Parent’s & their Children 5-MINUTE Guide to Paying for COLLEGE

After buying a house, paying for a child's college education is the biggest expense most parents face. A college education pays off in many ways. Recent studies indicate that college graduates earn more and are less likely to be unemployed than those with high school diplomas. In addition, the "college experience" - new friends, new challenges and new accomplishments – can provide personal growth and enrichment that last a lifetime.

Here are some suggestions and tips that will help you understand the financial-aid game and get you started in the right direction toward finding a way to pay those college bills:

Tip #1: Start planning as soon as your child is born. You won’t have to face the expense for another eighteen years, but there are steps, like setting up special tax-deferred accounts, that can pay big benefits in the future.

Tip #2: Set up a Coverdell Education Savings Account (formerly called Education IRA, EdIRA) for each child as soon as possible. Up to $2000 a year can be contributed to a Coverdell ESA for anyone under age eighteen. That may not sound like much, but assuming the stock market’s average return of 10 percent, by the time your child is eighteen, the account will be worth nearly $ 112, 099.25, all of which can be withdrawn penalty-and tax free if it’s used for college. There are income eligibility requirements, but if you don’t qualify, grandparents, godparents, and friends can make the $2000 contribution.

Tip #3: Contribute the maximum to any retirement plan that can be funded with pre-tax players. The formulas used by most colleges for calculating financial aid don’t count the assets in your retirement accounts. In a pinch, you might be able to tap into your retirement money. (if you have a 401 (k) plan, for example, you may be able to borrow up to $80,000 and pay it back over as many as thirty years with a very attractive interest rate). Of course, you’ll want to avoid borrowing from your retirement money to pay for college if you can, since taking money out considerably reduces compounding. A better move might be to borrow against your house with a home-equity loan or second mortgage.

Tip #4: Do not set up a custodial account in your child’s name. Unless you are absolutely certain you will not qualify for financial aid, putting money in the child’s name is not wise thing to do. That’s because under the federal financial-aid formula many colleges use, children are expected to put 35 percent of their savings toward college costs. The more savings they have, the less aid you’ll get.

Tip #5: Plan your expenditures and investment activities with financial aid in mind. Your adjusted gross income (AGI) as shown on your tax forms is by far the most important factor in determining your eligibility for financial aid. But because most schools look at only the previous year’s finances when your child is applying for financial aid, you can reduce what you show if you plan things properly. (Some private schools examine two years of returns.)

For example, if you take capital gains in the years when your child is applying for financial aid, the college will assume that you earn that income every year. So don’t do it. Similarly, if you’ve been saving for a new car or for some other major expense, consider spending the money and thus removing it from your assets column.

Tip #6: Negotiate! Negotiating happens far more often than financial-aid administrators would want you to know. One technique: Play two or more colleges off against each other. Colleges will compete for desirable students. So if your child’s second choice makes a better offer than the first choice, call the financial-aid officer at the first choice and ask if the school can do any better.

Tip #7: Apply early and don’t give up. Colleges have a pool of money each year that they can use for financial aid, and when it’s gone, it’s gone. So don’t delay. Apply for aid at the earliest possible date. Also, don’t assume that you make too much money to qualify for any form of assistance.

You or your child will almost certainly qualify for some kind of low-interest, deferred-payment loan backed by the government. This is a good deal, and only after you have maxed it out should you consider getting a second mortgage or home-equity loan.

Tip #8: Students who work part-time or during summer vacations can really help a college fund grow. Adding cash gifts or part of an allowance to college savings increases your fund even more. This not only helps with college expenses but also teaches a valuable skill-saving for a goal.

When savings aren't enough. Financial aid is money that is given, lent or paid to you so you can pay for college. And, despite what you may have heard, financial aid is available to more students than ever before. The single largest source of financial aid is the federal government, followed by state governments, colleges and private organizations.

Plans to make payments more manageable. Loan consolidation, with plans like Sallie Mae's SMART LOAN Account, gives you the lowest monthly payments for the longest period. Loan consolidation offers initial interest-only payments that can be more than 40% lower than Standard Repayment, and the repayment term can be extended up to 30 years. With loan consolidation you can combine all your eligible loans into a single loan with a single monthly payment. A longer repayment term and lower payments will increase the total cost of your loan. Life after college is hard enough without having to worry about your debts. Student loan consolidation can help make it easier for borrowers to manage loans.

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(Personal Finance Management Guide by Marie Claire Cooper. It's all about good reading and smart information.)