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What to do when you haven’t saved much for your kid’s college education

Don’t have much money saved for your college-bound kid? There are options.  (AP Photo/Susan Walsh)

Your high school senior comes home with a stack of college applications. As thrilled as you are, you get a sinking feeling because you’ve saved nothing to cover the costs of her dream school. Now what?

There are options available to help you pay for your child’s education. A crucial first step is having a frank conversation with your college-bound student about your finances. Figure out how much you can contribute, but don’t immediately write off expensive schools, said Lauren Asher, president of the Institute for College Access & Success, an education nonprofit.

“Look beyond the sticker price,” she said. “It doesn’t tell you much about what you and your child will be expected to pay at a specific schools. Most people don’t pay the full sticker price because aid can help offset the costs.”

Colleges are required to post net-price calculators on their Web sites to give families an estimate of what they can expect to pay based on such factors as income, bank balances and test scores. Calculators vary from school to school, but they paint a more accurate picture of individual pricing than the standard cost of attendance found in applications.

Consider this: While the full price of tuition, fees and living expenses averaged $40,920 at private colleges in the 2013-2014 academic year, the amount students actually paid averaged $23,290 after scholarships and grants, according to the College Board. Student aid lowered the average cost of public colleges from $18,390 to $12,620.

Those five-figure averages may still seem daunting, but the calculation is a starting point. To get a truly complete picture of what your child is eligible for, you’ll have to fill out the Free Application for Federal Student Aid (FAFSA), which colleges use to determine the amount of aid to award to students. FAFSA forms for the 2015-2016 school year come out in January, so look out for those then.

In the meantime, here’s a cheat sheet for getting a jump on what your options are:

FEDERAL & PRIVATE STUDENT LOANS: Chances are, your child will have to borrow some money to pay for college. Students can either get money directly from the federal government or private lenders — banks, credit unions and other financial firms that provide education loans.

There are a few types of federal student loans. Subsidized Stafford loans are earmarked for lower income students whose families can’t contribute much, while unsubsidized loans are open to everyone. The other big difference is the government pays the interest on subsidized loans while your child is in school, which is not the case with unsubsidized debt.

“There is no income cap for federal student loans,” Asher noted. “Subsidized Stafford loan eligibility is based on a combination of your family’s resources and the cost of the school, so in some cases, a child from a high-income family applying to a high-cost school might still qualify.”

There are caps on how much students can borrow that increase on an annual basis. In the 2013-2014 academic year, freshmen could take out no more than $5,500, sophomores $6,500 and so on. Students can borrow more if they are legally independent of their parents.

Students may also qualify for a Perkins loan, which uses federal money and payments from prior recipients to help the neediest kids. Your child has to attend a participating school to be eligible, and the pool of money available varies from one school to another.

How do you pay back these loans? Federal loans, including Stafford and Perkins, are eligible for government programs called income-driven repayment plans, which could be a big help for your child after graduation. These plans, with such names as Pay as You Earn, are designed to help people who leave school with debt that exceeds, or comes close to exceeding, what they earn in a year. Say your daughter graduates with $29,000 in student loans and lands a job earning $30,000 a year. If she has a hard time keeping up with all of her bills, she could apply to have the government limit her monthly payments to as low as 10 percent of disposable income or $104.

There’s also private borrowing options, but keep in mind that new private loans are not eligible for these helpful government repayment plans. Private loans also typically carry higher interest rates than federal loans, so they are recommended as a last resort. Lenders often require a co-signer, which means you could be saddled with your child’s debt if he fails to pay.

Financial planners say the total amount of debt your child takes out should be no more than the starting annual salary in his or her desired profession. The average starting salary for 2013 grads with a bachelor’s degree was $45,000, according to the National Association of Colleges and Employers. Keep that in mind as you borrow from year to year.

Bottom Line: Use private loans sparingly, if at all. Federal loans have more repayment options and consumer protections, but that doesn’t give you the go-ahead to load up on debt.

FEDERAL PARENT LOANS: Through what’s known as the federal PLUS program, parents can borrow up to the full cost attendance, minus the aid the student receives. That means between you and your child, you two could cover the full cost of school. But be careful.

You shouldn’t take on more debt than you can pay back in 10 years or less, said Mark Kantrowitz, publisher of, a college planning Web site. He recommends that the total amount you borrow for all of your children should be less than your annual income, assuming that retirement is more than 10 years away. If retirement is only five years away, you should be borrowing half as much.

Unlike the federal loans offered to students, a credit check is required. Parent PLUS loans drew criticism last year when tighter credit requirements led to a spike in rejection rates, which disproportionately impacted historically black colleges that rely heavily on such funding. Starting next year, however, it will be easier for parents to obtain PLUS loans as the Department of Education will only check the past two, not five, years of their credit histories.

“PLUS is a tricky program because you want families to have access to education, but at the same time you want to make sure they are not being burdened by excessive debt,” said Jesse O’Connell, assistant director for federal relations at the National Association of Student Financial Aid Administrators. “It’s an important tool, but one that is best used carefully.”

Bottom Line: It’s typically easier to qualify for a PLUS loan than a private loan. You can apply to defer payments if you’re struggling to pay, but federal PLUS loans do not qualify for repayment programs pegged to income. As with any form of credit, don’t over-extend yourself, especially if you’re nearing retirement.

SCHOLARSHIPS & GRANTS: Let’s talk about free money. It’s highly unlikely that your kid will get a scholarship that covers the full cost of attendance, but you could cobble together a few awards to reduce your contribution, Kantrowitz said.

Students received an average $6,200 in scholarships, grants or tuition waivers from federal, state or private sources in 2011-2012, according to the most recent data from the government’s National Postsecondary Student Aid Study. Based on an analysis of that study, Kantrowitz estimates that one in eight students received private scholarships that academic year.

“If you’re a talented student, you can win scholarships. But don’t put all of your eggs in one basket,” he said.

Stick to free scholarship matching services offered by companies such as Fastweb, College Board or Sallie Mae. Apply to as many scholarships as possible, especially smaller ones that tend to be easier to win because they are less popular, Kantrowitz said.

There are also federal grants that your child may be eligible for based on financial need. Pell Grants, the most common federal grant program, awarded a maximum of $5,730 for the 2014-2015 academic year. Grants have not kept pace with the cost of college, although the government has incrementally upped funding.

Bottom Line: Very few kids land a scholarship to cover the entire cost of attendance, so don’t sit back and wait for that golden ticket. Have your child apply to as many scholarships as possible, even while he or she is in college.

FEDERAL WORK-STUDY: If you think your child is responsible enough to balance school and work, take advantage of the federal work-study program.

Schools receive a subsidy from the government to pay up to 50 percent of a student’s wages for part-time work on campus or at a nonprofit or public agency. These are hourly jobs that pay at least the federal minimum wage. Here’s the tricky part: the money isn’t directly applied to tuition, instead students are given the autonomy to use it as they seem fit.

Awards are based on financial need and the pool of money the school receives. According to the government, schools disbursed about $1.2 billion through work study programs in the 2012-2013 academic year. Congress hasn’t poured much money into this program, so funding has been relatively flat over that past few years.

Bottom Line: Work-study jobs tend not to pay much, but every bit counts. If your child signs up for a work-study program, make sure you two create a plan for spending the paycheck. All of the money could be spent on living expenses or a portion earmarked books, but it’s best to agree beforehand.

529 PLAN: One of the best ways to save for your child’s education is to open a 529 savings plan, financial advisors say. These accounts are akin to 401k retirement plans because contributions are invested and the earnings are not subject to federal, and in most cases state, taxes. You can usually choose among a variety of investment options, including stocks, bonds or money market funds.

States sponsor these plans for a fee, but you don’t have to select a plan where you live. Shop around for plans with low fund management fees and commissions to maximize your earnings. You can open a plan through an investment broker or directly from the plan sponsor. You generally won’t be taxed on the money you put into a 529 plan as long as it’s used for college expenses. But you will be hit with a 10 percent penalty for using the money for anything besides paying for school.

It is never too late to sign up for a 529 plan, even though financial advisers say parents should open one at birth to maximize the savings.

“You could do a big lump-sum contribution, even at the last minute,” Kantrowitz said. Individual annual contributions are capped at $14,000, but you can funnel up to $70,000 into the plan as a lump sum and elect to have the evenly spread out over five years.

Bottom Line: Having money stashed away in a tax-advantaged plan to pay for school is a great way for your child to avoid graduating with mounds of debt. But investing in a 529 plan will likely reduce your child’s eligibility to receive need-based financial aid.

Have questions about student financial aid? Send us your questions at

Read More:

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