A we-haven't-been-saving guide for parents.

By Julie Bawden Davis

Types of Aid

When you have three kids — one of whom is already in high school — the subject of college comes up often. It would make my husband and me stress out because we just haven't been able to save much money. Luckily, that doesn't mean higher education is out of reach; you just need to know what to do. Here's the lowdown.

Need-Based Aid

Exactly as the name implies, this type of assistance comes into play when a given school costs more per year than what a family can be expected to pay, relative to their financial situation. While people of modest means will qualify for more assistance, everyone should still apply. "It's a potentially costly mistake to assume you make too much money to be eligible for aid," says Tom Bottorf, a college planning specialist in Dana Point, California, with getcollegefunding.com. And it's a common misconception that owning your home automatically means aid is out of the question. The bottom line: Apply. It can't hurt and it might help.

How to Apply: You must fill out the Free Application for Federal Student Aid (FAFSA) annually. Using information you provide about your family's income and certain assets, such as bank accounts, stocks, and bonds, as well as any similar assets your child may have, the government comes up with a dollar figure called your Expected Family Contribution (EFC).This is the amount of money they say you can reasonably afford to put toward college costs for the next school year and also establishes whether you're eligible for any federal programs, including subsidized loans. Every school has a unique Cost of Attendance (COA). If the COA at a school is greater than your EFC, the difference equals Need, meaning, the amount of money the family will still need after their contribution, or EFC, is applied. There's no ironclad guarantee that her dream school will offer that dollar amount, but qualifying is the crucial first step.

Technically, the FAFSA can be submitted anytime from January 1 through June 30 of your child's senior year of high school, but earlier is better. Though loan applications are processed on an ongoing basis for qualified students, grant money is generally given out first-come, first-served, so you want to submit all your info as soon as possible. A paper FAFSA is available, but it's best to file electronically at www.fafsa.edu.gov. Omissions or errors can be caught and rectified a lot more quickly, and better still, when your form is accepted, your estimated EFC appears onscreen, giving you a quick sense of where you stand. Your official Student Aid Report (SAR) will follow in about 7 to 10 days.

Before you log on, gather recent federal tax returns, W-2 forms, and savings and checking account statements. Data about retirement accounts such as IRAs and 401(k)s aren't required for the FAFSA, but the values of any other types of investment accounts are. About 33 percent of FAFSA forms are randomly verified (meaning, you will be asked to provide documentation) in any given year, so don't fudge the numbers. If the government finds that you intentionally provided false or misleading information, you could get fined up to $20,000.

Non-Need-Based Aid

Brainiacs, athletes, tuba players, kids from rural areas. Colleges want them all so they have an interesting student body. Millions of dollars in non-need-based aid is offered every year to students for reasons that have nothing to do with their family's financial situation. Although these awards are frequently merit-based and go to students who excel academically, there are plenty of scholarships given out for athletic ability and creative talent in areas such as music and art. Even your ethnicity or the region where you live can be a plus. When you know your kid is serious about a particular school, inquire with the college's financial aid office about any special scholarships he might be eligible for. Just be aware that merit-based aid may likely lower the need-based aid.

Loans and Work Study

According to CollegeBoard.com, more than half (about 54 percent) of all financial aid comes in the form of loans. Generally, federal ones are most economical — and therefore most desirable — because they have low interest rates and payments are deferred until after graduation. In some cases the government picks up the tab for the interest while the student is in school. Loans are also available from banks and other private sources, but they have higher interest rates and are not subsidized.

  • Federal Perkins Loans are need-based, low-interest (5 percent) loans administered by a school's financial aid office. The max for undergrads is $4,000 per year.
  • Subsidized Stafford Loans are also need-based and carry an interest rate a little lower than prime. The U.S. Department of Education subsidizes them by paying the interest while the student is in school and during a six-month grace period after graduation; after that, monthly payments come due. Annual awards range from $2,635 to $5,500, depending on grade level.
  • Unsubsidized Stafford Loans differ in that the student is ultimately responsible for all interest incurred during the life of the loan, though rates are generally reasonable. Demonstrating financial need is not required. Loans start at $2,635 and max out at $5,500 per year.
  • Plus Loans are available to parents of dependent undergraduate students enrolled at least half-time. Moms and dads can borrow up to the full cost — tuition plus expenses like books and housing — minus any financial aid received. Interest rates for these loans tend to be somewhat higher, fixed at 8.5 percent, and repayment starts right away.

If your child qualifies for the Federal Work-Study Program, she can get a part-time job; the program is administered by individual schools with government money. Undergrads are paid an hourly wage and the amount earned per year cannot exceed a student's total Federal Work-Study award unless the school is willing to absorb the cost of wages above the approved amount. Of course, if no "official" work-study money comes through, there's nothing prohibiting your kid from lining up a part-time job on his own. (As long as he doesn't earn more than $3,000, this added cash won't up the family EFC.)

Gifts from Relatives

If grandparents want to chip in toward college costs, it's best — for you — if they hang on to the money until after aid eligibility has been determined; then, you can put the cash toward your EFC or save it until loan payments come due later. However, relatives may have their own reasons (most likely tax-related) to want to hand over the money sooner. If so, one option is to transfer the funds to a custodial account in your child's name under the Uniform Transfers to Minors Act. When used, the money will be taxed at the child's rate, which is lower than the parents'. Just know that 35 percent of the money may be considered when determining federal aid eligibility, potentially raising your EFC. And once a kid reaches what is called the age of majority (18 in most states), she can use the funds for anything she wants. The restriction on the account has to do only with age, not how the money is spent. Make it clear ahead of time that the cash is for educational expenses only.

Money-Saving Tips

Bang-for-the-Buck Schools

Everybody wants the best possible deal for a big-ticket purchase like a house or a car, but when it comes to college, "People still think they need to spend more to get more," says Robert Franek, vice president of publishing for the Princeton Review. "It's not necessarily true." To find out more, check out America's Best Value Colleges, 2007 (Princeton Review). Franek's top picks:

  • University of California-Los Angeles (ucla.edu) A diverse population of high achievers who thrive inside and outside the classroom.
  • New College (ncf.edu) The public honors college for the Florida state system, it provides a traditional liberal arts education at a bargain-basement price.
  • Brooklyn College (brooklyn.cuny.edu) A campus of academic strivers, many of whom are from the New York City area and are the first in the family to go to college.




— Rachel B. Martin

Smart Ways to Save

With total yearly fees at a private four-year university currently averaging $29,026 and $12,127 at a 4-year public college, higher education is a pricey proposition. Though a degree is definitely desirable — over an adult's working life, someone with a bachelor's degree earns nearly $1 million more than a person with just a high school diploma — facing the 20s and beyond with hefty student loan payments is not. According to a May 2006 survey, 44 percent of respondents paying off education-related debts said they had to delay buying a house. How to steer clear of debt, or at least minimize it? Try these tips from Corey Sandler, author of Cut College Costs Now! (Adams Media).

  • Consider a cheaper path to a big-name degree. Think about having your kid enroll at a community college; after a year or two of getting great grades, she can transfer to her dream school. She'll end up with a prestigious piece of parchment for far less money.
  • As her list of potential schools narrows, evaluate each one's approach to financial aid as closely as you weigh its academic offerings. For example, some schools, including Harvard and the University of North Carolina at Chapel Hill, are trying to help kids who come from families below a certain income threshold graduate debt-free by providing tuition through a combination of scholarships, grants, and work-study programs. Read the Web site for a basic policy overview, then call to speak directly to a counselor if you have additional questions.
  • Alert schools if there has been any change in your family's financial circumstances — such as death of a wage earner, divorce, or major medical expenses not covered by insurance — since you filed the FAFSA. They may be able to offer more aid.
  • Be ready to negotiate. If your child receives a much better package from a competing university, speak with a financial aid officer about the discrepancy; he may be able to offer more aid to match or at least come closer to the higher offer.

— Anna Davies