CLOSING THE GAP
Borrowing $27,000 over four years probably won't cover the full cost of attending college away from home. Clients who are willing to take on college debt can get PLUS loans, under another federal program. Parents can borrow amounts up to the full cost of college, minus any financial aid package.
PLUS loans, though, are not as attractive as Staffords. The fixed interest rates are higher (either 7.9% or 8.5%), and there is a credit check. "The credit check is not as stringent as it is for some other loans," Chany says.
Still, parents who have lost a home in a foreclosure or have been severely late with a debt payment will not get these loans; Kantrowitz says that PLUS loan denials appear to have increased in 2009. If a parent is denied a PLUS loan, the student can borrow slightly higher amounts via unsubsidized Staffords, just as independent students have the same higher Stafford ceilings.
Besides an interest rate that's higher than the rate for Staffords, PLUS loans have fees of 4%. An alternative for parents, suggested by Chasnoff, is to use home equity debt for higher education. "Interest rates are attractive," he says. "If a family has a reasonable amount of home equity, that could be a good choice." Bankrate.com puts the average interest rate on a home equity line of credit under 6%; the interest payments are more likely to be tax-deductible than the interest on a PLUS loan.
"Although some parents have discussed the possibility of withdrawing from their retirement accounts to pay for their children's college education, our analysis concludes that they would be better off using debt," Chasnoff says. "Loans are generally a better option, given the tax implications associated with retirement account distributions."
Even though there is no 10% early withdrawal penalty if a client uses an IRA to pay higher education expenses, it should still be considered a last resort—especially now that it could mean selling stocks near a market bottom (we hope). As McGrath puts it, "The last thing a parent should do is to tap his or her retirement account. You can borrow for college, but you can't borrow for retirement."
"Even with endowments down, many private universities have attempted to maintain financial aid to students," Kantrowitz says. "They may be cutting back elsewhere, and they might be reducing merit-based aid in order to maintain their need-based aid."
Some need-based aid might be available to financial planning clients in the current economy. "If the parents have experienced a significant change of circumstance (job loss, reduction in income, high medical bills, etc.), they can send a letter of explanation to the financial aid office to request reconsideration of their financial aid package," Fox says. "This year we have found colleges to be very responsive to families who have demonstrated a genuine need for additional help."
Moreover, families not considered "needy" may nevertheless qualify for financial aid-at the right school, one where the student will easily qualify for merit aid. "One of the best strategies for reducing higher education costs is to make sure the student applies to colleges where he or she falls within the top 20% to 25% of the applicant pool," Fox says. "Or, a school may be looking for a talent or a characteristic that student can provide. In those situations, students may be offered the best financial aid packages, even in tough times."
According to Fox, there are hundreds of private schools that will offer tuition discounts or scholarships of $5,000 or more to get the students they want. "This one strategy alone may allow parents to send their child to a private school where their student can actually graduate in four years and get taught by professors rather than teaching assistants, yet pay the same as (or even less than) the cost at a public university," she says.
MAKING COLLEGE LESS TAXING
The federal government also offers financial aid for higher education, including various tax breaks. Earlier this year, the American Recovery and Reinvestment Act of 2009 created an expanded version of the Hope Scholarship tax credit: the American Opportunity tax credit, now scheduled to expire after 2010.
The new credit can save taxpayers as much as $2,500 in tax, if they spend at least $4,000 in a calendar year on tuition, fees, books and materials for higher education. The credit is per student, so a client paying for two collegians this year or next can save up to $5,000 in tax. There is even a refund, up to $1,000 per student, if the parent owes less federal income tax than the credit would be worth.