Ten Tips for Parents to Save on College Tuition
July 22nd, 2010 
Carol 
Paying for college can be intimidating. Financial aid has its own language, including an alphabet soup of acronyms like FAFSA and EFC. It changes rapidly, with new programs and tweaks to old programs occurring every year. College tuition also continues to increase faster than the consumer inflation rate. Even financial aid professionals have trouble keeping track of it all. So what can a parent do to save money on college costs and avoid making a mistake that will ruin their child’s future?
Mark Kantrowitz, a nationally-recognized expert on student financial aid, student loans, scholarships and paying for college, provides ten tips about the most important steps parents should take to cut college costs. Mr. Kantrowitz is also the publisher of FinAid.org, the most popular free web site for clear and unbiased student aid information, advice and tools, and Fastweb.com, the largest and most frequently updated free scholarship matching web site.
1. Save money in a 529 college savings plan. Start saving as soon as possible because your greatest asset is time. If you start saving at birth, about one third of your college savings goal will come from earnings, not contributions. If you wait until your child enters high school to start saving, about ten percent of the savings goal will come from earnings.
You can invest in any state’s 529 college savings plan, but 32 states and the District of Columbia provide a state income tax deduction for contributions to the state’s 529 plan. That’s like getting a discount on tuition equal to your marginal tax rate. (Some states require that you keep the money invested for a year before taking a distribution, since the state income tax deduction is based on contributions net of deductions.) If you start saving when your child is young, however, you should focus on the state 529 plan with the lowest fees. These are usually the 529 plans that are managed by Vanguard, TIAA-CREF and Fidelity. Also invest in the direct-sold version of the plan, not the adviser-sold version, as the fees are much lower. Use the age-based asset allocation within the 529 plan, as this will reduce the risk of losses as college approaches.
It is also cheaper to save than to borrow. If you save $200 a month for 10 years at 6.8% interest, you’ll accumulate about $34,400. If instead of saving, you borrow this amount, you’ll pay $396 a month for 10 years at 6.8% interest. The difference is that when you save, the interest is paid to you, while when you borrow, you pay the interest. So you can pay less after college by saving more money before college. Every penny helps.
Parents should aim to save about one third of future college costs to spread out the cost over time. Another third will come from current income and financial aid, and the final third from future income in the form of education loans. Since college costs increase by a factor of three over any 17 year period, this suggests that your savings goal should be based on the full cost of a college education the year your child was born. You can probably predict whether your child will enroll in a public or private non-profit college. If you think your child will enroll in a public 4-year college, you should save about $200 a month from birth until matriculation. If your child will enroll in a non-profit 4-year college, you’ll need to save more than twice as much, $435 a month from birth.
2. Search for scholarships on free web sites like Fastweb.com. Answer all of the optional questions in addition to the required questions to maximize your matches. Start searching as soon as possible, as there are scholarships with deadlines in every month. Don’t wait until the spring of the senior year in high school to start searching, as you’ll miss about half the deadlines. There are also scholarships for children in grades K-11, as well as scholarships for students who are already enrolled in college. Fastweb will automatically send you an email message to notify you about new awards for which you are eligible.
Beware of scholarship scams. If you have to pay money to get money, it’s probably a scam. Never invest more than a postage stamp to find out information about scholarships or to apply for scholarships. The best scholarship databases are free, like Fastweb.
3. Apply for financial aid for free with the Free Application for Federal Student Aid (FAFSA) at www.fafsa.ed.gov. The FAFSA is used to apply for federal student aid, state grants and money from most public and private colleges. You should apply every year, even if you didn’t get any money last year, as the formula is complicated enough that slight changes in your financial situation can have a big impact. The FAFSA is also a prerequisite for some forms of financial aid that do not depend on financial need, such as the unsubsidized Stafford loan.
The FAFSA is submitted every year as soon as possible after January 1. Don’t wait until you’ve filed your federal income tax return, as several states have very early deadlines for state student aid, as early as February or March.
4. Choose a lower-cost college. Be realistic when selecting colleges. Include at least one financial aid safety school, which is a college that will not only admit your child, but where your child could afford to attend even if he or she got no financial aid. The differences between most colleges are in the students, not the faculty or facilities, so a motivated student can do well at any college, regardless of the price tag. Debt at graduation correlates strongly with college costs. All else being equal, students who graduate with no debt are about twice as likely to go on to graduate school as students who graduate with some debt.
When choosing a college, compare the financial aid offers based on the out-of-pocket cost. This is the difference between the cost of attendance and the grants and scholarships in the financial aid package. It ignores loans, which have to be repaid, usually with interest. The out-of-pocket cost is a reflection of the real cost of each college.
5. Don’t overlook the education tax benefits. The Hope Scholarship and Lifetime Learning tax credits give you some money back at tax time based on the amounts you spent (using cash or loans) for college costs. The Hope Scholarship is the better of the two tax credits, as it gives you more money (up to $2,500) with higher income phase-outs and is not subject to the Alternative Minimum Tax (AMT). It is also partially refundable.
6. Minimize debt. Every $100 you spend using student loan money will cost you about $200 by the time you pay off the debt. Live like a student while you are in school so you don’t have to live like a student after you graduate. Don’t borrow more for your entire education than your expected starting salary after you graduate.
7. Use a Tuition Installment Plan instead of borrowing. If you can afford to pay the college bills, just not all at once, a tuition installment plan spreads out the cost over 9 or 12 months for a small up-front fee, typically less than $100. Ask the college for information about the tuition installment plans they offer.
8. Borrow Federal First. Federal student loans are cheaper, more available and have better repayment terms. The federal education loans have fixed interest rates, in contrast with the variable interest rates available on private student loans. Private student loans might have a low initial interest rate, but that rate is sure to increase over the life of the loan. Even if you don’t qualify for a subsidized loan like a Perkins loan or a subsidized Stafford loan, you can still get an unsubsidized Stafford loan or a Parent PLUS loan since you don’t have to be poor to qualify for these low-interest rate loans. Call your college’s financial aid office to ask how to apply.
Private student loans should be used only if you have exhausted your eligibility for federal student loans. Needing to borrow private student loans is often a sign of over-borrowing. If you must apply for a private student loan, apply with a creditworthy cosigner. Lenders base eligibility and the interest rates and fees on the higher of the two credit scores. So if your cosigner has a good credit score, it can save you money by getting you a lower interest rate.
Try to pay the interest during the in-school period, if you can afford it, as this avoids the need to defer the interest by capitalizing it. Interest capitalization adds the interest to the loan balance, increasing the size of the loan and forcing you to pay interest on interest.
9. Claim the student loan interest deduction on your federal income tax returns. Up to $2,500 in student loan interest can be deducted as an above-the-line exclusion from income. You can claim this deduction even if you don’t itemize.
10. Parents should partner with the student. Neither student nor parent should do all the work. College is a transition from a sheltered existence to the real world. Paying for college is a good opportunity to teach the student about personal finance. The student can help by applying for scholarships and by working part-time during the school year and full-time during the summer. Working part-time can improve grades by forcing the student to learn time management skills. However, working more than 30 hours a week could interfere with academic performance. Most importantly, the student can help by studying hard to get good grades. Students must maintain at least a 2.0 GPA in order to continue to receive federal student aid.
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