheating is illegal, and your chances of getting caught are at an all-time high as colleges and the U.S. Department of Education crack down on violators Congress just gave the department the authority to compare financial aid information with federal tax returns--without your written permission.

“We’re doing more things to check, and the rules are tighter,’ says Maureen McLaughlin deputy assistant education secretary.

Congress loves to tinker with the rules, so some of these strategies may not work in future years. But, for now, here are ways to position your finances.

Reducing Income: It’s best to get started, financial planners say, when your child is in his or her junior year in high school. Make the changes by Dec. 31 of that year.

That’s the end of the tax year, or base year, that will be used to calculate how much you can afford to contribute to the first year of college expenses.

If at all possible, try to reduce parental income during the year. That’s not to say quit your job just to improve your child’s chances for financial aid. But there are other things you can do.

Try to avoid selling any stock or bonds during the base yea because any capital gains you incur will be treated like income. So if you must sell stocks to help put your child through college, it’s better to do that before the junior year in high school. Another option is to wait until after the last financial aid application has been filed, in the junior year of college.

If you have any losers in your stock portfolio or other had in investments, you might consider selling them to offset other capital gains from the year’s dividends.

The federal formula is based on the adjusted gross income as reported on your federal tax return. So any strategies that re reduce that figure will also help you maximize your eligibility for federal aid.

Other ways to minimize parental income, financial planners say, are postponing any bonuses until after the base year, taking an unpaid leave of absence. And family-owned businesses can reduce the salaries of family members during the base year.

Don’t despair if you miss the Dec. 31 deadline or your child already a high school senior. What you do will affect a eligibility for the sophomore ye. in college. You’ll be applying for financial aid each year.

Sheltering Assets: One common pitfall is opening a college savings account in your child’s name, said Kalman A. Chany, author of “Paying for College Without Going Broke,” published by Random House.

You may get a tax break, Chany said, but you also could end up forfeiting any chance qualifying for financial aid.

Why? Because when a school calculates how much a family should contribute to college costs, it expects that 35% savings in a child’s name will go to meet educational expenses. Yet the expectation, under the federal formula, is that only 5.65% of parental assets should go to pay for college.

So, if you have stashed away $50,000 in a college fund in your child’s name, for example, the expected family contribution would be $17,500 for the first year in college. But if the fund were in the parents’ names, it would be assessed at only $2,825. And the more a family can pay the less aid is awarded.

If grandparents want to give money for a grandchild’s education, ask them to wait until after the student has graduated. They can help the student pay off student loans. If the grandparents cannot wait, ask them give the money to the parent instead, so the money will be assessed at the lower rate.

Liquidity of Assets a Prime Consideration

Under the federal aid formula, it’s not just who holds the money, but where it’s held and how liquid it is. The formula counts some types of assets when calculating how much a family can afford to pay, but not others.

Cars and boats, for instance, are not considered assets in the federal formula. Nor does the formula give you a break by factoring in high credit card bills.

Let’s say you have $10,000 in the bank but $5,000 on your Visa card. You know that you have a net of $5,000 in cash, but the formula only sees the-money in the bank,

So one strategy is to take liquid assets--such as cash from a bank account--to pay off credit card debts or automobile loans.

If you are anticipating certain expenses for your college-bound student--such as a car, furniture or a computer--it might be better to buy them before the base year as a way to reduce your liquid assets.

Of course, if your child has a savings account, you should spend that money first, given how it would be assessed at the much higher rate.

The federal formula also doesn’t Count home equity--although many universities do. So depending on the student’s college plans, it may be worthwhile to pay down your mortgage with any extra cash lying around.

Individual Retirement Accounts and 401(k) funds are not considered assets in the federal formula. So it makes sense to maximize contributions to these funds before the base year.

Don’t withdraw money from these accounts to meet college expenses, especially if you incur tax penalties. Many 401(k) plans allow you to borrow against your holdings for college expenses.

Tax Breaks: If you are absolutely sure that your hefty salary or fat portfolio will disqualify your child from receiving need-based financial aid, you might as well take advantage of as many tax breaks as possible, financial planners say.

Giving money to your child could save you tax dollars because the child would be in a lower tax bracket. Parents can give up to $20,000 a year to a child without incurring a gift tax.

In addition, parents now have the option of putting money into an Education Individual Retirement Account in their child’s name, under a new tax break that began this year.

To be sure, there’s nothing quite like tax-free earnings to help boost compound interest over the years.

But there are limitations to these Education IRAs.

First, a family can deposit a maximum of only $500 a year in the name of a college-bound child under the age of 18. So even in a bull market, such a savings plan couldn’t begin to cover the steep tuition of most private colleges, nor all of the expenses--including room and board--of going to a public university.

The Internal Revenue Service does not allow a tax deduction for such an IRA deposit. But the earnings will accumulate tax-free and can be withdrawn without paying taxes, provided the money is used for college tuition, fees, books, equipment or basic room and board.

Once a student reaches 30, the student’s Education IRA must be closed or transferred to a younger member of the family.

Under new rules that took effect in January, you can also withdraw money--without penalty--from your own IRA to cover your own college expenses or the expenses of a spouse, child or grandchild.

But these new Education IRA benefits are designed for married couples with adjusted gross incomes of less than $150,000 a year and are completely phased out for couples with incomes that exceed $160,000. A single parent can make up to $95,000 and still squirrel away future college expenses in them; however, the benefit is phased out if that single taxpayer’s income tops $110,000.

Furthermore, any student who receives tax-free distributions from an Education IRA is automatically excluded that year from two other tax breaks aimed to help the middle class: the Hope Scholarship and the Lifetime Learning Tax Credit.

The Hope Scholarship applies to tuition and fees during the two years of college or vocational school. Students receive a 1( tax credit for the first $1 spent on fees or tuition and a 50% credit on the second $1,000, up to a maximum of $1,500 a year.

College juniors, seniors and turning students can qualify the Lifetime Learning Credit, which took effect July 1. It allows a family to get a 20 credit for the first %5,000 tuition and fees paid by a student each year through 2002. A that, a family can claim a 20 credit for the first $10,000 in tuition and fees.

For now, the Lifetime Learning credit is limited to $1,000 family, no matter how many family members are in coil But a family can claim both credit and the $1,500 Hope Scholarship.

These credits were designed for middle-class couples with adjusted gross incomes of less$80,000 and slowly phase out as income reaches $100,000. For a single parent, the full credit is available to those who make up to $40,000 and then phases out by the time income reaches $50,000.

If these tax breaks sound complicated, it’s because they are. The IRS offers some help on its Web site (See Online Help), detailing the rules and exceptions.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Getting Help Online

In the confusing world of financial aid, looking for guidance on the Internet can quickly become overwhelming. Most university Web sites give some tips on how to get going. But here is a short list of some of the better sites that offer practical advice:

The National Assn. of Student Financial Aid Administrators offers an extensive Web site (www.finaid.org) with helpful work sheets, briefing papers and financial calculators, and has links to sites with information on grants and loans and free Web searches for scholarships.

The U.S. Department of Education’s site (www.ed.gov) is where you can find information ton the Direct Loan program and the government’s Student Guide to Financial Aid, as well as the Free Application for Federal Student Aid, which must be filed out as the first step for anyone applying for student aid.

Inside the Internal Revenue Service’s site (www.irs.ustreas.gov/hot/hot97-60.html), you can figure out if you qualify for the Hope Scholarship, the Lifetime Learning Tax Credit, Education IRAs and other tax breaks that became available this year.

The College Board’s site (www.collegeboard.org) offers free online searches for scholarships and has a variety of calculators that can determine how much your savings can grow over the years, how much debt parents can afford, and even one that matches student loan debt against typical first-year earnings for graduates of various majors.

Sallie Mae, which buys student loans from lenders, offers a site (www.salliemae.com) with calculators to help you figure out your expected family contribution to future college costs, estimate borrowing needs and figure out how . much interest will accrue on your loan if you defer payment.

Mortgaging the Future?

Although overall financial aid has been increasing, most of it now comes in the form of loans, which must be repaid.

Some experts worry about the escalating debt facing students after graduation.

1997-98

Loans: 59.4% Grants: 38.9%

Source: College Board, Trends in Student Aid, 1998.