What do you do if the government's Expected Family Contribution is just too high or you can't manage the unmet need in your financial aid package? This page provides a few tips on finding the necessary resources.
See also FinAid's page concerning cutting college costs.
Your first step should be to talk to the financial aid office at the school. Ask for a professional judgment review and tell them about anything unusual about your family finances and anything that has changed since last year. Sometimes the school can make adjustments that will result in more financial aid.
Ask Relatives for Help
Asking relatives for money is never easy, but it is easier when you are asking for help with a worthwhile cause like your children's college education. Their grandparents may be interested in helping because your children are their legacy.
Relatives can pay the money directly to the college without incurring any gift taxes. (A payment for the education of a designated individual is not a charitable contribution and cannot be deducted on their income taxes.) Be sure to ask the school whether this will affect the student's need-based aid eligibility. If the school will be treating it as a payment on the student's account, it will generally have no impact on aid eligibility. But if the school treats it as a resource, it will reduce aid dollar-for-dollar.
There are other ways your relatives can help that will not have an impact on the student's financial aid package:
- If the grandparents set up a Section 529 College Savings Plan (or a prepaid tuition plan after July 1, 2006) where they are the account owners and the student is the beneficiary, it will not be reported on the FAFSA as an asset. Qualified tuition plans like these are only reported on the FAFSA when either the parents or the student are the account owners. (Some private colleges, however, will count all such plans as assets for awarding their own financial aid.) Distributions from qualified tuition plans are also not counted as income.
- If the grandparents pay the money to the parents, instead of the student, it will have no impact on aid eligibility. Gifts to the student are reported on Worksheet B of the FAFSA. Gifts to the parents of a dependent student, however, are not reported on the FAFSA due to a quirk in the definition of untaxed income and benefits. (Section 480(b)(7) of the Higher Education Act defines untaxed income and benefits as "cash support or any money paid on the student.s behalf, except, for dependent students, funds provided by the student.s parents". Since this definition is limited to money paid to or on behalf of the student, gifts to the student's parents are excluded.)
- A gift to the student after the student graduates will not affect need-based aid, so long as it is not a completed gift until after the student graduates. (Trust funds, on the other hand, are counted as a student asset and will severely impact aid eligibility.)
Borrow the Money
Education debt is good debt, in that it is an investment in the student's future. Just be careful to avoid borrowing more than you can afford to repay.
There are many options available for borrowing money to pay for your children's education. We are listing them in order from least to most expensive.
- The Perkins and subsidized Stafford loans have the lowest interest rates and the government pays the interest while the student is enrolled at least half time. But the loan limits are low, so this may not cover the full cost of education.
- If there is additional Stafford Loan eligibility, you can borrow it as an unsubsidized Stafford Loan.
- The PLUS loan is a parent loan that allows you to borrow up to the full cost of attendance, minus any aid received. But this is a parent obligation.
- Home equity loans and lines of credit may be an option for some families. They are available as either fixed rate loans or variable rate loans. Again, these are parent obligations.
- Private education loans have a variety of terms. They are generally based on credit with terms that are pegged to your credit score. These are student obligations, but often the parent must cosign the loan.
You can also make the federal education loans more affordable by consolidating them, which makes a variety of alternate repayment terms available. These include extended repayment, graduated repayment, and income contingent repayment. These can cut the size of the monthly payment significantly (by as much as half), at a cost of increasing the term of the loan and the total interest paid over the lifetime of the loan.
Cut your Budget
FinAid has two budget calculators that can help you manage your budget.
- The student budget calculator calculates the difference between education expenses and income, identifying when you are spending beyond your means.
- The family budget analyzer compares your expenses against regional and national norms, helping you see where you are spending more than most other families. This can help you identify budget categories where there are opportunities for saving by cutting expenses.
Some of the most common budget areas where savings is possible include:
- Meals & Entertainment
- Scale back or eliminate the family vacation. Travel and lodging costs are often the most expensive component of the family vacation, so consider staying local to cut costs.
- Cut back on eating out. Eating in is often much less expensive than dining in restaurants.
- Reduce other entertainment spending, such as cable/satellite TV, movies and spectator sports.
- Avoid replacing an older vehicle, or get rid of an unnecessary car. You will not only save on car and fuel costs, but also on auto insurance. Also consider replacing more expensive cars with less expensive cars and less fuel efficient cars (SUVs, Trucks) with more fuel efficient cars (compact cars, hybrids). Change your engine oil and filter as per the manufacturer's recommended schedule and maintain proper tire air pressure.
- Use public transportation to save on gas and to make your commute more productive.
- Buy gas at the lowest octane level for your car. Higher octane fuel does not improve performance and adds to your fuel costs.
- If you pay someone to mow your loan or a housekeeper to clean for you, doing the work yourself can save hundreds or thousands of dollars a year. It is also a good source of exercise.
- Install a setback thermostat to reduce heating and cooling costs. Turning down the heat a few degrees and minimizing use of air conditioning can save as much as 15% of the annual heating and cooling bill. Sweaters and blankets are cheaper than gas and electricity. Weatherstripping the doors and windows and adding insulation to the attic can save money and make your home more comfortable. Turn down the thermostat on your hot water heater and insulate it.
- Replace incandescent light bulbs with compact fluorescent bulbs. Turn off your computer and monitor when not in use to save about $100 per year.
- Finances and Insurance
- Pay off and cut up your credit cards, instead of carrying a balance. If you carry a balance, you are living beyond your means. Use cash to pay for your purchases. Reducing your high interest debt will put more money in your pocket, instead of the bank's. Target the most expensive debt (highest interest rate) for elimination first. Paying all your debt installments on time can cut your financing costs by improving your credit score, as some interest rates are based on your FICO score.
- Refinance a high interest home mortgage at a lower fixed rate, to save on your monthly mortgage payments. If you've built up 20% equity in your home, ask your lender about eliminating the Private Mortgage Insurance (PMI).
- Cut insurance costs by increasing the deductible on your insurance policies and installing dead-bolt locks on your doors.
- Reduce your charitable contributions. Although helping others is important, it is also important to address your own needs first.
- Eat before doing your grocery shopping. You buy more when you're hungry, leading to wasted food. Also do your grocery shopping less frequently, reducing the opportunities for impulse buys. Use coupons when you shop.
- Shop around for major expenses, such as home repairs, car and homeowner's insurance, long distance telephone service and mortgages.
- Buy used but quality products at garage sales and online. Use web search engines to comparison shop on major purchases.
- Reduce spending on the lottery or other forms of gambling.
- Giving up coffee, tobacco, alcohol, candy and soda can save thousands of dollars per year, and also improve your health.
Reprinted with the permission of FinAid. © 2008 by FinAid Page, LLC. All rights reserved.