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Is Your Child Headed To College Next Fall?
It's Time for Both of You to Take a Crash Course on Borrowing
and Spending
Even if you've planned relatively well for your future
college student's expenses, the credit crunch and downturn in
investment income for colleges have changed the game for
financial aid at many schools. That means both parents and
students need to approach the college financial aid scene with
unprecedented caution.
Harvard University, the world's richest school, announced in
February that it was slashing 25 percent of its investment staff
after its $36.9 billion endowment lost 22 percent of its value
in the previous four months and could decline as much as 30
percent by the end of June. In two separate surveys released in
January, the Commonfund Institute and TIAA-CREF, in a survey
done for the National Association of College and University
Business Officers, reported that college endowments fell on
average 23 percent in the five months ended Nov. 30, 2008.
Why is this important? It's true that endowments at schools
of all sizes mostly pay for faculty and facilities. But they
also provide both grants and scholarships for talented students
who need them and have been under significantly more pressure to
do so. When students have a tougher time finding lower-cost
school financing, the demand for scholarship and grant funding
goes sky-high. In many cases, students are forced down the
borrowing chain to increasingly risky loan options.
The private student loan sector has also been hit by reports
of questionable practices in the last two years. In December,
New York Attorney General Andrew M. Cuomo reached an agreement
with the College Board — the developer and administrator of the
SAT and AP — to stop discounting products and services in
exchange for a ranking on colleges' preferred lenders list. The
College Board will now invest $675,000 to develop a set of tools
to help financial aid administrators to help students and
parents compare student loan offers and identify the lowest-cost
loan options.
What can you do? One of the best starting points is a meeting
with a CERTIFIED FINANCIAL PLANNER™ professional with specific
expertise in planning for college and financial aid options. The
smartest thing is to work with a planner when kids are young to
amass the right amount of savings for college, but it makes good
sense for both parents and students to meet with a planner
before school starts to underscore the complete list of
financial issues the student will face. These include:
Planning alternatives for financial aid shortfalls.
Over the past few years, colleges have not been able to offer
adequate amounts of funding through Perkins, Stafford and Plus
federal education loans, and private student loans through banks
have closed up with the credit crunch. For students already
admitted at schools for their freshman year in the fall,
financial aid letters will start going out this month.
Here's the catch — many college students get in trouble with
debt because they are unaware that many for-profit companies
advertising access to federal loans pull their financing from
private sources that cost the borrower far more than actual
federal loans would. The ability to plan for college well in
advance and work with an expert to sift through proper loan
alternatives can make the difference between an affordable debt
load when a student graduates and potential bankruptcy.
Setting a budget as early as possible for basic expenses.
Until the student gets to school it will be tough to tell what
actual expenses will be, but it won't hurt to set a tentative
budget that involves taking full account of the student's
savings, the parents' (and possibly the grandparents')
contribution to everyday expenses and any planned income from
work-study or other sources. For a template of a budget written
specifically for college students, go to: http://www.aie.org/Calculators/budgetworksheetinschool.cfm
Start managing credit and debit cards before school
starts. The time to start managing credit and bank accounts
isn't freshman year. While a teenager won't build a credit
history as an authorized user on a parent's card, it's good to
get a little practice using it under a parent's watchful eye.
When a child goes on to college, the challenge will be looking
for the best credit card offer amongst many and managing that
credit responsibly. This is another good reason for both parent
and student to meet with a financial planner ahead of school to
discuss proper credit card usage and monitoring of a student's
fledgling credit score.
March 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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