Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 26, 1993 TAG: 9304250007
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: Knight/Ridder-Tribune
DATELINE: PHILADELPHIA LENGTH: Long
Worse, costs are rising about 7 percent a year, or nearly twice the rate of inflation and faster than most families' incomes.
In 10 years, the bill will have nearly doubled to between $85,000 and $228,000. That's the bottom-line for everything, including room, board, transportation and spending money, according to Educational Planning Systems, a Marlton, N.J., consulting firm.
Most families, no matter how frugal, simply can't foot the bill.
But that doesn't mean their kids won't get a degree, or must settle for a two-year community college.
Last year Congress adopted changes that will increase financial aid availability for many middle-class families starting next fall. For one, the value of equity in a home or farm - usually the biggest family asset - will no longer be counted when determining financial need.
Families that don't qualify for financial aid can borrow the money. A new federal low-interest loan program will allow them to finance up to 100 percent of college costs.
So, no matter how little you've saved, the kids can still get their tickets to rewarding careers and much higher lifelong earnings.
But don't relax - your worries aren't over yet.
College bills can create an even bigger financial problem: Retirement.
Parents who exhaust savings and borrow to the hilt risk leaving too little for retirement. They could be forced to work long past age 65 to repay college debt, or to drastically curtail their lifestyles.
"Parents who have not saved enough for college expenses have a retirement problem," said Raymond D. Loewe, president of Educational Planning Systems, which does financial planning for college.
They could end up deeper in the hole, now that Congress has expanded financial-aid eligibility. With no additional federal money available for grants, the extra help will consist mostly of loans that must be repaid - often at the expense of retirement savings.
It isn't only a few spendthrifts who risk robbing their futures.
Loewe, an authority on paying for college, has counseled 25,000 parents in 15 years. "I haven't seen one that has saved enough for college," he said.
In fact, more than 90 percent of his clients are "crisis planners," who haven't saved much and don't think about college until their kids are juniors or seniors.
By that point, it's too late to save enough - and they're scared.
But careful planning can improve even late savers' prospects for affording college, without mortgaging their retirement, according to experts.
Key steps include maximizing financial aid to reduce out-of-pocket costs, selecting colleges that cost less or provide more aid, and investment and tax planning.
Parents often make serious blunders that reduce financial aid or limit college choices.
Putting away college savings in a child's name, for instance, can hurt financial-aid eligibility. That's because aid formulas count 35 percent of a student's assets, compared with only about 6 percent of parents' assets.
The worst mistake is failing to start saving early, preferably when a child is born.
Don't leave savings in the bank. CDs, money market funds and bonds won't provide the 7 percent after-tax return that you need to keep up with spiraling college costs.
Consider other funding sources, including home equity loans, borrowing from 401(k) retirement plans, or borrowing from cash-value life insurance policies.
Don't borrow too much. Older parents may have too little time to pay off college debt, unless they're willing to postpone retirement.
When children reach age 14, parents should figure out their expected financial contribution, using financial aid worksheets available at high schools.
Parents are likely to get some financial aid if their expected contribution is less than $10,500 a year. Aid candidates should avoid the tax-saving maneuver of putting money in their children's names, since this could jeopardize eligibility. Similarly, non-working spouses may decide against returning to work, given that aid is cut by 47 cents for every extra dollar earned, Loewe said.
Parents are unlikely to receive aid, and are more likely to pay list price, if their expected contribution exceeds $27,000.
For them, strategies include giving up to $10,000 a year to children 14 and older, so earnings will be taxed at the child's lower rate of 15 percent.
They should also consider increasing family income, or choosing among "many great colleges that don't charge a lot of money," Loewe said.
Nearly half of all college enrollees, or 42 percent, qualify for financial aid, according to the College Board, a nonprofit association. Some high-income families qualify because they have multiple children in college.
For aid-eligible families, the "expected contribution" represents the real cost of college, in effect a discount from list price, provided the school can meet 100 percent of financial need.
Under Congress' new guidelines, average annual parent contributions will drop 11 percent to $3,632, from $4,082. Contributions from dependent students will drop 75 percent to $512, from $2,051, said the College Board.
Parents who can get aid may find a top-name private college will cost them "only peanuts more" than a run-of-the-mill state school, Loewe said.
If the expected contribution is $11,500, for example, a well-endowed Ivy League university would cost a family only $1,500 a year more than a $10,000 school.
by CNB