Q&A: Advice on Paying for College Paying for college is a daunting endeavor for most families. For advice on what parents and students can do to help finance the cost of higher education, NPR.org turned to financial aid experts Kenneth Redd and Kal Chany.

Q&A: Advice on Paying for College

Web Links from Kenneth Redd

Links Redd mentioned in this Q&A:

Other Web resources Redd recommends:

This site has information on 529 college savings plans for all 50 states.

Some examples of free scholarship Web services include:

In addition, Redd says parents and students should check with the financial aid office of their college or university to see if they offer scholarships for students with and without financial need, and parents should consult a financial adviser to see if they are eligible for tax-advantaged college savings plans or other types of savings or investment opportunities.

Taking Issue

Author Richard Vedder argues higher education lacks market discipline. College presidents fire back that the business model doesn't apply. Follow the debate:

Paying for college is a daunting endeavor for most families. For advice on what parents and students can do to help finance the cost of higher education, NPR.org turned to Kenneth Redd, director of research and policy analysis at the National Association of Student Financial Aid Administrators, and Kal Chany, president of Campus Consultants and author of Paying for College Without Going Broke.

Q: How early should parents start to plan and save for their children's college tuition?

REDD: Of course, the earlier parents can start saving for college the better. Many low-and middle-income parents say they don't have the resources to save for college. But if parents can start saving small amounts when their children are newborns (for example, $25 per month), then even that small amount could go a long way toward reducing the amount of financial aid they will need when their children are 18.

But this is always an individual decision, based on the parents' income and many other factors, and regardless of their children's ages, parents should discuss their savings goals and objectives so that they can do what is comfortable for them.

CHANY: Ideally, parents should start planning for college costs nine months before their first child is born. While you might think I am joking with such a response, the reality is that time is everyone's greatest asset --regardless of one's financial circumstances. The sooner you start to save and invest for upcoming college costs, the longer you will have for your nest egg to grow.

In terms of exactly how much money you should be setting aside, I think it is best to have families start by setting aside whatever they can. Then it is crucial to have the discipline to keep adding to the college fund on a regular basis. Think of it as a required monthly or quarterly payment. So that just as you pay the monthly bill for your housing or an auto loan, you make a payment to your college fund. Then if there's a financial windfall, such as an inheritance or a bonus at your job, you should consider placing a significant portion of the funds you receive in the college fund.

Q: Let's say you have parents with a young child -- a 3-year-old, for example. They have a long time to plan and save for that child's college tuition. What can they do now to maximize their savings potential?

CHANY: Unfortunately, there is no "cookbook" response to that question, as the correct answer will depend on a number of factors, including the family's educational goals for the child(ren), the family's current financial situation and the family's future income prospects.

The parent's risk-tolerance level is also important. Over time, the rate of return on stocks has exceeded the rate of return on fixed-income investments such as bonds, Certificates of Deposit and money market funds. Given the younger age of the child(ren), you can afford to take more risks. However, if you are the type of person who will lose sleep if you notice your investment has gone down in value, then you will need to take that into account as well.

REDD: There are a number of tax-advantaged savings programs that parents of all children (regardless of their ages) should be aware of. For example, by using "529 savings plans," parents of young children can save for college, with their savings amounts being sheltered from state and federal income taxes. There are also Coverdell Education Savings Accounts (formerly called Education IRAs) that might help, as would U.S. Savings Bonds, which are geared for low- and moderate-income parents who may be able to save small amounts each month for their children's college plans.

Parents should consult the Web site SavingforCollege.com, which has good, objective information on tax-advantaged 529-college savings plans and Coverdell Education Savings Accounts.

Another option for parents of very young children is to invest in a college tuition pre-payment plan. These plans allow parents to pay the tuition of their young children at today's rates. Because tuition will undoubtedly go up over the next 15 years, a family that could afford to pay tuition now for a child who might go to college in the future would save a great deal of money. For a listing of all the states with pre-paid tuition plans, go to HigherEducation.org.

However, many states have restrictions on their tuition pre-payment plans, so parents should check with their state department of treasury to find out the eligibility requirements and other possible restrictions. For information on the recent pitfalls of pre-payment plans, visit the link to Money-Zine.com (provided at top left).

Finally, parents of very young children should consult a financial advisor, who could tailor a college savings plan for their individual needs and circumstances.

Q: What about parents who DON'T have a lot of time left to save -- say, those with a 14-year-old, or a 16-year-old. Do you have any savings tips for them?

REDD: Regardless of the child's age, it is NEVER too late to save for college! College savings plans (such as Coverdell Savings Accounts and 529 plans) are available for the savings of teenage children as well. Even saving small amounts for children of these ages could make a difference in lessening the amount students may have to borrow in the future. Once again, the best advice for these parents is to consult a financial advisor who can explain the savings plan options that might best fit their needs.

CHANY: Even if you have been diligent with your college nest egg since your child was born, you should be adjusting the allocation of the funds out of equities as the college years approach. You want to be sure that the funds are available when you will soon need them, and you do not want to be forced to sell them to pay some tuition bills right after the stock market has had a significant decline. Many families learned this lesson the hard way after the stock market bubble burst in the early years of this decade.

Q: What kind of strategies can help increase eligibility for financial aid?

CHANY: I almost always start my college financial planning seminars that I give to parent groups with the same statement: "There are a number for ways to pay for college, but perhaps the best way is to have someone pay for you –- and you do this by applying assertively for financial aid." Unfortunately, most families pay more money than they have to for college because they do not plan ahead early enough for the financial aid process, take a passive approach with the process, and/or do not take advantage of all the educational tax benefits that are available.

In terms of financial aid, you should realize that certain adjustments to your income, assets, debts, expenses and retirement provisions can have a significant impact on how much need-based financial aid you receive from the federal government, your state government and the college itself. Assuming your child will go directly from high school into college, eligibility for such assistance will be based on income generated as early as Jan. 1 of the junior year in high school. As such, it is not too early to start planning to maximize your eligibility by making some adjustments when the child is in ninth or tenth grade.

For example, you should try to minimize any discretionary income during the years that affect aid. I'm not saying you should quit your job. However, let's say you are going to sell some stock that has appreciated in value to help pay for college. You would be better off selling that stock before Jan. 1 of your child's junior year in high school if you were otherwise eligible for financial aid. That is because if you waited any longer, the capital gain caused by the stock sale would raise your income in the aid formulas and reduce your aid eligibility.

Adjusting your income tax withholding can also impact aid, since refunds on state and local taxes can boost your Adjusted Gross Income (and your income in most aid eligibility formulas) if you itemized your deductions on your federal tax return in the prior year. These are just a couple of the strategies you can employ.

Q: What sorts of scholarships are available for college students today?

REDD: Basically, there are two major types of scholarships and grants available for college students. The primarily type is referred to as "need-based" grants. These are grants that are provided to students who have financial need -- need is determined based on information from the students' and their families' financial aid application.

The second type of scholarships is often referred to as "merit" or "non-need based." These are grants that are given to students based on their academic merit, athletics, artistic talent or other criteria besides financial need. That is, students who have good grades or high scores on SAT or ACT college admissions tests often qualify for these "merit" scholarships.

In 2004, the College Board found that there was $46.4 billion available in college scholarships from all sources. Roughly 75 percent of these scholarships were "need-based" and 25 percent were "merit" or "non-need based."

Q: How should parents and students go about finding these scholarships?

REDD: To get information on the federal grants and scholarship program, parents and students should consult the Student Aid Guide, which is on the Department of Education's Web site.

The Education Department's Web site also provides a link to the Free Application for Federal Student Aid, which is the basic application that students and families must file in order to qualify for financial aid.

Second, families should consult the financial aid departments at their current or prospective colleges and universities. These aid officers are usually quite helpful in providing students with information on institutional need- and merit-based scholarships and other types of aid programs.

One thing parents and students should NOT do is hire a consultant to search for scholarships or apply for financial aid. Paid consultants are usually quite expensive, and there is so much free information available that paying someone generally is not worth the cost.

CHANY: Most colleges and universities offer merit-based scholarships. At the majority of schools, these funds are awarded by the admissions office. While most schools will simply use the admission application to determine eligibility for these funds, some may require students to complete additional forms, take an exam, or submit other materials. It is best to review the college's admission literature regarding these awards, as the deadlines to apply for these awards may be sooner than the regular admissions deadlines.

The high school guidance office and your home state's higher-education assistance authority should be able to provide you with information regarding any merit-award funding by home state.

However, while all states have need-based programs to assist students, not all states offer merit-based scholarships. And those that do may not permit students to take such funds to out-of-state institutions.

The typical student who applies for outside scholarships doesn't get any money. For those that do, the average awards are rather small. Such outside scholarships also represent less than 5 percent of all the financial aid that is available. (The other 95 percent is mostly need-based assistance).

And if you are lucky enough to win an outside scholarship, it may not even save you one penny. That is because outside scholarships represent a "resource" that reduces your eligibility for need-based aid dollar-for-dollar. While some schools have become more enlightened and reduce the student loans and work-study part of the aid award first, most just reduce need-based grants and replace the lost funds with the outside scholarship.

This is not to say you should not spend any time looking for such scholarships, but you need to be pragmatic. Unless your child is stellar, you are most likely wasting your time applying for the big national scholarships, as only one student in 25,000 or 50,000 may get any money.

You will have a better chance applying for the more locally based scholarships that are awarded by an employer, community organization, or your church, synagogue or mosque. These awards are often not listed on the free scholarship search Web sites that so many students use. Then if you win an award, you should try to convince the school to reduce any need-based loans or work-study jobs awarded as part of your financial aid package.

Q: What about getting a loan?

REDD: To qualify for loans or grants from the federal government or colleges and universities, students and families must complete and file the Free Application for Federal Student Aid -- often referred to as the "FAFSA." This application is available on the Web. Financial aid administrators use the information from the FAFSA to determine which students are eligible to receive federal grants and loans.

The types of loans available vary by students' and families' income and other information from the FAFSA. Students who have "financial need" may qualify for "Subsidized Stafford Loans," which allow students to get the loan aid without having to pay interest while they are in school. Students who do not meet the financial need requirements may qualify for "Unsubsidized Stafford Loans," which require students to be charged interest while they are enrolled in school.

Another type of loan is the Federal Perkins Loan, which is usually reserved for students with very high amounts of financial need or students who come from low- or moderate-income families. The types of loans students may receive is determined based on the information provided to aid administrators from the FAFSA.

CHANY: After investigating these students loans, you should next consider the federal PLUS loan (which is a loan available to parents of undergraduate students). The PLUS is not based on need, but there is a credit test involved. (However, some PLUS lenders will permit a creditworthy individual to co-sign the loan if you cannot pass the credit test.) The school should be able to supply you with information about other private loans as well. Most of these private loans have more attractive terms than a personal loan you will get from your local bank.

Q: Is it wise for students to get into debts so early in their lives?

REDD: College debt can be quite daunting. The most recent report on debt found that roughly 60 percent of students who received bachelor's degrees had borrowed at some point during their college careers, and the average amount of debt was nearly $16,000. While that is a lot of debt for someone just 22- or 23-years-old, it should be kept in mind that college debt really does pay off in the long run.

Most bachelor's degree recipients receive jobs soon after completing their programs, and the average starting salary for B.A. and B.S. recipients has been rising -- it is now over $30,000. One national study published last year found that most new college graduates now use less than 8 percent of their starting salaries to repay their loans, which means that their incomes are large enough for them to pay their loans without a lot of difficulty.

CHANY: Problems can occur, though, if students take on additional debt beyond the federal loans (i.e. excessive credit card debt and/or private education loans as a student borrower). One should also be more cautious if the student’s chosen career involves a lower-paying entry-level job.