A college degree is one of the most expensive purchases an American family can make. Recently, the College Board1 reported that if the annual rate of increase averages 5 percent, the cost of a baccalaureate degree for a child entering the first grade in September 2003 will reach approximately $104,000 at a public institution and just over $214,000 at a private institution.
On the brink of this significant investment, families often receive inadequate information from frontline admission and recruitment personnel. Parents, particularly those with incomes well above the national average, have questions that go beyond the basics. They want to know how to leverage their limited resources so that they can help their sons and daughters pursue higher education and still preserve their financial condition.
While today's costs are higher than ever before, parents have many more options whose sheer number and complexity have given rise to a whole new field-financial planning for college. This article, which is based on materials created for the enrollment management program at Tulane University, will supply admission and recruitment staff with practical financial planning advice that they can share with parents. It is a primer in college finance with enough detail to allay a family's fears and keep them engaged in the discussion of college affordability. The reaction from the families of prospective Tulane students has been very positive. They found this piece among the clearest and most comprehensive treatments of college finance that they had encountered.
This article focuses on federal need-based programs and explains how savings and other investments affect a student's eligibility for financial aid under the federal program guidelines. Institutionally-funded aid programs are mentioned when appropriate.
Five key questions drive financial planning for college.
1 How much financial aid will be available to the family?
2 How much need-based financial aid could they receive?
3 How much will they pay from annual income?
4 How much will they pay from savings?
5 How much will they finance?
Any discussion of financial aid and college finance must focus on these five questions as well as the four broad categories listed below.
* Financial aid programs-the basics
* Tax relief provisions for families with educational expenditures
* Tax incentives for those wishing to save for educational expenses
* The impact of various savings instruments on financial aid eligibility
Financial Aid Basics
Creating an effective strategy for financing a college education begins with a basic knowledge of current financial aid programs and processes. While the rules and regulations are numerous and complex, families formulating a college investment strategy only need to understand some basic principles.
BASES FOR AWARDING FINANCIAL AID
Two types of financial aid are available: merit and need-based.
Merit-based financial aid awards recognize the student's special skills or academic achievement. In making these awards, institutions typically do not consider whether the student needs the funding. Merit-based aid might be awarded to those with outstanding records of academic achievements, special abilities (e.g., athletic or musical), demonstrated commitment to community service, or some other activity that the college seeks to promote.
Need-based financial aid involves an analysis of the cost of a particular college and a family's income and assets. Financial aid is awarded to cover the portion of college costs that exceeds the family's ability to pay.
TYPES OF FINANCIAL AID
Financial assistance includes grants, scholarships, loans or work-study arrangements. Grants and scholarships represent a real reduction in the cost of attending the institution and carry no obligations for repayment. …