Can You Pay His Way Through College?

By Jillian Kasky

When Christopher Wartmann set his heart on going to the University of Dayton, a private Catholic college in Ohio, he was less worried about getting in than about how his family would come up with the more than $20,000 a year it was going to cost. Thomas Wartmann, Christopher's dad and a route salesman in the Frito-Lay division of PepsiCo, earned just $38,000 last year, and Christopher's mother Eva earned $17,000 as a tennis coordinator at a country club. They faced a challenge common to the families of more than a million aspiring college students each year: how to pay the tuition, room and board that, without some kind of help, can total a third or more of the family's yearly income.

More than a decade ago, college tuitions were increasing at double-digit percentage rates. By last year the average increase had dropped to a more manageable 5%, and some schools, including the entire California state system, actually lowered tuition. But for most families the damage had been done. "Even the low increases in tuition this year were twice the rate of inflation," says Jonathan Satovsky, a New York City- based financial planner with American Express, "much higher than most families can prepare for."

The typical bill for tuition, fees, room, board, books and incidentals is $10,069 at public schools--23% of the average American family's household income. Only a very few of us can open our checkbook and zip off that amount. And yet somehow it gets done, as thousands of families scrimp a little here, borrow a little there and take advantage of a host of scholarships, grants and tax credits made possible by organizations ranging from the local Lions Club to the Federal Government in Washington.

The Wartmanns, you will be pleased to learn, actually can afford to send their son to Dayton. Christopher did his part by earning good grades--a 3.5 GPA--and participating in activities outside the classroom (he was captain of the varsity tennis team and an Eagle Scout).

Thomas Wartmann deserves high marks as well. As a 25-year employee of PepsiCo, he had heard about the company's generous scholarship programs and made a mental note to have Christopher apply for one when the time came. Christopher did apply and "let out a whooping scream" when he won the maximum amount: $8,000. The University of Dayton kicked in $7,500 in scholarship and grant aid (money that won't have to be paid back), leaving the Wartmanns with a bill of just $5,500, which they plan to pay in 10 monthly installments of $550 each.

To be sure, the Wartmanns are lucky. PepsiCo sets aside more than $1.5 million to dole out to employees' kids each year. But this one family's success carries a lesson for every family, whether your child is 18 months or 18 years away from freshman year. In spite of the record-high sticker prices, now is actually a great time to be headed for the halls of higher learning--right on the heels of Chelsea Clinton. Since her dad, the President of the U.S., has already paid a year's worth of tuition at Stanford, one of a growing list of schools that cost more than $30,000 a year, he feels your pain. So too, apparently, does Congress, which is why there has been a recent spate of legislation making college more affordable. The tools and the resources are there. If you plan ahead and do your homework, you too can afford to send your kids to college.

PERCEPTION VS. REALITY

For a start, don't be intimidated by reports of astronomical college costs. They apply to relatively few students: only about 80 colleges and universities charge more than $20,000 for tuition and fees. Add room, board, books and incidentals, and that number jumps to 300--out of 3,600.

Moreover, even at the priciest colleges, the real cost, after all aid is factored in, is just under half the sticker price. That's for the theoretical average student, of course, and shouldn't be taken to mean that you can just lop half the cost off any college's price tag and expect to pay that amount. But it does mean that, as Deputy Secretary of Education Mike Smith says, "the resources are there." You need to find them, and you need to plan. "No matter how old your child is," says American Express's Satovsky, "saving for college is paramount."

How to plan depends on where you and your children are in the cycle. The more time you have, the better your chances of meeting your target. Even if your child is within a year of enrollment in college, however, there are many strategies that will make college an attainable goal and resources that will help get you there.

THE LAST-MINUTE SCRAMBLE

The endgame tactics for paying the college bills are less about stashing away money and more about reducing the amount you'll pay. You can cut your college costs considerably before you figure in how much aid you're eligible for, how much you'll have to borrow or whether the new education-related tax credits apply to your family. So, even if you don't give it a thought until spring of your child's senior year in high school, you can still pull it off.

Let's say your child is accepted by all six colleges to which he applies. For starters, congratulations! You must be proud. Remember that when colleges accept applicants, they actually want them to come and will do what they can to make that happen.

At the outset, each school will evaluate your FAFSA (Free Application for Federal Student Aid) using a federal formula to determine how much federal aid you're eligible for, including loans with competitive interest rates, like the Perkins and Stafford (see chart). You'll receive a report from each school advising you of your expected family contribution.

Once that is determined, each college will decide how much money it will kick in from its own coffers. Public schools tend to be stingier with aid, but their fees are much lower to begin with. Private schools, on the other hand, show big numbers up front but are more likely to discount. Altogether, nearly 70% of all students receive some type of aid, including loans, and the average amount of federal money awarded to students is $7,441.

Grants aside for the moment, virtually any full-time student, regardless of income, is eligible for a federal college loan--an appealing option since the interest rates on loans, including Stafford. by far the most widely used, were lowered this year.

The new rates will save a four-year college student with a $12,000 average debt about $600 in interest over 10 years. That's a real boost, considering the average debt of college graduates is $12,866, and almost 1 in 7 alums owes more than $20,000. Additionally, the interest paid on any loan used for education expenses is deductible for borrowers with an adjustable gross income of less than $55,000 a year, or $75,000 for joint filers.

PLAYING THE MARKET

If your child is accepted at Princeton, you're doubly lucky. Not only is it an elite university, but in January, Princeton announced it would begin to dip into its endowment (the nation's fourth richest, valued at nearly $5 billion) specifically to help students from middle-income families offset more of its $33,040 annual price tag. Since then, Yale, Stanford and M.I.T. have announced similar plans.

Rather than stick to traditional financial-aid formulas that consider the value of your home, cars and other assets, these colleges will provide more grants and disregard at least $90,000 of income in calculating need. For a family earning $65,000 with college savings of $20,000, that could equal $3,500 more in grants than was possible under the old formula. Families with an annual income of less than $40,000 will receive substantially more in grant aid. "This new formula answers a question schools have heard middle-class students asking," says Tim McDonough of the American Council on Education (ACE): "'What about us?'"

These new breaks for the middle class are indicative of an important trend in college finance. As the cost of a four-year education climbs out of reach for more and more families, the colleges themselves are looking for ways to balance their desire for the best students with their need for paying customers. Depending on your own circumstances and the quality of your child's academic record, you may well benefit from this trend.

A bit of history: For more than three decades, something called the Overlap Group, a collaboration of financial-aid officials from the Ivy League and a few other top private colleges, compared notes on scholarship applicants to equalize aid offers and thereby prevent bidding wars over the best and brightest students. Then in the early '90s, the U.S. Justice Department argued that the Overlap Group was essentially engaging in price fixing and forced an end to the program. Now only the government monitors need, through its FAFSA process, and, though the colleges claim their policy is not to award scholarships purely on merit, there is a lot of juggling around the fringes of that policy.

Take, for example, Hong Kong-born Yat-Ming Judith Leung, valedictorian of the class of '98 at Nova High School in Davie, Fla. Leung, a poster child for the kind of diversity and achievement sought by colleges, earned a 4.0 GPA, taking 14 advanced-placement classes, and was accepted at Harvard, Yale and Stanford, with a generous aid package from each. By her calculation, Stanford's package was the best--a mix of loans and outright gifts. Her father earned just under $30,000 last year, and she felt her family couldn't afford to contribute as much as Yale expected. So she let Yale know. She wrote the financial-aid office and asked that the amount be adjusted based on the award from Stanford. "Since my father is in the process of opening his own business," she argued, "I fear that paying for my college education will drain our family's financial resources and jeopardize this chance he has to fulfill his lifelong dream." As a result, she got an additional $4,000 offer from Yale, lowering her parents' contribution to $6,000. Ultimately, Leung chose Stanford because of its psychology department, but she made a point well worth emulating.

A newfound willingness to bargain is even more likely to be found at colleges generally less successful than Yale and Stanford in attracting the most qualified students. Many highly competitive schools have begun to use a thinly disguised form of merit scholarship to land prized applicants. If your family income is not low enough to warrant a need-based scholarship but your daughter is seen as something of an academic catch, she may well be offered an additional stipend to make her decision easier. Don't hesitate to ask.

When applying for aid, however, don't assume that you can go around collecting scholarships from different sources outside the college and still get the same amount from the financial-aid office. Sparlha Swaby of Oyster Bay, N.Y., won a combined $12,000 in scholarship monies and assumed it would simply be tacked onto the more than $20,000 in grants she was getting from Stanford. But Stanford's policy at the time (it has since been changed) was to count that outside help against its own contribution--and so reduced the total awarded Sparlha by more than $11,000.

Such zero-sum policies are the focus of widespread debate on campuses, with some schools ignoring outside help completely and others applying formulas to reduce their own offers. The growing use of merit scholarships to snag the best students will only intensify the controversy. Since merit-based and need-based aid come out of the same till, there is a larger downside risk that this trend will come at the expense of the poor. So far, the effect is marginal, but, as Tim McDonough of ACE notes, "there's enough movement for people to be concerned about it."

GEOGRAPHY COUNTS

Since the college market is a two-way business, with admissions officers trying to buy the best students and students trying to get the best deal, it's important that you scour the landscape for all possibilities. In some cases, you may find a better bargain far from home, on a campus that values geographic diversity; in others, you may find a steal right under your nose.

One strategy is to abandon the East and West coasts, where the competition is keenest. Michael McPherson, president of Macalester College in Minnesota and co-author of The Student Aid Game, notes that "the majority of schools that have trouble filling their seats are regional." But they'll use money to attract exceptional students from outside their region, who in turn will attract similar students from back home. It is every college's dream, says McPherson, to attract "exceptionally bright and wealthy" students who come not only with the brains but also with the money to pay full tuition. A little aid here and there for the bright ones, the theory goes, and some wealthy ones will eventually follow.

Although many high school kids lock in on one college as their dream destination, it often pays--literally--to be flexible. Joel Kwamena Abraham of Santa Cruz, Calif., had already been accepted by schools he liked when Howard University urged him to apply. He was reluctant to trade the sunshine and easygoing atmosphere of the Pacific Coast for Washington--until he was offered a full scholarship, with a laptop computer thrown in, to attend Howard. He decided he was ready to try something new. "Money definitely played a major part" in his change of heart, he admits, but it paid off. He has found a school that's a good academic fit for him, with a supportive faculty. Last spring he was invited to dinner with members of Howard's board of trustees. Now a junior, he says, "I know I made the right choice."

State colleges and universities offer lower, subsidized tuitions for a reason: they want their sons and daughters to stay within their borders, prosper and contribute. In fact, 80% of all college students attend state schools. Don't overlook what they have to offer. Kathleen and John Firchau have four children--two in college already, two in high school with plans to attend college--and a household income of just $53,000. The family would be hip-deep in debt if all the kids ended up in private school. But Dennis, a senior at Michigan State, and Katie, a sophomore at Central Michigan University, have so far required a total of less than $4,000 in student loans, a relatively manageable sum thanks to the low costs for in-state students at Michigan's public schools, federal and state aid for Katie, and a scholarship Dennis earned from his high school job as a caddy.

Then there is sister Bridget, a high school senior, who is wavering between distant private and public schools, and local state schools. Cost, predicts mother Kathleen, "will play a very large role" in determining which college she attends. "You can get a good education at the schools in your state, so you have to weigh it out."

THE MIDDLE YEARS

If your child is between nine and 14, you've got more time to prepare, but there are clear-cut investment strategies you should implement now.

Stay in equities, recommends Satovsky. But start shifting part of your long-term college savings from riskier stock funds to safer investments, like a balanced mutual fund that invests in a mix of stocks and bonds. "If you have enough for school right now, and you move it all to only fixed-income, it's likely that college costs are going to outpace your portfolio," says Satovsky.

As your child gets older and closer to college, shift prior savings from stock investments to lower-risk savings bonds or CDs with a maturity concurrent with the time the bills are due. "Stay liquid," advises Lawrence Wiener, chairman of Pension Investors Corp. in Hollywood, Fla. "Don't expose yourself to unnecessary market risks; instead, emphasize accumulating as much money as possible, not on the return. The more risk you take, the more you'll suffer."

Try to keep your head during all this. "The money you're collecting is to contribute to your portion of the bills, which is the expected family contribution," or EFC, reminds Jacqueline King, director of federal-policy analysis for the American Council on Education. Don't alarm yourself by thinking you have to save the full amount of college tuition. On the other hand, don't fool yourself into thinking that if you neglect saving altogether, you'll qualify for more aid and thus be better off. "You'll only hurt yourself by not saving any money," warns King. "Believe me, it's not worth it to avoid saving to try to lower your EFC." That's because your EFC without any savings will be insignificantly lower than if you're somewhat prepared for the cost. You'll just end up saddling yourself or your child with extra debt to cover the EFC.

CRADLE TO COLLEGE

If you've just had a child, probably the last thing in the world you're worried about is college. But thinking about it eight to 18 years in advance puts you way ahead of the game. Even small amounts of money can grow enough to cover college costs. One way, of course, is to start stashing money into an account and watching it grow. Another is to take advantage of various prepayment programs that help you pay for tomorrow's education at today's prices (see box). Here's what the experts recommend for families in for the long haul:

Your best bet for earning high rates of return on your money over time is to invest in the stock market. Since you've got at least 10 years before you'll need the money, put it in growth-oriented investments that pay low or no dividends, like a stock mutual fund. Try stashing away a predetermined sum each month, say $100.

Avoid investing that money in income-generating and high-dividend stocks that could be taxed at a federal rate as high as 39%. Satovsky recommends stock mutual funds that are taxed at only the maximum capital-gains rate of 20%. Also remember that by keeping the money in your own name, you may net your child more financial aid when college finally rolls around. To calculate aid, colleges count 35% of the assets held in a child's name as being available to pay for her education and then reduce any aid they might give by that much. By contrast, only 5.64% of your savings are counted. That means if you saved $50,000 in your child's name, the college would count $17,500 of that; the same $50,000 in your name would result in a reduction in aid of only $2,820.

If, based on your assets now, it's unlikely that your child will get any financial aid, you should consider putting money into a Uniform Gifts for Minors Act account, which is in the child's name and offers more favorable tax rates. There is one drawback: "You lose control of the money," says Wiener of Pension Investors Corp. "At age 18, your child can use it for anything, even things you didn't intend the money for."

Another guaranteed-savings vehicle Wiener recommends for families that may not qualify for aid is a term life-insurance policy--one that will expire just at the time your child is ready to enter college. If you are a parent under 40, for example, for less than $1 annually per $1,000 of death benefits, you can ensure that the money will be there when your child is ready to enter college, even if you are not around.

Regardless of your income, many states allow you to either prepay tomorrow's tuition at today's rates or save in some other tax-favorable education account, for instance one that lets your money grow tax-deferred, much like an IRA.

"There are probably smarter ways to invest money," says Barbara Ellis of the $7,000 she and husband Chris paid into Colorado's Prepaid Tuition Fund for 16-month-old Lexi's college education. "But I'm no whiz at investing, and this way I know it's taken care of."

The trade-off is what you'd expect: investing in market instruments will probably yield higher returns and give you much more flexibility, but prepaid plans, while earning relatively less, ensure that you will have what you need when you need it. "The discipline of savings is the key," says Wiener.

For the Ellises, that means no need to apply for financial aid or be worried about market dips--and whether they can afford vacations. Their investment takes care of four years' worth of Lexi's tuition (any extra money from the fund can be applied to the cost of room and board or books), as well as her parents' peace of mind.

That's what the government was attempting to give families when it created the Education IRA last year. It was a good idea in theory. In practice, however, it doesn't do much for most families. "I would not recommend that any client save money in an EIRA," concludes Satovsky. Colleges have yet to decide how they'll count that money when determining aid, he reasons. Furthermore, in the year they withdraw from their EIRA, students won't qualify for the other generous programs created by Congress last year: the HOPE scholarship and the Lifetime Learning credit. Nor can money they withdraw from an EIRA be used in conjunction with a prepaid tuition plan. Since EIRAs are not considered retirement funds, they are set up in a child's name, and their value is calculated in the federal formula for financial aid. Result: colleges will take a bigger bite out of the savings.

There are a few ways you can send your children off to college and not be worried about all these calculations and caveats. You could be Bill Gates and buy the college of your choice. You could steer them toward one of the five U.S. service academies, where an appointment comes almost entirely at taxpayers' expense, or toward Berea or the Webb Institute, where tuition is free. Or you could get a job with Wilson Greatbatch Ltd. in Clarence, N.Y., which has an education fund that pays the full freight for company employees and their children. But chances are, those aren't options, in which case all this advice just might be worth a degree in something.

Jillian Kasky is the editor of TIME/The Princeton Review's The Best College for You, available on newsstands on Aug. 17.

--With reporting by Greg Fulton/Atlanta, Maureen Harrington/Denver, Marc Hequet/St. Paul and Adrianne Navon and Megan Rutherford/New York

With reporting by Greg Fulton/Atlanta, Maureen Harrington/Denver, Marc Hequet/St. Paul and Adrianne Navon and Megan Rutherford/New York