The College Crunch

By Daniel Kadlec

Robert and Kyuja Kafka never thought they would need a scholarship for their son Gene, who is enrolled to start college in September. The Kafkas had saved diligently through a tax-favored college fund. But along with their retirement kitty, the Kafkas' college savings are dwindling. It's an urgent problem that many families with college-age children now face: while retirement is still some years away, college, which they thought they had prepared for, is suddenly a crisis. Some parents are postponing their children's education; others are bypassing private schools in favor of good old State U.

For the Kafkas, it's a mad scramble. Gene agreed to early acceptance at Colby College in Maine, and half his $37,000 first-year tuition, room and board is due Aug. 1. But the Kafkas' savings have fallen more than 50%, to just $16,000. The Kafkas are applying for student loans and lining up some backup plans, like arranging a home-equity line of credit and postponing a home-remodeling project. "We're not in a negotiating position," says Robert, 54, a college administrator in Los Angeles.

Jack Girvan, a college-funding adviser in Hyannis, Mass., recounts how a couple burst into tears in his office last week after telling their daughter that she would have to transfer from St. Mary's, a private college in Maryland, to the University of Massachusetts at Amherst (not to be confused with private Amherst College). "She was devastated," Girvan says. But the family had few alternatives after its savings in stocks designated for her remaining education and that of two siblings dropped from $121,000 to $37,000.

Universities across the U.S. are reporting a sharp increase in requests for financial aid. At Arizona State, students qualifying for need-based loans are up 30% over the past two years. "There is a lot of uncertainty due to the loss of value in families' assets," says Jim Molloy, associate director of financial aid at Notre Dame, where spending on need-based financial aid is up 10%. Mark Evans, director of financial aid at Kent State, reports that requests for additional aid because of "special circumstances" have risen 65%.

State schools, meanwhile, are being deluged. At Kennesaw State University in Kennesaw, Ga., freshman applications doubled this year. "That's just stunning for us," says Joe Head, dean of enrollment services. He attributes the increase to heightened job insecurity, layoffs, a post-9/11 desire among parents to keep the kids close to home and the meltdown in stock savings.

The much touted 529 college savings plans aren't providing much shelter. The plans, whose earnings are exempt from federal and some state tax, came into wide acceptance about three years ago, just as the market was peaking. They now have $11 billion in assets, much of it stuffed into aggressive-growth portfolios--the ones that have fallen hardest. For one Arizona Family College Savings 529 plan, nearly a quarter of the assets are in funds that have fallen 30% to 60% since its inception in 2000.

How best to cope? If you've taken a big hit or lost your job, go back to the financial-aid office. That's what Esther Park, 49, of Allentown, Pa., did after her husband was laid off. Now daughter Michelle can stay at Northwestern University in suburban Chicago. Originally, Esther and her husband were responsible for $23,000 of the $40,000 annual bill for tuition, room and board. The school agreed to reduce the Parks' contribution to $7,000. Another option is borrowing and giving your stocks a chance to rebound. Student-loan rates are less than 4%, the lowest ever, and home-equity loans are back near the 35-year lows seen last fall. If you stay with stocks, diversify. Look for low-fee 529 plans like the ones run by TIAA-CREF, and for safety's sake, select funds that automatically shift into conservative investments as college age approaches.

--By Daniel Kadlec. With reporting by Sean Gregory/New York, Jeffrey Ressner/Los Angeles and Leslie Whitaker/Chicago

With reporting by Sean Gregory/New York, Jeffrey Ressner/Los Angeles and Leslie Whitaker/Chicago