Crash Course in Funding College

By Sarah Max, CNN/Money Staff Writer
NEW YORK (CNN/Money) – For many U.S. high school seniors, April is College Acceptance Month, the time when letters of admission finally arrive. For their parents, it’s Welcome to Poverty Month, when they see the size of next year’s tuition bill.

If your bundle-of-joy plans to head off to some leafy campus, this may be a bittersweet time for you. On the one hand, you’re relieved that the college search is coming to an end. Then again, the reality of what college will cost is finally hitting home.

In 2002 alone, tuition prices crept up an average of 5.8 percent at private schools and 9.6 percent at public schools. Investment portfolios, meanwhile, shrank by at least that much.

That sounds bad, but don’t nix your kid’s dream school just yet. The price of tuition still may be negotiable, and it’s a buyer’s market if you’re shopping for a loan.

Get your facts right about financial aid

The biggest mistake parents make in the college planning process is assuming that they will or will not get financial aid. Those who think they’ll qualify for aid don’t bother to save, while those who think they earn too much don’t bother to apply.

As a general rule, according to Ray Loewe, founder of College Money, parents with income below $75,000 are likely to qualify for some need-based aid, while parents with income above $150,000 probably won’t get much unless they have a lot of children. Still, you can’t be sure until you apply.

“There is no such thing as a cut-off for who does and does not qualify for aid,” said Linda Peckham, director of financial aid and training for the College Board. “There are so many factors that affect your aid. Often, private institutions have very different ways of determining need.”

If you did have the good sense to apply for financial aid in January, you’ll want to compare the different schools’ award packages, paying particular attention to what you’ll be getting in grants versus loans.

If you did not apply for financial aid, look into doing so now. Depending on the school, you may still be able to get some financial aid, though the best awards may already be accounted for. Even then, there’s always next year. Financial aid is awarded on an annual basis, and families must apply for these packages every year.

Go where the money is
Schools – particularly small private ones – are increasingly awarding what’s known as “discounted” tuition. You don’t have to demonstrate financial need for such discounts, and your child doesn’t have to be the next Carmelo Anthony or John Nash, either.

“One of the best things that happened to the middle-income group is colleges woke up and realized that it behooves them to divide up scholarships among several kids, rather than giving a free ride to one kid,” said Loewe. “Your kid doesn’t have to be a superstar to qualify. All they have to be is better than their peers coming into that school.”

Parents just starting the college hunt should try to target schools that are most likely to award such tuition breaks. In many cases, the schools themselves supply this kind of information.

You just need to ask for it
“Call the colleges, ask them to describe their ideal student and find out whether they have special scholarship money available to these students,” said K.C. Dempster, director of program development for College Money.

If you’re already holding acceptance letters from such schools, you may be in a position to negotiate for a better deal.

“One of the things we recommend is when you get financial aid packages, you go back and play one college off the other,” said Loewe, who advises clients to approach the schools by saying you can’t understand why college B offered you such a different package than university A. Playing dumb, it seems, works better than making demands.

Of course, there are certain schools where you can’t negotiate. “State colleges don’t have a lot of money and the price is fixed,” Loewe said. “At prestige schools there is such a waiting list to get in, they don’t need to give discounts.”

Borrow for a worthy cause
If there were ever a time to borrow for school, it’s now.

“Interest rates are so low, and on top of that they’re often tax deductible, said Kalman Chany, author of “Paying for College without Going Broke.”

The most desirable loans are awarded with financial aid, are in the student’s name and are subsidized by the government. With Perkins loans and subsidized Stafford loans, no interest accrues while a student is in school, payments don’t start until after he or she graduates, and interest is deductible, though there are income limits.

Right now rates for Perkins loans are fixed at 5 percent, while rates for Stafford loans are 4.06 percent; they’re adjusted every July but are capped at 8.25 percent.

Often, students who apply for financial aid don’t qualify for subsidized loans, but do qualify for unsubsidized Stafford loans, which accrue interest during school but still have the same low interest rates as the subsidized variety.

The next best loan, at least for the time being, is a home equity loan or line of credit. Rates on these loans also are extremely low, and in most cases, interest is tax deductible. Keep in mind, however, that rates on these loans are variable. (See “Are you blowing your equity?”)

If borrowing from home equity isn’t an option, you might then look into a Federal PLUS loan. Rates, also adjusted every July, are 4.86 percent. You could potentially finance 100 percent of your tuition bill with these loans, which are based on credit worthiness rather than financial need.

Many states even offer their own education loans at below-market rates. To see if your state has such a program, contact its treasurer’s office.

Finally, individual schools sometimes offer payment plans or have their own loans, for which they’ll waive fees. Hey, every little bit counts.