Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 18, 1993 TAG: 9310160030
SECTION: MONEY PAGE: A-10 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Higher education is an expense that requires many years of planning and saving, plus knowing how to tap a variety of other sources of aid.
New federal eligibility rules make it easier than ever for families to qualify for financial aid for college.
The question is whether the money will be there when you need it.
The Institute of Certified Financial Planners said the rules alter the formula for determining how much federal aid a student can obtain.
The formula, now known as the "federal methodology," is based on four major factors: income of the student's parents, the parents' assets in savings accounts and other investments, the student's income and the student's assets.
Using those factors, the formula calculates how much money the family is expected to contribute to the student's education.
If their contribution will not cover the total costs of the college or university, then financial aid will make up the difference.
At least, that's the theory.
Suppose you want to send your child to a public institution whose total costs - tuition and other fees - will run $9,000 a year.
The formula may determine that the family can afford to pay $6,000 of the bill.
That means financial aid - a package of low-interest loans, grants, work-study programs and scholarships - is supposed to cover the remainder.
If you have a second child in college at the same time, the family's expected contribution would not rise significantly. Rather, it means the family would qualify for even more aid.
Under the new federal rules, the institute said:
Equity in a home or farm no longer counts when determining a family's assets. That removes what is typically the largest single asset that most families own.
Students no longer are expected to provide from loans or income a minimum of $700 a year for freshmen and sophomores or $900 a year for juniors and seniors. If they work, a smaller portion of their income counts toward their income factor of the formula.
Families whose annual income is less than $50,000 and who file a short tax form don't have to report any assets.
The impact of these rules, financial planners said, is a family's expected contribution at a public college generally will be smaller. The amount of aid for which the family is eligible will be larger.
However, private institutions use an "institutional" formula for determining the aid they provide in addition to federal aid. The institutional formula still includes home equity and the other factors.
Because the federal formula focuses on the family's expected contribution and ignores the cost of college, the planners said, families in theory may be able to send students to more expensive schools that they may have planned.
But there's just one problem: The money for financial aid may not be there.
As more students qualify for aid, including more upper- and middle-income students, the pool of aid money is being spread thinner, the institute said.
Also, many financial aid programs are underfunded.
A major source of student aid, the federal government's Pell Grant program, has been underfunded since its inception in 1974. The maximum Pell Grant is $3,400, the planners said, but qualified students are getting $2,400.
And funds for scholarships remain limited.
Much of the financial aid available comes in the form of loans. They are low-interest loans, but still loans that must be repaid after a student completes college.
Despite increased eligibility for financial aid, the institute said, families are likely to pay more out of their pockets or to borrow heavily for college costs.
Most families will be able to borrow the money, according to the institute. But it costs much more to pay interest on borrowed funds than to earn income from investments.
That's why, the institute said, you earn the highest grades when it comes to planning for a college education by saving in advance - the sooner, the better.
by CNB