The weird world of college financing

Failing to have finances planned by Dec. 31 of your child's junior year in high school could prove costly


If your child will be going to college in a couple of years, prepare for a shock: Sending a child to college is going to cost a fortune.

With tuition, room and board, four years at a public university on average will cost about $70,000, and at private colleges the price is likely to be $140,000 or higher. But don't accept the price tag at face value.

Most middle-class families can qualify for some financial aid to reduce the cost, especially if they think ahead.

Parents who review their finances and make adjustments during their children's high school years can enhance their chances of receiving aid, potentially shaving thousands of dollars off the cost of college.

Yet many parents make mistakes, like keeping college savings in a Uniform Gift to Minors account or taking out a second mortgage to pay for college.

To avoid costly mistakes, families must position their finances by Dec. 31 of the child's junior year in high school.

"People wait until it's too late," said Kalman Chany, a New York financial aid consultant and author of Paying for College Without Going Broke (Princeton Review, $20).

"They think they don't have any money and assume colleges will help them," Chany said. "Then they apply for aid and are shocked. They come to me and say, `How do they expect me to pay that?'"

But once a college financial aid offer is made, it's difficult to increase it. So the time for financial strategies is long before the senior year of high school.

Parents with incomes up to $200,000 should do a calculation at to see if their finances position them to qualify for financial aid - especially grants, or free money available to people who can't afford the full cost of college.

At public colleges, outright grants for college become difficult to receive when family income approaches $60,000. And at private colleges, that's the case when incomes are about $150,000.

Yet certain circumstances, such as sending many siblings to college simultaneously or excessive medical costs, may help.

Of course, students with strong talents and abilities also may qualify for merit scholarships in addition to financial aid.

To qualify for financial aid based on family finances, parents need to understand a quirky formula that is as complex as the tax code.

Using the formula, colleges calculate what they believe a family can afford to pay for college. That calculation is called "the expected family contribution," and essentially tells parents and students what percentage of their income and assets should be devoted to college.

After a college has calculated what students and parents must pay, the financial aid office helps cover what families can't afford, frequently by providing low-interest loans, work-study jobs and grants.

Attention to detail

Because parents frequently think they are strapped when colleges see plenty of resources, it's critical for parents to understand the elements in the formula so the calculation turns out as favorably as possible. It takes as much attention to detail as identifying deductions to cut taxes.

One common mistake is that tax accountants often encourage grandparents and parents to shift money to children by opening Uniform Gift to Minors Act accounts. Those accounts sabotage financial aid because they are in the child's name.

"If you are going to qualify for financial aid, you should never, ever put money in the child's name," Chany said. "It's like throwing money away."

For example, if a family has saved $40,000 for college, and the money is kept under the parents' name, the family will be required under the formula to use as much as $2,260 of that savings to pay for the first year of college, Chany said. If the family instead has kept identical savings in their child's name, they will have to spend $14,000 immediately.

This is often difficult for parents to understand because they assume college money will be treated the same regardless of the account it is in. But the quirky financial aid formula doesn't act with that logic. It looks at student income and assets differently from parents' income and assets.

Parents with an account in their child's name should try to get rid of it before Dec. 31 of their child's junior year in high school, said financial aid consultant Ray Loewe of College Money in Marlton, N.J.

The December date is crucial because tax returns from a student's senior year must be submitted along with financial aid forms when the student applies for college. Any financial transaction after the start of that tax year comes too late.

Loewe suggests families look for legitimate ways to use Uniform Gift to Minors account money before Jan. 1 of their child's junior year in high school. The money belongs to the child and can't be moved to a parent's account. It also does no good to put it into any other account for the child.

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