College Finance 101: A Crash Course for Parents

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The Zimmermans are seeking ways to contain son Chad's future college debt.

Last year, Chad Zimmerman, then an 18-year-old high school senior in Montclair, New Jersey, applied to nine colleges. “Chad managed the whole process,” recalls his mother, Karin. “He chose schools with the aim of majoring in environmental science and he also wanted to play lacrosse.” When acceptance letters started pouring in, Chad ogled team stats while his parents eyed financial aid offers. One school’s aid package stood out—Hobart and William Smith Colleges in Geneva, New York, which offered the most aid. “Even more than a state college,” Karin says. “That’s why we chose it.”

Deciding on a college because of its generous financial aid offer is one strategy parents use to contain college costs. And no wonder. The latest report from the College Board puts average total charges at $14,333 a year for public, four-year, in-state colleges and $34,132 for private schools. Fortunately, there are several ways to make college more affordable.

Lesson #1  Tax Tips

Take tax breaks. For 2009 and 2010, the HOPE Scholarship Credit has been replaced by the more generous American Opportunity Credit. Recently signed into law, the new credit lowers income taxes by up to $2,500 for those who pay for qualifying tuition, fees, and course materials during the first four years of a student’s post–high school education. The tax credit is issued per student. Furthermore, if you have three kids who qualify you may be able to claim three American Opportunity Credits.

Moreover, the American Opportunity Credit is partially refundable, up to 40% of the amount for which you qualify. If you don’t owe enough tax to use the full credit, you will receive a refund check.

The full American Opportunity Credit is available only to taxpayers with a modified adjusted gross income of less than $80,000, or $160,000 on a joint tax return. Partial tax credits are available to those with incomes up to $90,000 or $180,000 for a joint return. Other small tax breaks may help cut costs if your income exceeds those limits.

Lesson # 2  Loans

Borrow wisely. Most students finance their education with borrowed funds. Some 80% of African American students pursuing bachelor’s degrees take out loans to pay for school. And of those borrowing, the average cumulative debt at graduation is $25,519, according to the most recent data from FinAid.org and FastWeb.com publisher Mark Kantrowitz. For those who don’t have enough ready cash, Uncle Sam has a federal loan program that may provide an answer, but it pays to be an educated consumer. “Stafford loans are available to students who fill out the Free Application for Federal Student Aid, or FAFSA,” says Kantrowitz. All students are eligible to take out these loans regardless of their credit histories and they do not require collateral or a co-signer.

Former law limits apply to subsidized Stafford loans, which have lower fixed interest rates: 5.6%, as of July 2009, versus 6.8% for unsubsidized Stafford loans. The loan is “subsidized” because the government pays the interest while the student is in school; with unsubsidized loans, the student pays all the interest.

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