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AP: College financial aid system facing stiff test

By DAVE CARPENTER

Finding financial aid for college this year promises to be tougher than any final exam.

The quest for money that begins for students and parents every January has taken on new urgency in 2009 amid fears that loans and grants will be scarcer than in the past due to the recession.

“The financing system for college is in real crisis,” said Barmak Nassirian, associate executive director of the American Association of College Registrars and Admissions Officers. “Every one of the participants in the system is experiencing hardship — higher education institutions, states, aid donors and families all are cash-strapped.”

Federal student loans remain readily available — with some funding even increased recently by Congress. But the prospect that grants and scholarships may be cut at many schools, combined with the shrinking availability of private loans, has fueled widespread angst at a time when more people than ever are seeking help. Applications for federal aid for the current academic year already are running 10 percent above last year’s record pace, according to the Department of Education.

Savings held in Section 529 plans — the state-sponsored investment funds for college that are popular for their tax breaks — have been depleted by the worst bear market in decades and home equity values have plummeted. That has sapped two sources most tapped by parents to fund their children’s higher education. Colleges’ endowments have been similarly walloped.

Private student loans are especially hard hit. Last year, 60 private lenders provided $19 billion to students. Now, 39 of those have stopped lending to students and the remaining firms have made it harder to borrow, according to Finaid.org, a Web site that tracks the industry.

“The stress level is high,” said Rod Bugarin, financial aid adviser for the New York-based college consulting firm IvyWise.

Numerous revenue-short states are likely to consider cutting aid in one way or another, and public colleges and universities are expected to raise tuition — in some cases by double digit percentages — as they set rates for next year.

Scholarships from civic groups and local companies across the country also are likely to decline, Bugarin said, although it’s too early to know the extent.

What it all means is that families and college counselors are having to hold difficult conversations about reduced savings and the need to take on more debt and lower sights to focus on more affordable schools.

“There are no sure answers because we’re in new territory,” said Bruce Hammond, a Washington, D.C.-based college admissions consultant and co-author of “The Fiske Guide to Getting into the Right College.” “But students with high need and lesser credentials are going to have to brace themselves for less aid.”

Jean Kliphuis, 46, of Huntington, N.Y., is concerned about the tightening vise of college costs and how to pay for them as she studies aid prospects for daughter Katie, a high school senior who has applied to six schools. Jean is a librarian and her husband Tim is self-employed in the office equipment business. As middle-income parents of three children, their tab for college could be overwhelming if they didn’t do all their homework on aid options.

“There is money out there, but you have to jump through a lot of hoops to get it,” Kliphuis said. “So my husband and I are jumping through the hoops.”

The key to success in the “convoluted” financial aid process is good information, she said, and there’s lots of it available through schools’ aid offices and online at such sites as Collegeboard.com and Princetonreview.com.

Indeed, the news isn’t all bad. The federal government has authorized some $95 billion in grants, loans and work-study assistance to help almost 11 million students and their families pay for college this year, and its recent commitments mean that total will all but certainly be exceeded next year.

“It’s scary, but not as scary as people might think,” said Lauren Asher of the California-based Institute for College Access and Success, an independent nonprofit group.

Among the encouraging developments for parents and students:

- The government broadened student borrowing in the midst of the credit crunch, ensuring the continued flow of federal loans that families depend on ahead of costlier private ones. Among other changes, annual borrowing limits for unsubsidized Stafford loans, which students can take out regardless of income, were raised by $2,000 and parents can now defer repayment of federal loans until after their child leaves school.

Stimulus proposals that would give students more financial aid also are progressing through Congress.

“This certainly has been an unprecedented disruption in the student loan marketplace,” said Mark Kantrowitz, publisher of Finaid.org. “But Congress and the Department of Education have acted quickly to avert a crisis.”

- No school is known to have withdrawn pledged financial aid this academic year despite financial setbacks that have prompted them to make cuts elsewhere. A number of top institutions, from Harvard, Yale and Duke to smaller institutions with large endowments, announced expanded aid last year and have insisted they will stick to those commitments.

Aid can make a huge difference in affordability. The average list price of tuition and fees for the current academic year is $6,585 for in-state students at four-year public universities and $25,143 at private colleges, with some costing far more. But grants and tax breaks lower the average net price to about $2,900 at public universities and $14,900 at private schools, according to the College Board.

- Some students will benefit from the turmoil, especially at colleges with high tuitions and scarce resources.

“These places continue to jack it up,” Hammond said of tuition increases, “so if you can pay the full outrageous fee in this economy, as long as you can walk and chew gum you will be admitted. And if you’re pretty good — average, even — you might get a $10,000 merit scholarship.”

Admissions experts recommend considering a range of fallback options, from lower-cost public schools to community colleges or even waiting a year to save more money. And colleges and parents alike are hedging their bets on next year and beyond.

Administrators at Ohio State University see no big immediate impact on aid from the economy but are concerned about what may happen over the longer term, said Bill Shkurti, chief financial officer. The school’s endowment has fallen by as much as 30 percent from $1.5 billion a year ago but accounts for just 2 percent of operating revenue, he said.

The University of North Carolina at Wilmington, with a much smaller enrollment and endowment, similarly has taken a hit. In a scenario likely to be repeated on many campuses, financial aid director Emily Bliss says the school is bracing for unpleasant conversations with parents about next year as it relies more on loans in its aid packages and eliminates some of the “free” money.

“Grants and scholarships won’t all come through,” she said. “It’s difficult for us to tell families that, because our heart is breaking for them knowing what they’re going through.”

AP Education Writer Justin Pope contributed to this report.

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Another Financial Aid Horror Story – 100% True

This is about the worst case scenario that I’ve heard of when it comes to paying for college, and it’s completely true (except for the names). I know this family personally (and, no, they weren’t my clients. If they had been, they wouldn’t be in this mess right now!)

When it was time for Edward to start thinking about which college to attend, he didn’t give it a lot of thought. Many of the kids from his private catholic high school attended a particular local private catholic college, so that was what he decided to do. His parents hadn’t attended college, and Edward was their oldest child, so they fell squarely into the “clueless” category. All three of their children had attended private school K-12, and they had managed to pay with working overtime and taking second jobs. How different could it be for private college?

Edward was a decent student, but not strong enough to qualify for any merit-based scholarships. The school he attended didn’t offer much in the way of need-based grants, and with both parents working like crazy to pay for schooling for 3 kids, he probably wouldn’t have qualified for much free money anyway. So they took the student loan route. But did you know that Federal student loans have a maximum amount that students can borrow each year? When Edward started college, he was only able to borrow $2625 * his first year. That doesn’t go very far at a private college when you’re not getting any other free money, so he and his family also looked into private loans to cover the remainder of his charges. As an 18-year-old with no credit, he had to have a co-signor in order to qualify, so his father co-signed for his private loan.

Now multiply that scenario by 4 years of college. Oh, and Edward decided to move onto campus for his final two years, so his private loans went way up to cover those charges. When Edward graduated, he had over $17,000 in Federal student loans (not too bad), but almost $80,000 in private loans.

After graduation, Edward was lucky to secure a job in his field. It wasn’t quite full-time, so he got a second job to help with his bills. But his loan payments, combined with other normal living expenses (rent, food, utilities, car expenses, etc.) began to overwhelm him. He found that he couldn’t pay for his living expenses and still keep up with his student loan payments. He made sure to keep up with his Federal loans, but his private loans (from two different banks, which meant two different monthly payments) began to slide into delinquency. Edward’s father knew that one of his son’s private loans was in trouble, and helped by making payments on it, and counseling his son on financial matters. Edward did not share with his father that he had completely ceased making payments on the other, much larger private student loan.

Edward’s father had no idea that his credit was plunging into the depths until he applied for a mortgage and was denied. He was shocked! He had perfect credit (or so he thought) and 29 years on the same job. It was then that Edward confessed and told his father that:

• Edward had stopped making payments on his second set of private loans,
• The lender was preparing legal action against both Edward and his father (remember, the father had co-signed, so he was legally responsible to pay),
• And that the only way for the father to avoid having a lien placed on his home (and have the lien on his credit for 7-10 years) was to pay the full amount owed on the loans - $57,000.

Surprise! Bankruptcy wasn’t an option. Even if Edward filed, his father would still be left holding the bag. The father didn’t have enough equity in his house to cover the bill, and he probably would have been denied an equity loan because of his ruined credit. His only choice was to pull the $57,000 out of his retirement account, complete with penalties and taxes. So much for retiring in 6 years.

How could this have been handled differently?

• First and foremost, Edward should have shopped for schools that he and his family could have afforded. That doesn’t mean just cheap schools. Families are consistently surprised when they find out how much free money some colleges give their own students. After the college’s institutional gift aid (free money, grants, scholarships, etc.) are taken into consideration, some prestigious private schools are even more affordable than public universities.  That’s exactly why I created CollegeMoneyMatch.com. 
• If Edward was already borrowing private loans for his first two years while he was living at home, he should have remained there rather than moving onto campus and increasing his expenses and debt.
• Edward’s father moved from his home and didn’t notify the second lender of his change of address. He relied on Edward to keep him up-to-date on the loans.
• Edward should have been up-front with his father about his financial predicament.

It’s too late to fix Edward’s problem. His relationship with his father has been seriously damaged, and his father’s plans of retirement have been delayed significantly. My hope in sharing their story is that you learn from it. Let Edward’s devastating story inspire you to make better choices when it comes to fundingyour college education.

To read about other costly financial aid mistakes to avoid, check out www.DeadlyFinancialAidMistakes.com.

* Congress can change this, and as of this writing, first-year dependent undergrads can currently borrow $3,500 combined subsidized and/or unsubsidized plus $2,000 additional unsubsidized for their first year.

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Do You Really Need a College Financial Aid Consultant?

Would you trade $500 for $2000? How about $10,000, or even $40,000? If so, than read on.

Let me start off by saying that hiring a college financial aid consultant is not absolutely necessary. Many families manage to put in the time and effort to research the financial aid process, and end up doing just fine. Having said that, I’ve seen firsthand how being uninformed and making mistakes when it comes to financial aid can lead to devastating consequences.

A friend of mine (we’ll call him Rob) is a prime example. He hired a “financial aid consultant” to help him navigate the bewildering financial aid system when his oldest son was applying to colleges. I don’t know the exact qualifications for the man who showed up at Rob’s house to “help” him, but, he was clearly not qualified. Rob’s son was subsequently admitted to the expensive private school of his choice (which was no surprise, since it wasn’t a selective school), and they paid full price for the privilege. The son graduated, and now, 4 years later, both Rob and his son are still struggling every month to cover the payments on over $80,000 in student loans. I look incredulously at Rob and ask him, “What were you thinking?!?” His response: “We just didn’t know.”

So if you want to be sure that you’re informed about getting the most free college money, you may want to hire a professional. Let’s take a closer look at college financial aid consultants:

1. What does one have to do to become a college financial aid consultant? They must go to their computer and print up business cards with their name, phone number, and the words “College Financial Aid Consultant” on them. That’s it. There is no governing board or regulatory agency to qualify, regulate or monitor them. It’s up to you to determine if they are qualified.
2. What does a college financial aid consultant charge? Most reputable college financial aid consultants charge a fraction of what admissions consultants charge, and will probably end up saving you a lot more than what you paid. 
   
3. Exactly what does a college financial aid consultant do? An ethical, qualified college financial aid consultant will tell you all about the financial aid process. They will answer questions like: What is financial aid? How do I apply for it? How much can I get? They will inform you about grants, scholarships and student loans. They will also provide you with advice on exactly how and when to apply. They will go through the applications question-by-question, making sure that you answer each one accurately. They will help you sort through financial aid award letters, and help you determine which offer is the best one for you. If there are special circumstances, they will help you submit an appeal to the financial aid office.
4. What does an ethical, qualified college financial aid consultant NOT do?

• They will not ask you for your PIN in order to complete the FAFSA for you. That’s illegal.
  
• They will not tell you to lie about your income or assets in order to receive aid your wouldn’t normally qualify for.
  
• And they will never, NEVER offer to sell you an annuity. Some insurance agents have realized that parents who are applying for financial aid are “ripe for the picking” for buying annuities. Why is that? Because annuities aren’t listed as an asset for financial aid purposes. If a family has $100,000 in investments (stocks, bonds, CDs, etc.), that amount must be listed as assets on the FAFSA. However, if they liquidate all of it and buy a $100,000 annuity, they don’t have to list it on their FAFSA, and they may be eligible for more financial aid. Don’t be fooled. Anyone who offers to sell you an annuity is an insurance agent, not a college financial aid consultant.

If you’re looking for an ethical, qualified college financial aid consultant, there are two main questions to ask:

1. Have you ever worked in a college financial aid office? This answer should always be “Yes”. There are over 7000 federal regulations that deal with financial aid, and only someone who has worked in the “trenches” can really know the ins-and-outs of the application process, eligibility, packaging, etc.
2. Are you licensed to sell annuities? This answer should always be “No”. I have run into many of these “financial aid consultants” who make a KILLING selling annuities, but don’t offer very good financial aid advice.

So now that you know the ropes, don’t end up like my friend, Rob. Like hiring a tax preparer when you don’t know much about taxes, hiring a qualified, reputable college financial aid consultant can make a scary, confusing process easier, and can even save you money.

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Warning: Does Not Sugarcoat the Financial Aid Experience

While I was a college financial aid director at a small private college, I received a call from a nun who ended up cursing and hanging up on me. She happened to be working with a young girl from a very low income family, and believed that I wasn’t using my full power to give the girl the amount of free college money it would take for her to be able to afford my college. I tried in every way I could to explain our packaging policy and limited funds to her, but she was convinced that I was being unfair. So she swore at me and hung up. You know you’re having a bad day when a nun hangs up on you!

Anyone who has been through the college admissions and financial aid ringer has heard, “Don’t worry about the money. We’ll make it work.” For the lucky few, that’s a reality. However, for the most part, what they mean is, “We’ll make it work by you paying for most of it.” So here is my bottom line, and it may be a bitter pill to swallow: there may be colleges out there that you can’t (or shouldn’t) afford.

Ever since that nun hung up on me, I’ve dreamed of calling her back and saying, “There’s a blue Saturn in the parking lot. That’s my car. I could afford a Saturn, so I bought a Saturn. I didn’t go into the Mercedes dealership and blame the salesman for my not being able to afford the kind of car he sold.” College is the same way.

When I say that perhaps you “shouldn’t” afford a particular school, I’m saying that perhaps you will be so far in debt upon graduation that you’ve mortgaged your future to the hilt. Imagine if I had walked into the Mercedes dealership, and they had given me the best deal they could, but it was still beyond my means. Now imagine that I bought the car anyway. Imagine me driving that car back to my parents’ house, because I could no longer afford my own apartment. Imagine me eating my peanut-butter-and-jelly sandwich as I drove by the restaurant where my friends were having dinner. You get the point. Again, college is the same way. Is the diploma of that particular expensive school worth what you’re going to give up for it? Maybe, and maybe not.

I can already hear the responses now… “Do you mean to say that only rich kids should get to go to expensive colleges?” No. I’m not saying that at all. I’m saying that you need to look at the bottom line for each college before you make a decision.

Here’s an example:

There are two things to consider here:

• Notice the difference in free college money between the schools. Before looking at that, Private College B looked like the most expensive choice. Afterward, it’s almost on par with the State School. Before you decide that a school is too expensive for you, see how much of its own free money it gives to its students.
• Look at the total loan amounts. Even at the state school, you may be borrowing a lot of money. If you go to Private School A, borrow $108,000 and extend the payment period to 30 years, you’ll have payments of over $700 each month, and will pay more than $250,000 over the life of the loan. Now let’s look at the State School example. If you go to the State School, borrow $60,000 and pay the loan off in the 10-year standard repayment, your payment will still be about the same ($690), but you will only be making that payment for 10 years instead of 30, and you’ll pay less than $83,000 to pay it off.

My best advice is

• Find out how much of its own free money a college gives to its students. That can make the difference between what you can afford, and what you can’t or shouldn’t.
• Determine how much you might have to borrow over the life of your college education. Go to www.finaid.org to calculate your loan payments based on that amount.
• Decide whether you want to drive the Saturn and afford to have a life, or drive the Mercedes and live off of PB&Js for the next 30 years.

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Free College Money – Why Is It So Hard To Apply For?

Why is it harder to apply for financial aid and free college money than it is to do your taxes? We have been hearing about simplifying the financial aid process, so why can we not seem to do it? Why does it have to be so hard?

Those are good questions, and worth looking into. I have been saying for years that financial aid should not be so hard. It is hard on the students and parents trying to get it, and hard on the financial aid administrators trying to administer it. The system is cumbersome and confusing.

In my perfect world, I envision a student applying for financial aid like we currently apply for credit cards: just one SIMPLE online application. From that information, the Department of Education (ED from here on) would determine their eligibility, and apply that amount to their new “ED account”. ED would then mail the student a debit card connected to the account. The student could take that debit card to the school of their choice. Swipe – tuition is covered. Swipe – books are paid for. It is a beautiful thought, but there is no way for it to work. “Why not?”, you ask… Here is just one little reason why….

There are over 7000 federal regulations that deal with financial aid. You may have heard the saying, “It would take an act of Congress to…”. Well, since these regulations are written into law, it actually does take an act of Congress to change the financial aid process. In and among these federal regulations is an equation (or formula, or methodology) used to calculate a student’s or family’s ability to pay for school. This ability is called the student’s/family’s Expected Family Contribution (or EFC).

Imagine a large, complicated equation (or formula, or methodology). For our purposes, I will use this simple one below:

A + B – D x C = EFC (Expected Family Contribution)

If the regulations dictate that this is the equation you must use in order to calculate a valid EFC, then you have to have some way of collecting the data for A, B, C and D, right? That is exactly what the FAFSA does. It collects all (or most) of the information needed to calculate a valid EFC. So when someone asks, “Why are there so many questions on the FAFSA?”, I say, “Because those are the questions needed to fill in the blanks in the federally-regulated EFC equation.” And when they say, “I think we should simplify it and only ask 30 questions instead of 100.”, I say, “Great idea! But we will have to get Congress to change the EFC equation first, or no one will have a valid EFC.”

Clear as mud, right? The bottom line is, if you want it to be easier to apply for free college money, you will need to contact your elected officials and let them know about the problem.

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