It’s great that you’re still basking in the warm, proud glow of your child’s high school graduation. Brace yourself, though. Come autumn, the cold realities of paying for college are sure to come rushing in. As you’re no doubt aware, higher learning comes at a high price. The latest report from the College Board puts average total charges at $14,333 a year for public colleges and $34,132 for private schools. But there’s no need to worry.
There are ways to cut the costs of college, and BlackEnterprise.com has compiled a guide for doing just that. Over the next few days, we’ll offer money-saving tax strategies, loan tips, and other creative techniques to see you through your next graduation celebration.
Lesson 1: Tax Tips
Take tax breaks. For 2009 and 2010, the Hope Scholarship credit has been replaced by the more generous American Opportunity tax credit. Recently signed into law, the new credit lowers income taxes by $2,500 for those who pay at least $4,000 a year during the first four years of a student’s post—high school education. The tax credit is issued per student. If you have three kids who qualify, and you spend more than $4,000 for each of them, you may be able to claim three $2,500 American Opportunity tax credits, for a total tax savings of $7,500.
Moreover, the American Opportunity tax credit is refundable, up to 40% of the amount for which you qualify. Say you spend $10,000 on your child’s college education in 2009. However, when you file your 2009 tax return, you owe only $1,200. Your American Opportunity tax credit would completely offset your tax liability, and because you don’t owe as much as your tax credit is worth, you will receive a $1,000 refund check (40% of $2,500) from the Internal Revenue Service.
The full American Opportunity tax 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, smaller tax breaks may help cut costs if your income exceeds those limits.
Lesson 2: Loans
Most students finance their education with borrowed funds. According to FinAid.org, 65.6% of students graduate with education debt, and of students who attend private college, 72.8% graduate with debt. The average amount of money owed by African American students leaving school is $19,800. 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.
Borrow wisely. “Stafford loans are available to students who fill out the Free Application for Federal Student Aid, or FAFSA,†says Mark Kantrowitz, publisher of FinAid.org. All students are eligible to take out these loans regardless of their credit histories, and they do not require collateral or a co-signer. (See chart.)
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, while with unsubsidized loans, the student pays all the interest.
There are loan forgiveness options that your student may want to consider as well. 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 FinAid.org.
Stafford loans may not cover the entire college bill, so federal PLUS loans are also available. Parents can use PLUS (Parent Loan for Undergraduate Students) loans to borrow the full cost of attendance, less any financial aid package.
At many colleges, PLUS and Stafford loans are offered 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 until six months after your child leaves 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 their son 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. Andréa Holman of San Leandro, California, 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.â€
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.
Here are the maximum amounts that dependent students can borrow:
| Year | Current Law | Former Law |
| Freshman | $5,500 | $3,500 |
| Sophomore | $6,500 | $4,500 |
| Upperclassmen | $7,500 | $5,500 |
| Total* | $31,000 | $23,000 |
* May exceed four undergraduate years
If you send your child away to college, room and board will be a major budget item. The charges are the second most expensive part of college. On-campus housing averages $8,000 a year, and over four years you can expect to pay $30,000 or more per student.
Lesson 3: Housing
To save on room & board, consider a housing purchase. 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 some college towns. When your student graduates, you might 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 increase your chances of coming out ahead, especially if you buy a large apartment or house near campus and rent to multiple students. You’ll collect rent while you take all the tax deductions available to owners of investment property: operating 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 spot will help to attract tenants and make it easier to eventually sell the property, perhaps to the parents of an incoming student.
Lesson 4: Creative Thinking
Invest in test prep. Would you invest $2,000 in SAT prep classes for your high school child? Although the cost sounds over the top, some parents are doing just that and see it as a less expensive option, and it is, compared with just one year of college tuition. “My friends in Texas put their daughter in a two-year, $2,000 SAT prep program, because they wanted to position her to get the highest SAT scores,†says Angela Redekop. “Sure enough, she got a free ride to college.†High SAT scores often translate into scholarship offers and generous financial aid. But black students score lower on the SAT and ACT than any other racial group, including Native Americans. When you consider that higher scores could mean lower college costs, SAT prep courses are a worthy investment.
Look for campuses seeking to diversify their student body. Last year 19-year-old Chad Zimmerman, then a high school senior in Montclair, New Jersey, applied to nine colleges. “Chad managed the whole process,†his mother, Karin, recalls. “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 College in Geneva, New York, offered the most aid, “Even more than a state college,†Karin says. “That’s why we chose it.â€The Zimmermans feel that Chad’s generous aid is a result of Hobart and William Smith Colleges’ diversity objectives. Though the campus is only 8% minority, Michael and Karin felt that the right choice for their pocketbook was the right choice for Chad. Such campuses may offer more liberal financial aid to African American students.
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 have eliminated loans 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 Project on Student Debt.org for a list.
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 that has the name of the senior college on it. Some community colleges have honors programs and are actively recruiting strong students.
These are just a few of the cost-saving options out there. Others–such as co-op programs, attending college 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 all of them.
Robin White Goode is the co-author of this story.