College Finance 101: A Crash Course for Parents

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 For 2009 and 2010, the HOPE Scholarship Credit has been replaced by the more generous American Opportunity Credit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.

There are also loan forgiveness options that students may want to consider. If your child serves in the military or performs certain volunteer work after graduation, he or she may be eligible to have part of the loan forgiven. Explore these options at www.finaid.org.

Stafford loans may not cover the entire college bill, so federal Parent Loan for Undergraduate Students (PLUS) loans are also available. Parents can use PLUS loans to borrow the full cost of attendance, less any financial aid package.

At many colleges, PLUS and Stafford loans are made directly by the federal government. If your child’s school does not participate in the direct lending program, you may be able to get PLUS loans from private lenders, but they may charge higher interest, 8.5%, as opposed to the government’s fixed rate of 7.9%. Repayment of PLUS loans can be deferred for six months after your child graduates school, but be aware that for PLUS and unsubsidized Stafford loans, deferred interest is added to the loan balance.

PLUS loans are subject to a credit check. Kantrowitz notes that independent students as well as those whose parents are ineligible for PLUS loans may borrow more than the Stafford loans’ stated limits.

Michael and Karin Zimmerman took out a $5,000 PLUS loan and intend to cap Chad’s student debt load at $10,000. “That’s about what I owed when I graduated, so I don’t want him to owe more,” Karin says. However, Andréa Holman of San Leandro, California, advises otherwise. She took out a PLUS loan years ago to finance her son Marcus’ education at Hampton University. “At the time I saw it as an emotional safety net, but now I strongly advise parents to explore all their options before taking out a PLUS loan.”

If you do opt to take out a PLUS loan, determine to borrow intelligently. Be aware that PLUS loans charge a fee of 4% out of each disbursement. Come up with a plan and time frame for paying off the loan (there is no prepayment penalty). If paying the loan off early is not an option, be sure to ask your tax preparer about writing off the interest you’re paying. Even if you don’t itemize your taxes, you may be eligible to write off up to $2,500 a year in interest.

Lesson #3  Room & Board

Consider a housing purchase. If you send your child away to college, room and board will be a major budget item. On-campus housing averages $8,000 a year; over four years you can expect to pay

$30,000 or more per student. One way to trim this cost–and possibly turn a profit–is to buy your child a place to live near campus. In many markets, housing prices are appealingly low–even in college towns. When your son or daughter graduates, you could sell the property at a gain. Even if you just break even on the real estate, you could save thousands of dollars in room and board. Tax breaks can help when you rent to multiple students. You’ll collect rent while you receive all the tax deductions available to owners of investment property: travel costs, maintenance, depreciation, etc. If you name your child as property manager, you could pay him or her a reasonable management fee, which will be deductible for you, the property owner, while your student might owe no tax.

“As with any real estate investment, you have to do your homework,” says Stewart Welch III, a financial planner in Birmingham, Alabama. “Spend some time exploring the neighborhood. You’ll want to find a home located near campus, preferably within walking distance.” Finding an appealing location will help attract tenants and make it easier to eventually sell the property, perhaps to the parents of an incoming student.

Lesson #4   Creative Thinking

Look for campuses seeking to diversify their student body. Schools such as Hobart and William Smith Colleges, which has a minority population of approximately 8%, may be looking to broaden the ethnic and racial landscape of their campuses. As a result of diversity objectives, schools may offer more liberal financial aid to minority students.

Invest in SAT prep. Consider this an investment with big returns. Although the cost may sound steep–classes usually start at $2,000– some parents are doing just that and finding it to be a less expensive option than just one year of full-price college tuition. High SAT scores often translate into scholarship offers and generous financial aid. Unfortunately,  black students score lower on the SAT than any other racial group, including Native Americans. So higher scores could mean lower college costs.

Look for more than just loans. Target schools that have eliminated loans from their financial aid packages. Some of the top schools in the country, including Columbia University, Northwestern University, and Stanford University, have pledged to reduce student debt or taken steps to significantly limit the loans low-income students would need to take out. To lower costs, consider limiting your child’s choices to such schools. Go to www.projectonstudentdebt.org/pc_institution.php for a list of these colleges and universities.

Choose a state school, even if it’s not in your state. Public colleges cost less money, but if your child wants to attend a public school in another state, you’ll be charged hefty out-of-state rates. If your child has a good GPA and high SAT scores, or is otherwise an attractive student, try asking the school to waive the out-of-state rates.

Go to an elite school­–for two years. Take advantage of the community college option for your child’s first two years. After he or she graduates, your student can transfer to a four-year school and graduate with a bachelor’s degree that has the name of the senior college on it. Some community colleges have honors programs and are actively recruiting strong students. Top colleges like New York University and the University of Michigan have community college transfer programs.

These are just some of the cost-saving options available to students and parents. Others–such as co-op programs, attending university in Canada, and writing essays for scholarships–may also be feasible. College is an investment that’s worth every penny, but clearly you don’t need to spend them all.

— Donald Jay Korn contributed to this article.

This article originally appeared in the August 2009 issue of Black Enterprise magazine.