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Michelle Singletary
Washington Post Columnist
Thursday, November 30, 2006; 12:00 PM

Michelle Singletary hosted authors Kalman Chany and Mark Kantrowitz for a discussion about November's Color of Money Book Club selections:

* "FastWeb College Gold: The Step-by-Step Guide to Paying for College," by Mark Kantrowitz with Doug Hardy (Collins, $21.95).

* The 2007 edition of "Paying for College Without Going Broke" by Kalman A. Chany with Geoff Martz (Random House and Princeton Review, $20).

Read Michelle's column about the books here: A Crash Course In How to Pay For College (Nov. 5).

A transcript follows.

Read Michelle's past Color of Money columns.

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Michelle Singletary: Good afternoon all. Thanks so much for joining me today. We have quite a number of questions so let's get started.

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Annapolis, Md.: I was thrilled to find your advice re: moving my kids' money from their custodial accounts into the 529 before we apply for financial aid, as then FAFSA will consider the funds as part of the parent's assets. All my nieces and nephews have similar accounts, so I advised my siblings to do the same.

This summer I will quit my full time job to attend school full-time, so we will have one income and 3 in college (husband will support 2 kids at out of state universities and I will be at the community college for 26 months).

I plan on applying for scholarships, FAFSA aid (and loans if I have to) for my own tuition and living expenses. QUESTION: How do I protect my assets and show financial need at the same time. I will have about $50,000 from a 401K, about $100,000 in stocks and funds, home equity, limited savings and my husband's salary. We will not be able to support ourselves on one income but I hesitate to dip into my retirement fund and nestegg accounts.

NEXT QUESTION:Does FAFSA consider my assets as "parental" or "students". Can an adult student shelter her funds in a 529?

(Fotunately the kid's accounts will carry them thru til they finish their undergraduate degrees)

Mark Kantrowitz: You are an independent student because you are over age 24, married, and have dependents other than a spouse. (Any one of these is sufficient for independent student status.)

Any reportable assets (e.g., investments, cash in the bank) owned by you or your husband will need to be reported as a student asset on your FAFSA. But since you have dependents other than a spouse, this will be at a maximum rate of 5.64% (this year), dropping to 3.29% next year. Plus, the asset protection allowance will shelter about $45,000 in your assets.

The money in your 401(k) is not a reportable asset on the FAFSA. The prior tax year's contributions to your 401(k) will, however, count as untaxed income, but there's nothing you can do about that.

The stocks and funds are reportable assets.

The net market value of your primary residence is not a reportable asset.

You can put money in a 529 college savings plan with yourself named as the beneficiary. This will not affect the treatment of this money as an asset, since it will get the same assessment rate (as described above) either way. But it will have some tax advantages that are worth considering even on a short-term basis.

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Raleigh, N.C.: This Christmas and upcoming birthdays, I want to start giving financial gifts to my neices and nephews instead of toys which they never play with, I am only looking at 25.00 a pop for each occasion. I have 1 4yr old , 2 2yr olds, and 1 6month old. What would you suggest and if you can provide links if appropiate for more info.

Michelle Singletary: How nice of you. Check to see if the parents have set up a 529 plan? If not you can and that's what I would recommend.

Go to www.savingforcollege.com to find out more about 529 plans.

Besides they are so little you can get away with contributing to their college fund without them rolling their eyes at you :)

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Frederick, Md.: Our son (only child) will be attending college as a freshman next year, so we are beginning the process of applying for financial aid. He's been accepted to the 2 schools of his choice -- one public and one private. Surprise! We just found out that his grandmother has about $15,000 saved for him in a custodial account which bears his name. A lovely, generous gesture, but one that hurts our hopes and plans for aid. Should we use the entire amount towards his freshman year tuition in order to put us in a better position to reapply for aid for the following year? Thanks! Mark G.

Mark Kantrowitz: Liquidate the custodial account and move the money into a 529 college savings account, prepaid tuition plan account, or Coverdell Education Savings Account. (The latter has a $2,000 annual contribution limit, so it is probably less useful to you than the others, which have higher contribution limits.)

Contributions to these accounts must be in cash, and the account will have to be titled the same as the original custodial account (e.g., a custodial 529 college savings plan account), where the student is both the beneficiary and the account owner.

Due to a legislative drafting error in legislation enacted in February of this year, money in the custodial versions of these three accounts is disregarded on the FAFSA.

It is expected that Congress will correct the drafting error next year. However, even after they correct the error, it is expected that money in such accounts will be treated as though it were a parent asset, not a student asset, and as such will have much more favorable financial aid treatment (i.e., maximum rate of 5.64% vs the 35% rate for student assets; the 35% rate changes to 20% on 7/1/2007, but 5.64% is still better than that).

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Washington, D.C.: I have a question about saving for our child's college vs. paying off our school loans.

We still owe about $20K for our school loans and should have them paid off by the end of 08. We are currently putting $200 per month in a 529 for our 1 year old. We don't have a savings cushion but have stable jobs.

Is it OK that we have started saving for college while we pay off the school debt? We thought it would be good to start early and get the compounding interest going. We'd like her to not have to pay off the debt the way we have had to.

Kalman Chany: The answer depends on what interest rate you are paying on your student loans. If the rate exceeds the rate of return you are getting on the 529, you would be better off paying down the debt first since you indicate that will happen very soon and your child is quite young.

Michelle Singletary: If it were me (and you asked me too) I would stop contributing to the 529 plan and pay off your own loan first. I would also build up an emergency fund AND begin savng in my own retirement fund BEFORE saving for college.

You very much need a cash cushion. Yes, college is expensive but you have some time. So get rid of your debt, which will free up some money and free you from a burden.

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N.J.: The best advice here is to get good grades and be desirable to colleges.

If you apply to a college and are over the 75th percentile for their SAT scores, then you are more likely to be offered more financial aid at private schools, and possible free tuition at public schools.

Of course, cost is the last determinent, since there is no sense appyling to scholls that don't offer your major, share your values, and numerouse other qualitites.

NJ offers a STARS program, with free tuition and fees to county college to the top 20 percent of the high scholl graduating class. Keeping a B average, after graduation, gets you free tuition and fees for the remaining 2 years at a state institution (4 year turition and fees are now getting close to $40K).

Michelle Singletary: The better advice is to get good grades AND SAVE.

Grades alone no matter how good doesn't guarantee you free money.

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Silver Spring, Md.: My husband and I are newlyweds, and have spent the last 6 months paying off our debts. We are now down to 1 credit card with a permanent 2% interest rate, my car loan at 0% and his car loan at 6%. In all likelihood, we can have everything but my car paid off by next summer.

My question is this: Does it make sense to apply more money to his car payment until its paid off while making just over the minimum payment on the credit card? In general I think it's makes sense to pay higher interest rate debt first, but having a manageable sized car loan doesn't seem as bad to me as having credit card debt.

Thanks so much.

Mark Kantrowitz: The general rule of thumb is to prepay the most expensive debt (highest interest rate after taxes) first. So I'd recommend paying off the 6% loan first. This assumes that you're making the required payments on the other debt, and that the 2% rate you specified on the credit card debt isn't a typo (that's a pretty good rate).

Michelle Singletary: If you can make more than the minimum on the credit card do that as well, even at 2 percent. No use in giving the bank money.

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Washington, D.C.: Hello!

Not a college question but hope you have time to respond.

My husband and I live in an apartment, and wish to put a down payment on a house. We hav no credit card debt, but he has a car loan for about 5,000. We are saving as much as we can out of every paycheck for the down payment, and getting 4.75% interest in a money market account. The car loan is at 4.9%. Should we forego any more saving and just pay the car loan off first?

Many thanks

Michelle Singletary: If you are not in a rush and want to begin devoting every dollar to saving for a house, pay off the car.

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Middletown, Md.: Our two kids are now in grades 2 and 4. When the kids finished preschool and started attending the local public school we took the amount we had been spending on preschool tuition and put it into the Maryland 529 plan.

It has amazed me how this small monthly amount has grown. The key is to just start setting aside what you can.

Mark Kantrowitz: Congratulations on starting to save for college. Time is your greatest asset.

Definitely keep on saving regularly. Try to make the savings automatic, such as having an automatic monthly transfer from your checking/savings accounts to the 529 plan. Also do extra transfers any time you have a windfall (e.g., income tax refunds). Once a year evaluate whether you can increase the amount you are saving. This makes it easier to save.

Michelle Singletary: A testimony to how little money adds up to big dollars.

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Washington, D.C.: Is it a good policy to start talking to potential colleges now regarding potential finacial aid offers for my son who will enter college in Fall 2007?

As you know, the application process has started but the Offcial Financial Aid Process will start January 1 (with Submission of FAFSA).

Kalman Chany: Before you complete the forms or talk to the aid officers, you should first get an estimate of your Expected Family Contribution and then see if there are any strategies that can employ to lower than number (assuming that you demonstrate need in the formula). It is difficult to give specific advice since I don't know enough about your circumstances, but my book that in much detail.

Michelle Singletary: Just so you know both books by Mark and Kalman have worksheets to help you figure out your EFC.

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Columbus, Ohio:

Dear Michelle, Kalman, Mark -

I have two teenage daughters (11th and 9th grades), too much debt, and too many sleepless nights worrying about paying for college. I wonder if we'll ever get out of this hole.

Briefly, my question is this: Should I cash out my retirement account to pay off our credit card debt?

When I married my second husband three years ago, I also took on a burden he was bearing thanks to years of financial neglect: $10,000 at 9% interest on an already-consolidated student loan, $14,000 in back support for a child he didn't know existed for her first eleven years, and nearly $40,000 in high-interest credit card debt. Our salaries were each around $60,000 which covered our expenses but did not leave anything for savings. We were making more than the minimum credit card payments. I took advantage of those low-interest introductory rate offers; our highest credit card interest rate is now 7% (the majority are 0-2%), spread out over eight different accounts.

I receive $3000 per year in child support from my former husband until the children graduate high school; we do not expect that he will contribute to the costs of college. I have $65,000 in my retirement account through my job, where I have good job security and my employer matches my $200 monthly contributions. I also have a $8000 IRA.

Due to budget cut-backs, my husband was laid off from his public relations job at a non-profit association last year. After 6 months without a job offer, he cashed in his $50,000 retirement plan, using the balance (after penalty and tax) to pay off the lease on his car, half the balance on his student loan, and to hire a professional job-search agency. He has progressed to several second interviews, but still no offers. A three-month temporary job ended earlier this month. He is actively seeking work but there are not many white-collar jobs available in the area for a 50-something man in his area of expertise.

My salary (now up to $80,000) just covers our monthly expenses, despite cutting most of the fat out of our budget. Grocery and car-repair bills now go on the credit card. Despite our best efforts, our total balance has crept up to almost $50,000 and the monthly minimun payments are nearly $1000.

Our oldest daughter graduates in June 2008 and we will be completing the college financial aid form (FAFSA) in just over one year. I understand that my expected contribution will be based on my salary and that I won't get any "credit" for the huge debt I married into. The on-line calculators show that I should be able to contribute $8000+ per year toward each daughter's college expenses. She plans to get a job after taking her AP exams in May and knows that she will be expected to take out student loans.

Supporting arguments for cashing in: This would free up $1000/month in credit-card payments which I would use to buy a Roth IRA and to resume payments to our state's college savings plan (which I stopped during the fat-trimming). I would still contribute the maximum to my work-sponsored retirement plan and I expect to work for another 20 years. I know I would sleep better.

Opposing arguments: I would essentially have nothing saved for retirement.

I appreciate your consideration of my question and look forward to hearing your thoughts.

Kalman Chany: I would try to avoid withdrawing funds from your retirement plan if at all possible. Most likely, there would be penalties and taxes involved However, if you feel you that have no other choice, then you should consider doing it so that the withdrawal occurs in 2006. Since 2007 will be the first income year that affects your older child's aid eligibility, should a withdrawal in 2007 or beyond could significantly reduce your aid eligiblity.

Mark Kantrowitz: I agree with Kalman. If cashing out your retirement occurs during the base year (the tax year prior to applying for financial aid), it will negatively impact aid eligibility. The net result will be pennies on the dollar.

I'd recommend continuing to contribute to your retirement plans sufficient to maximize the employer match. That's free money.

I'd also recommend taking another serious look at your expenses and seeing where you can cut back. For example, do you really need a second car?

Michelle Singletary: Listen to the fellas. Please don't cash out your retirement fund. I agree that you need to really sit down with your husband and come up with a plan. And going forward your daughter may have to make some hard decisions about where she goes to school. Have her apply to her choices (in state, out of state, private whatever) Then see what mone you get. If it's not enough then you all have to do with you can afford. That may mean she stays in-state and lives at home.But you can't keep bleeding money and you should encourage her to take on a lot of student loan debt either.

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Washington, D.C.: Hello Michelle,

I love your take on financial responsibility-- probably because I agree with you!

My husband's employer offers a very generous retirement savings match: 7 percent. So since he started, we've been putting in the maximum that the employer will match.

Our mortgage is about 45 precent of our total after-tax income (our only systematic savings is that 7 percent, though we have a cushion in some investments we made several years ago), and it feels really high to me.

Do you think it would be smart to put that 7% towards the mortgage, instead of retirement? We're in our early 30s.

Thank you!

Michelle Singletary: Oh no. Get that match! Free money.

But I do worry that you have devoted so much of your take home pay to one expense category, even if it is your home. It's generally recommended you not spend more than 25 to 30 percent of your net on housing.

That means you really have to be tight everywhere else.

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Glastonbury, Ct.: We have 2 kids who are 2 years apart in elementary school now. We have 529s set up for both. My husband thinks it may be a good idea to put more money into the younger kid's account since it will improve our older's chance of getting financial aid. He assumes the colleges cannot consider the younger's savings in our older's financial aid review. Do you have any thoughts on how you disperse your savings between 2 kids' 529s to maximize our opportunity at college financial aid support?

Mark Kantrowitz: For federal student aid purposes, funds in a sibling's 529 college savings plan account is not reported on the FAFSA.

The CSS Financial Aid PROFILE, however, does consider sibling assets. But the PROFILE is only used by about 300 private colleges.

While putting the money in the younger child's 529 will increase the older child's eligibility, it will decrease the younger child's eligibility by the same amount. Likewise if you put the extra money in the older child's 529. It's a wash either way. Dividing the money equally is more likely to have more of the total under the asset protection allowance, so I'd suggest contributing to both children's accounts at the same rate.

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Arlington, Va.: Dear Mr. Chany and Kantrowitz:

I am a 29 year old MA student who will pursue my doctorate in three years and am interested in opening a 529 plan to increase my savings. How do I go about this especially when I might relocate from Virginia to another state to attend school?

Kalman Chany: Virtually all 529 savings plan allow you to use the funds out-of-state, provided the school attended participates in federal student aid programs (even though you might not yourself be eligible or want any federal aid.).

However, if you have any student loans from your prior schooling or other loans outstanding: you may want to consider paying those off first. If school is only a few years off, it is risky to invest funds in a 529 asset allocation that is tied to the stock market. The 529s often have choices tied to only bonds or money market rates, but those returns would most likley be less than what you are paying in interest on any debt. (Tip: you should pay off any Subsidized Stafford Loan or Perkins Loan debt last, as the government will again pay all the interest when you are back in school, so long as you are at least a half-time student.

Finally, when you apply for aid for your doctorate, any assets in yoru 529 could reduce aid eligibility, while the debt would not be recognized.

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Fairfax, Va.: Thank you so much for the article, "Tie Up Some Loose Ends." You are always timely with information that is a must read. When I am so busy at this time of the year, you help me remember the details that I need to do before the year is out. Your information is so practical and useable. Just what I need!!

washingtonpost.com: Before the New Year, Tie Up Some Loose Ends (Nov. 30).

Michelle Singletary: Oh thank you so very much. I do try.

However, I must point out that I make a boo boo. I wrote: "Although it's not quite time to file your 2005 tax return , there are some things you can do to improve your tax situation before year-end."

Of course I meant to write 2006.

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Greenville, S.C.: How many credit cards is too many? I have 5 (3 store cards and 2 major VISAs) that I racked up in college. Only one carries a balance that I'm working to eliminate. My credit score is good (mid-700s) since I have never been late and I don't want to lower it by closing some cards. I know the store cards should probably go (high interest rates), but I have had them the longest. The major VISAs both have 7% rates so I don't want to close those either.

In addition to the credit cards, I also have a small student loan ($2000) and a paid off car loan. So I think my credit mix is good (revolving and installment credit). Any advice is greatly appreciated.

Michelle Singletary: Don't worry about closing the open accounts if you don't have a balance. A mid 700 score is GREAT.

Now pay off that $2,000 student loan and that one credit card.

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Chapel Hill, N.C.: Hello,

I have a friend that recently approached me about help for paying for graduate school. She is an undocumented immigrant. What can she do?

Mark Kantrowitz: As an undocumented immigrant, she's ineligible for federal student aid. She might be eligible for in-state tuition at the public colleges in the state where she resides, depending on the state. See www.finaid.org/otheraid/undocumented.phtml

for more information on this topic.

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Boston, Mass.: Hi Michelle ! I've been wanting to ask you this question for ages, but am never on the Internet when your discussion is on - please please please consider this question!

What do you do if you have a house, made the downpayment yourself, mortgage for years, and it's tripled in value at least over the last 8 years. You've beem dating a great man and things are getting serious and now you are thinking how you would deal with a situation later on living together, house payments, ownership etc? He does not have a house or enough savings and it would be ridiculous to "by out half" as the value has gone up so much. I don't want to just hand over my house to someone, but am I supposed to if we get married? If he pays half the mortgage, is that fair, when it's still in my name? What about upgrades etc?

How to deal with this fairly?

Thanks!

Michelle Singletary: Oh, you are about to get me in trouble AGAIN. Singletary devotees will tell you I say if you get married the house belongs to the TWO of you. But before putting him on the title I would refinance so that you are BOTH obligated for the mortgage. If you just put him in the title then he get's half the house but isn't responsible for paying for the loan.

And I would not do anything -- shack up, move him in, be roommates, etc. until you get married.

Marriage for me solves your problem. You become one sharing in all that you have -- income, expenses, debts and yes, house.

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Alexandria, Va.: I have a comment and question. When I was in college, I found one of the most underutilized areas of financial support was work study. I was able to pick up some extra cash by picking up a couple of work study shifts. Also, it is a great networking opportunity because you meet all types of people.

I am going to get $10K for the holidays. This will be used to eliminate my credit card debt almost completely. I have been able to get my spending habits more or less under control. But I'm concerned about relapses. I would like to cancel one of my credit cards. This would reduce my credit line to about $7K. I know closing an account may hurt my credit score but frankly, in the long run, I would rather make sure that I don't get myself in this position again. I'm working hard to be frugal but I think the less money I have available at this point, the better. Your input would be great!

Mark Kantrowitz: If you're going to cancel a card, cancel the one you obtained most recently, all else being equal. That will have the least impact on your FICO score. But rather than cancel it, I'd suggest simply cutting up the card. You won't be able to spend money on the card if it is cut up, and a card with a $0 balance contributes to your FICO score more than an account cancelled at the cardholder's request.

Michelle Singletary: Good for you for trying to get your finances straight. Mark is right, right now just cut the card up. If you cancel it you hurt your score and if you plan on getting credit in the near future it might be more expensive.

Besides you can always open a new card. So use this as a way to find the discipline not to spend.

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Washington, D.C.: Michelle,

I have not saved a lot for my son to attend college; however I have saved for a new home and expect that I will have to use some of those funds to finance college. My new house money is liquid, sitting in a saving account. How will that affect my expected contribution. Should I expect to have to exhaust all of my house money to fund his college?

Mark Kantrowitz: Money in a bank account is counted as an asset on the FAFSA. After the asset protection allowance shelters some of the money (about $45,000 right now for parents of college age children, median age 48), the rest is assessed at a bracketed scale with a top bracket of 5.64%. So if you have $55,000 in assets, only the $10,000 above the asset protection allowance will be assessed, and the maximum impact of that money on reducing aid eligibility will be $564. That's a relatively minimal impact on aid eligibility.

If you buy a home, the net market value of your primary residence is disregarded. This is a useful way of increasing his aid eligibility.

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Middletown, Md.: How much of financial aid is "free"?

If someone qualifies for financial aid does that mean the aid is in the form of grants or does that just mean the student qualifies for loans?

Michelle Singletary: It can mean grants, scholarships, workstudy AND for a lot of folks mostly loans.

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Uncle Helping with College: Hi Michelle, Kalman and Mark:

My niece and nephew are in junior high school. I plan to help them out with their college educations. Would you recommend (generally) that I write a check to their colleges in each of the four years of their attendance (presuming that it takes them just 4 yrs), or that I give the money to them after they have graduated?

I'm hesitant to give the money during their college careers but I also know that I need to be sensitive to tax rules on gifts if I give the money directly. I guess I don't know whether writing a check directly to the college constitutes a gift, and whether it will affect their eligibility for financial aid.

Thanks for considering my question.

Mark Kantrowitz: Give the money to them after they graduate. That will help them pay off their loans and has no impact on aid eligibility.

Some colleges will treat payments directly to the school (i.e., payments taking advantage of the gift tax exclusion for direct payments to educational and medical establishments) as either a resource (100% reduction in aid eligibility) or untaxed income to the student (50% reduction in aid eligibility) instead of as a payment on account (0% reduction).

So you're better off waiting until after the students graduate to give them the gifts.

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Cville, Va.: My three kids are 2, 4,and 6. What am I losing by keeping their college money in investments (mut funds) in my name rather than a 529 plan?

Michelle Singletary: A HUGE tax advantage. 529 money is not taxed while it grows (if it grows) and it's not taxed once you withdraw it to pay for qualifying expenses.

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Alexandria: Getting good grades is like money in the bank, and I wish you would stress more the student's responsibility to study hard and get those grades up there. Plus the student, not just the parent, can be working and saving, too, with summer jobs during the high school years.

I grew up in Michigan where there was a state program whereby if you scored high enough on a state-given test senior year in h.s., you could get free tuition at any university (private or public) in the state. I did that, plus worked, plus had a scholarship direction from my university (Go Green!). After four years of school, my mom added up how much she had to give me - it came to a grand total of $2,000, about $500 a year.

Paying for college shouldn't be totally the parents' responsibility. The student needs to do his or her part too.

Michelle Singletary: First, I don't think any of us are discounting good grades. But far too often parents say, "Oh my kid is smart, he or she will get a scholarhip." And then they don't.

So yes if I must yell it GET GOOD GRADES.

But save too. Invest too. Do whatever you can to make sure your kid doesn't have to take out loans.

And personally, since this is my chat and they pay me for my opinion college is the parent's responsibility when they can afford it. And I mean that "if." I chose to have my kids and I know full well that getting a college education for most people is the way to do well in our society.

So since I chose to bring them into this world I'm going to do what I can to give them the best start. Will I make my kids help. Yes. But not if I have saved enough. I want them to study and participate in college activies and go to poetry readings and study aboard and do all the things we working folks can't anymore.

Listen, if you are just getting by, living paycheck to paycheck I'm not fussing if you can't save enough for college for your kids. Then it is up to them.

But hey if you aren't managing your money well. If you rather have a new car every 4 years then save for your kids college education, or think they need Xboxes and playstaions or whatever then shame on you.

Don't burden them with loans and HAVING to work while taking classes (they sure should work during breaks and summers).

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D.C.: Daughter has a boyfriend (34 yrs) who has been in the U.S. on a Green Card for 15 yrs. He never registered with the Selective Service, so apparently he is unable to apply for Federal financial aid. He does receive Pell Grants. Any other options?

Mark Kantrowitz: If a student's failure to register with Selective Service was not knowing and willful (as determined by the college), then the student will be eligible for federal student aid.

Federal student aid includes the Pell Grant. Since he's receiving the Pell Grant, that suggests that his school did determine that his failure to register was not knowing and willful and therefore he is eligible for federal student aid.

Note that the determination is on a per-college basis, so one school's decision will not necessarily transfer to another college.

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Rochester, N.Y.: My daughter is a sophomore in High School. I don't think she will qualify for finiancial aid because are hard working middle class parents who have saved (as Michelle advises). We have two other children who will be going to college about 5-7 years after the first. I would like my daughter to take some loans for college so that she can feel some responsibility and I can also reduce the amount I pay up front. I can decide to help her with loans later depending on our situation and my approval of her efforts/behaviour. What types of loans would you suggest she pursue.

Mark Kantrowitz: I recommend that all students consider the Perkins and Stafford Loans, as these loans have very low interest rates. The Perkins Loan has a 5% interest rate and the Stafford Loan has a 6.8% interest rate. The Perkins Loan is subsidized, meaning the federal government pays the interest while the student is in school. The Stafford Loan comes in two flavors, subsidized and unsubsidized. Both the Perkins and the subsidized Stafford are based on financial need. The unsubsidized Stafford Loan, and the Parent PLUS loan, are not based on financial need. Any amount not borrowed as a subsidized Stafford Loan (up to the annual limits) can be borrowed as an unsubsidized Stafford Loan.

The Stafford Loan limits, starting July 1, 2007, will be:

Freshmen $3,500

Sophomores $4,500

Juniors $5,500

Seniors $5,500

The cumulative Stafford Loan limit is $23,000. The PLUS loan

does not have a cumulative loan limit, and the annual loan limit is cost of attendance (minus other aid received).

Thus my overall advice is to borrow according to the cost of the loan, from lowest cost to highest cost. Ranking the loans according to cost from lowest cost to highest, the loans are:

Perkins

Subsidized Stafford

Unsubsidized Stafford

PLUS

Home Equity Loan

Private Student Loans

Credit Cards

Note that up to $2,500 a year in interest paid on education loans is deductible. Mixed-use loans like credit cards are not deductible.

As a middle class family, don't forget about the education tax benefits such as the Hope Scholarship and Lifetime Learning Tax Credit. These can help you defray the cost of college.

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fairfax, Virginia: Hello Michelle,

I love your comments and the understanding of what "Big-Mamma" truly meant to you!

My wife and I have a Freshman Daughter whose attending a private college with an annual price tag of: $43,850.

(However, the good-news is; I had eighteen years to plan for the expense).

Here's my question: Is any of this college cost tax deductible. Our combined annual income is over 200K.

Take care and keep up with the PMI (Positive Mental Attitude)

Will and Lorraine

Michelle Singletary: Interest on students loans is deductible up to $2,500 depending on income. But college costs you pay as a parent, not to my knowledge.

Sorry. I feel your pain!

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Kalman Chany: I wanted to reply to a question that was previously asked and answered.

Regarding "student-owned" 529 plans (which are sometimes called "Custodial 529 plans"): I do not know why the reader stated that these are to reported as parental assets on the aid forms.

The recent HERA legislation -and subsequent guidelines issued by the US Depertment of Education - are quite clear in stating that student-owned 529 plans (both pre-paid and the savings plans) as well as Coverdell Education Savings Accounts need not be reported as an asset on the FAFSA provided the student must provide parental information on the FAFSA. The instructions for the 2007-2008 FAFSA state this as well.

Parent-owned 529 plans or Coverdells in which the student and/or other individuals (which could be the parent himself or herself)are the beneficiaries, are considered as part of the parent's assets on the FAFSA.

Students who DO NOT have to provide parental information on the FAFSA form DO need to include the value of any 529 plan or Coverdell they own as part of their assets they own on the FAFSA

Since these rules apply starting with the current 2006-2007 school year, any student who reported any "student-owned" 529s or Coverdells as part of student assets on a previosly submitted 2006-2007 FAFSA should make corrections and alert the college aid office about this. You may get more aid. (Note: since the assets you report are the asset values on the day you completed the form, you should not correct the 2006-2007 form if you moved any student assets into a student-owned 529 or Coverdell after you submitted your FAFSA data. However, you may want to consider doing that before you submit the 2007-2008 FAFSA - though you should read my warning about this strategy below in the last paragraph of my response.)

Please be aware that many financial aid officers are not aware of these changes. Yesterday, I randomly called 5 aid offices and not one of them answered my question correctly when I asked them how to report student-owned 529s on the FAFSA. They also did not answers questions correctly as to how to handle net worth of a business, since there are new rules affecting many business owners as well) So you may need to "educate" them about these new rules by telling them to read the 2007-2008 FAFSA instructions carefully.

Warning: even though the 2007-2008 FAFSA does not require reporting of "student-owned" 529 plans and "student-owned" Coverdells, Congress may well change how these are handled in subsequent years. In addition, more and more schools are asking more detailed questions about 529 plans and Coverdells, so they may still consider such accounts as student assets when awarding their own funds. Finally, if you must complete the CSS PROFILE form: students who report parental information on the PROFILE should include student-owned 529s and Coverdells as part of the parents assets.

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Bethesda, Md.: Hi Michelle,

I'm sorry this isn't a question about college loans (fortunately I'm already paid up!) but I have a question about a car loan. I bought a new car this year and financed $18K at 4.9%. After using one of the online calculators I realized that my overpayments each month will literally only save me a couple hundred bucks over the length of my loan. Do you think it would be better for me to invest that extra money ($100) each month in some sort of mutual fund or keep paying off my loan faster? I have all the basics already covered, 401K, savings etc.

Thanks!

Michelle Singletary: I'm the queen of being debt free so I say keep paying off the loan. That's what I used to do when I had a car loan. I never felt bad about paying off my loan early.

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Washington, D.C.: As a former Financial Aid officer for a private college, I wonder if I may air a grudge on this subject. Pretty soon, virtually every financial aid magazine (Money, Smartmoney,etc.) will start featuring articles with titles like "How To Get a Better Financial Aid Package!" While some of these articles may feature the good advice given so far, pretty much all will have something to the extent of "Dont take no for an answer- keep harassing the school, point out other schools offers, etc." While it's a good idea to make sure your offer was based on correct info, in my experience financial aid packages are pretty much as big as they can be, depending on the wealth of the school, etc. and that complaining to everyone up to the president, being a nuisance, acting like you're "entitled" to a full scholarship, etc., does NOT bring extra $$$. Thanks

Kalman Chany: It is possible to appeal the awards. My experience as a private consultant, is that more and more schools are not giving their best offer in the initial package.

However, parents should use tact when dealing with the aid office. You don't want to re-enact the scene for "Jerry McGuire and start screaming "Show me the money".

Michelle Singletary: LOL.

I agree. Being nice always helps.

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Cambridge, Mass.: I've been to the site you've recommended,

www.savingforcollege.com, but can't find the answer to one very (to me) important question:

can I move from one 529 to another?

Or, if I am dissatisfied with the performance of the fund (or move to another state), am I stuck with leaving the money in the fund, and just investing new money in a new account?

Thanks for the chats; Michelle, you are a wonder!

Mark Kantrowitz: You can move from one 529 to another once a year.

Michelle Singletary: Thank you.

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Bethesda, Md.: We have $36K in savings bonds (that's the face value) in the name of my 12 year old daughter that will mature before she reaches college age. How best should we place this money once we have it in hand - a 529 account?

Mark Kantrowitz: The interest on certain savings bonds is tax free when the proceeds are used to pay for qualified higher education expenses or to fund a section 529 college savings plan. So I would definitely recommend rolling the money over into a 529 college savings plan.

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Washington, D.C.: Hi, Michelle

I read your columns and I have a question. I am in default on a student loan (7,000) and they are looking to garnish my check, I have the money in my 401K, should I use the money in my 401K to pay it off? I have a secure job but the money I make barely pays my bills each month and I can't cut back any further, I don't have a car, or a phone I am just paying the absolute necessities, no credit cards. What should I do?

Michelle Singletary: Oh you poor dear. Have you tried calling the lender to work out a plan? Just try everything before you pull that money out. Because keep in mind you have to pull out almost double to net the money you need (due to penalties and taxes).

If however that's it. That you have but to the bone, then yes under this circumstance (and I say this with a heavy heart) use the 401 money.

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D.C.: How much difference does the age of the parents matter? My husband will be 66 and 71 when our children enter college.

Mark Kantrowitz: Age of the older parent affects the asset protection allowance in the federal formula. Since you will both be over age 65, you'll get the maximum asset protection allowance, currently about $75,000.

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Baltimore, Md.: Hi, I have two questions. First, I have heard that the age of the parents is used as a consideration when determing EFC, especially if older and close to retirement age. Is this true?

Second, how much consideration is given to having 2 children in college at the same time? We intentionally spaced our children by four years, partly to avoid two tuitions at the same time. It seems that the number of children still at home was not considered for us, but my friend with two children in school has the same EFC as she did last year when her youngest was still in high school.

Kalman Chany: In the federal formula, the age of the oldest parent (stepparent) in the student's household is considered. The older the oldest parent (stepparent), the more assets are sheltered from assetment.

The federal formula also divides the parental contribution by the number of dependents in college on at least a half-time basis when calculating the EFC.

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Silver Spring, Md.: Can you comment on the pros and cons of 529 plans vs. prepaid tuition plans? Would you recommend one over another? Also, what do you think of prepaid tuition plans where you spread out your payments over time?

Mark Kantrowitz: The Higher Education Reconciliation Act of 2005 (passed 2/8/2006) changed the financial aid treatment of prepaid tuition plans, so they now have the same treatment as 529 college savings plans.

So the main decision between the two has to do with the differences:

1. Prepaid tuition plans are mainly tenable at

public colleges, while 529 plans are tenable

elsewhere. (You can use most prepaid tuition

plans anywhere, just not with the best return

on investment.)

2. Prepaid tuition plans give you peace of mind,

that you have saved a specific percentage of

the cost of a college education. 529 plans are

riskier, but also offer the possibility of

greater appreciation. (Prepaid tuition plans

can be a useful hedge against tuition inflation

during recessions, when public college tuition

rates skyrocket due to cuts in state support of

higher education.)

If you are certain that your children will attend state colleges, you might consider a prepaid tuition plan. Otherwise I'd advise against it. With a 529 college savings plan I tend to recommend putting the money into a broad index fund, like a S&P 500 fund or a Total Stock Market index fund.

With regard to which state 529 plan to use, I recommend using your own state's plan if you can deduct contributions on your state income taxes. Otherwise, I recommend looking for a state plan which has the lowest initial and ongoing fees (i.e., less than 1% a year). The plans run by Vanguard and TIAA-CREF tend to have the lowest fees.

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Leroy, N.Y.: With the recent change that allows UTMA 529's to not be counted at all, do you forsee this as a loophole that will be caught, and if so, what do you think the final assessment on these accounts will be? At the parent rate, or the child's?

Mark Kantrowitz: The loophole will be closed, probably in 2007.

After it is closed, such accounts will be given the financial aid treatment of parent assets, still a pretty good deal.

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Baltimore, Md.: I know it's late, but HAD to respond to Alexandria. It's great that he/she had a state program for good students, but a lot of people DON'T. I was a great student, even got a National Merit Scholarship, so I should have been in like Flynn, right? Except what they don't tell you is, even when you get aid, the FIRST aid they give you is LOANS!! You have to take out the maximum federal loans allowed; then you have to do work study for a certain amount; and THEN, if you're a good student, they'll make up the rest with scholarships. My National Merit Scholarship gave me $2K/yr grant instead of parental loans, but that's about all it got me. Luckily, back then, the federal loan max was $2500; don't know what it is today, but I'm sure it's a lot higher.

So even if you do have a reasonable shot at a scholarship (unless it's something like a full athletic scholarship), realize that your kid will likely still have loans and work study to deal with -- if you don't want to burden them with that, you need to PLAN for it, NOW!!

Michelle Singletary: Never too late for a good testimony!

Amen.

I won a full scholarship to college. I know it can happen. But still I'm saving like a mad woman for my kids. Just in case.

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Michelle Singletary: Oh my, so many questions. So little time. So we all have to go now but both Mark and Kalman have agreed some of the leftover questions. So please look for my print column or weekly e-letter (sign up if you haven't already) for answers to some of your questions.

As always, thanks so much for joining me today. Your questions and comments were right on the money.

And I did see the questions about my tithing column. Couldn't get to them but I will at a later time (perhaps in the e-letter or a follow up column).

Take care.

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