BY NORMAN G. GRILL
The prospect of paying for college can be daunting even if you have an above-average family income. Your first thought may be the college-funding vehicles, such as a Section 529 plan or a Coverdell Education Savings Account. But, while you ponder those, don”™t ignore financial aid.
Grants and scholarships are the most desirable form of financial aid, because unlike loans, they don”™t need to be paid back. Even though the two terms often are used interchangeably, they differ. Grants typically are reserved for financially needy students.
Scholarships are given to students with special skills ”” such as unusual academic, musical or athletic talents ”” or who belong to an underrepresented ethnic, religious or geographic group. They typically last for multiple years and may come with strings attached, such as having to maintain a particular grade point average.
Finding the right scholarships takes careful research, and competition can be fierce. Online scholarship databases can help your child target his or her search. Another invaluable resource is your child”™s college counselor, who may know about unpublicized local scholarships.
Loans ”” either federally guaranteed or private ”” are another option. If your family is financially eligible, federally guaranteed loans are preferable for three reasons:
Ӣ Students can defer federally guaranteed loans until graduation but generally must begin paying back private loans immediately.
Ӣ Federally guaranteed loans usually offer better rates.
”¢ Federally guaranteed loans don”™t require a parent to be a co-signer, while private loans often do ”” putting you on the hook if your child defaults.
Naturally, the major downside to college loans is that they can weigh down your child”™s financial obligation going forward. But their impact can be anticipated and managed with careful planning.
Starting several years before your child enters college, you can take steps to increase both the odds of obtaining financial aid and the amount of it you receive. For starters, apply annually. Your eligibility for aid may change from year to year. So even if you”™ve been turned down previously, it”™s smart to reapply in subsequent years ”” especially if your yearly income or savings fluctuate or if you have other children entering college.
Also, consider paying down debt as much as possible. If you have the savings to pay off debts, such as credit card balances or car loans, it might work to your advantage to do so before you apply for financial aid. This may also be a good time to prepay your mortgage. On the other hand, large amounts of savings can reduce your eligibility. Finding the right balance of debt and savings may require professional advice.
Fund your retirement, as well. Maximizing your retirement contributions ”” which aren”™t considered in financial aid calculations ”” can reduce your taxable income and thus increase the odds of receiving aid.
Last, consider going back to school yourself. Having more family members in college at the same time makes financial assistance more likely because of the added financial burden involved. If you”™ve ever thought about getting a graduate degree, now might be a good time.
To obtain federal financial aid, you and your child entering undergraduate or graduate school will need to do some homework ”” namely, fill out the Free Application for Federal Student Aid, or FAFSA. Most universities and states rely on the information on this federal form to make their financial aid decisions. Certain private schools may have a separate financial aid form for you to complete.
Jan. 1 is the earliest you can submit the form. Submitting it as close to that date as possible can get you into the aid pool early and maximize your chances of receiving assistance. If you”™re late with your application, you may find yourself at the bottom of the list when aid decisions are being made.
This has been a general discussion and is not intended as advice. Like any big financial decision, paying for college has a variety of nuances that you”™ll need to consider. So it is wise to seek the advice of professionals.
Norm Grill (N.Grill@GRILL1.com) is managing partner of Grill & Partners LLC, GRILL1.com, certified public accountants and advisers to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien. Contact the company at 203-254-3880.
A quick two comments. First, parents using the tactic of paying down debt won’t do much to increase the amount of aid their student will be eligible for. Second, parents attending college (going back to graduate school) will not count toward the FAFSA’s calculated ability to pay index (called an Expected Family Contribution) by federal regulations that were passed about 5 years ago.