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The State of Federal Student Financial Aid

March 3, 2009

by Scholarships.com Staff

With all the talk about spending and stimulus legislation and bailouts, it can be easy to lose track of what benefits taxpayers can actually expect to receive. Most likely, everyone knows that the American Recovery and Reinvestment Act, perhaps better known as “the stimulus,” will create jobs through funding “shovel-ready” projects and will put a little extra in paychecks through a tax rebate that will take effect this summer.  You probably also know that there’s also financial aid in there for education, but you may not be sure exactly what.

Frankly, so much federal legislation and talk of change has been floating around in the last two years that anyone who last paid a tuition bill as recently as 2007 probably doesn’t even recognize financial aid in 2009.  To help, we’ve prepared a breakdown of where student financial aid stands currently.

Pell Grants. The American Recovery and Reinvestment Act increased the maximum Federal Pell Grant award from $4,731 for 2008-2009 to $5,350 for 2009-2010.  The maximum Pell award will go up again in 2010-2011 to $5,500 under this legislation.

The income threshold to qualify for federal grant programs also increased.  Now students with an expected family contribution (a number determined by completing the FAFSA) of up to $4,671 (up from $4,041 this year) can qualify for Pell grants.  They will not receive the whole award, but even the minimum award has increased—from $400 for full-time students in 2007-2008 to $976 for the same group in 2009-2010, due in part to the College Cost Reduction and Access Act, which increased all Pell awards by $490.

Students qualifying for Federal Pell Grants can also pick up additional college funding through Academic Competitiveness Grants or SMART grants, which include Pell eligibility in their criteria.  Many non-federal college scholarships and grants also use Pell eligibility to determine awards, so the newly Pell-eligible will definitely want to do a scholarship search to see what’s out there.

Work-Study. More students will also see “federal work-study” on their financial aid award letter in 2009-2010 thanks to the economic stimulus legislation.  More money is available to work-study programs that allow students to get a part-time job on (or occasionally off) campus and count the income as financial aid.  Work-study programs provide great job opportunities for student workers, and since the money is given in the form of a paycheck, students can use these funds to pay their tuition bills or to cover living expenses.

Tax Benefits. One of the biggest perks of the American Recovery and Reinvestment Act is the creation of the American Opportunity Tax Credit, which replaces the Hope Credit.  The tax benefits under Hope only went up to $1,800 and only could be taken for two years.  The American Opportunity Tax Credit can be used for four years, can fund up to $2,500 of college costs (100% of the first $2,000 plus 25% of the next $2,000, for a total of $2,500), and up to 40% is refundable, so people who don’t pay as much in taxes as they would qualify to receive in the credit can still get something.

Additionally, the income level at which the American Opportunity Tax Credit phases out is higher than the Hope credit, allowing individuals with incomes of up to $90,000 and married couples with incomes of up to $180,000 to take it.

Families will be able to start taking advantage of the American Opportunity Tax Credit on their 2009 taxes.

Other Benefits. Much more is included in the American Recovery and Reinvestment Act.  For example, students with 529 savings plans can now use that money to purchase a computer for school.  Additionally, states will receive billions of dollars over the next two years, with a portion of the money devoted specifically to funding projects at public institutions of higher education, as well preventing or reversing massive reductions in state education spending.

While student loans stayed the same in the stimulus, they did receive a boost in the fall through the continuation of the Ensuring Continued Access to Student Loans Act, as well as other recent legislation, including some new aid to lenders.

If you’d like to read more about how recent legislation has affected paying for college, our blog archives feature breakdowns of the 2007 College Cost Reduction Act, the 2008 Higher Education Opportunity Act, the 2008 Ensuring Continued Access to Student Loans Act, the 2008 GI Bill, and more examples of what's going on with college in Congress.

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Saving for College, Part I: 529 Plans

March 5, 2009

by Scholarships.com Staff

Paying for college can be a struggle.  Nobody wants to repay student loans forever, not everybody is going to land a full-tuition scholarship, and federal student financial aid seldom takes care of all college costs.  If you're a parent or relative looking ahead to cover college costs for a child, finding scholarships is a great step now, but you may also want to consider college savings plans.

Read below for information on 529 savings plans, which are one of the most popular and diverse options for college savings.  If this is not for you, check back tomorrow for more information on other savings options.

529 Savings Plans While 529 plans have sustained average losses of 21 percent in the last year, they can still be a good idea, especially if you choose your plan carefully and have plenty of time to save.  Many 529 plans allow you to move your savings into a much more conservative portfolio when the student nears college, an option they're sure to publicize based on the recent behavior of the stock market.  While there are limits on how many changes can be made to a 529 plan per year, the plans are otherwise quite flexible and varied, so it's easy to find one that works for your situation. Plus, 529 plans can be taken out in the parent's name, rather than the student's, so they will only minimally affect a student's financial aid eligibility.

Additionally, contribution limits are high, income limits are nonexistent, minimum contribution requirements tend to be low, and many states offer a variety of incentives for residents who contribute to their plans.  As an added bonus, many 529 plans can accept contributions from anybody anywhere, not just the people named on the account, and several programs have been created to take advantage of this.  For example, some plans allow a portion of credit card purchases or purchases at certain stores to go towards a particular student's 529 plan.

Prepaid Tuition Savings Plans If you're hesitant about sticking money for college in the stock market with uncertain returns, another type of 529 plan is also gaining popularity.  Prepaid tuition plans allow families to contribute a fixed amount now in exchange for a certain portion of tuition being covered in the future.  Many states do this for their state colleges and universities, and the Independent 529 plan, which is accepted by over 200 private colleges, also fixes contributions to portions of future tuition.  Both of these varieties eliminate worries about tuition inflation, though if tuition actually goes down between now and when the student starts college, a prepaid plan might not be the most lucrative option.

The Down Side 529 plans do have drawbacks and limitations.  Money must be spent on education, and the expenses that qualify are limited to undergraduate tuition, fees, educational expenses like books, and now computers. However, if the student is enrolled at least half-time, money from a 529 plan can also go towards room and board, so even if your student earns a full-tuition scholarship, it's possible to still take advantage of 529 savings.  Money must stay in a plan for at least 3 years, so if you're saving for a college sophomore, you're out of luck with these.  However, you can transfer the unused portion of a 529 plan to another family member without incurring the heavy withdrawal penalties, and it may also be possible to use the funds towards graduate or professional school.

Plans also vary from state to state, so your state's plan might not have the best benefits for you, or might not offer as sweet a deal in terms of tax breaks or low fees as the next state over offers its residents.  Luckily, you can shop around among a variety of plans, including ones offered by several other states.

529 plans are not the only college saving option, though they remain the most popular and perhaps the most well-known.  Check back tomorrow for information on the rest of the pack.

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Saving for College, Part II

March 6, 2009

by Scholarships.com Staff

Continuing our theme from yesterday, today's blog post centers on more options for saving for college.  Yesterday, we discussed 529 plans, popular college savings vehicles that have been battered by recent financial troubles.  If you're considering saving for college but are not sold on a 529 plan, the most common alternatives are discussed below.

Coverdell ESA. Coverdell Education Savings Accounts are similar to 529 plans in most respects, but do have their own benefits and drawbacks. Rather than being sold by a state, they are sold by banks and brokerages, which can charge their own management fees. Because there aren't any state ties, there aren't any residency limitations, though there also aren't any state tax breaks for enrolling in a Coverdell ESA.

Coverdell accounts allow more flexible investment options and unlimited changes to investments. They can also be used to pay for high school and elementary school expenses, in addition to college costs. Otherwise, the expenses Coverdell and 529 plans can be used for are roughly the same: tuition and fees, books and supplies, room and board if over half-time, and other qualified educational expenses.

One major limitation to the Coverdell ESA is the $2,000 annual contribution cap. This is the limit per account holder, not per contributor. Additionally, individuals must have an adjusted gross income of $110,000 or below to contribute, and $95,000 or below to contribute the full $2,000. Coverdell accounts are held in the beneficiary's name, so they can hurt the student on the FAFSA. They also must be used or cashed out by the time the beneficiary turns 30, and they go to the beneficiary no matter what, while 529 plans can be given back to the parent in charge of the account if the student chooses not to go to college.

Roth IRA. The Roth IRA, typically used as a retirement account, can also be used to save for school. As long as you're withdrawing contributions, rather than earnings, there is no penalty if you are using the money from your IRA for educational expenses. However, a college savings plan might be the better way to go if you're setting up an account specifically for your student (especially since contributions to a Roth IRA must come from income the beneficiary earned from working), and dipping into your retirement funds to pay for college is widely regarded as a less than ideal choice by financial experts. But if you choose to take it, the option is there.

UTMA. The Uniform Transfer to Minors Act allows assets to be given as gifts to minors without the establishment of a trust. While the options explored up to this point have been savings accounts or investments, UTMA covers everything, including property. An adult manages these assets in a custodial account until the owner reaches the age of 18 or 21, depending on the state. In the meantime, the funds in the account can be used to benefit the child, including taking care of educational expenses. Once the owner reaches the age of majority, the assets are theirs to use as they please. This can mean paying for school, or it can mean making less desirable financial choices.  Since these assets belong to the student, they would count against them for student financial aid.

Government Bonds. While typically regarded as the province of grandparents, government savings bonds (Series EE is the most common) are also an option for paying for college. Bonds can be purchased online or at banks, and redeemed later for cash. As opposed to stock market-based savings plans which can lose big during crashes, government bonds are going to continue to grow as long as there's a government to honor them. And if there's no longer a United States government, well, you might have more to worry about than paying for college.

Also, since no rules state that a savings bond must be redeemed for college costs, the money can be used towards paying off student loans, covering college living expenses...or partying it up during spring break in Mexico.

While EE Savings Bonds grow at a steady rate, they do grow very slowly. You're also limited to a purchase of $5,000 per calendar year. Since they're such a safe bet, they can be great gifts for high school students, but a market-based option might be a better way to grow savings and maximize returns for younger children.

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529 College Savings Day

May 29, 2009

by Scholarships.com Staff

Today is May 29, also known as "529 College Savings Day," named after 529 plans, which are popular state-sponsored college savings plans.  Today has been designated as a day to raise awareness of the importance of saving for college, as well as ways to do so. While 529 plans suffered along with everything else in the stock market, they are still being emphasized as a valuable tool for saving money for college.

According to a poll conducted by Gallup and Sallie Mae, 62 percent of families with college-bound children are already saving for college in some capacity, with the majority planning to contribute at least half of a child's tuition.  About half of families that are saving already regularly contribute to college funds, and around a third use state 529 plans.  The Chronicle of Higher Education has more information on the survey, as well as a link to the results.

If you're curious about college savings plans, we have some resources to help you get started.  A few months ago, we did a couple blog posts on saving for college, featuring a discussion of 529 plans, as well as other savings options.  While the focus of today is on saving for college, it's also a good time to look into college scholarships, especially for students still in high school.  Read up on college savings accounts today, then do a free college scholarship search to find more options for paying for school.

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Guaranteed Tuition Plans No Guarantee

September 25, 2009

by Scholarships.com Staff

Personal savings, college endowments and college savings plans all suffered when the stock market took a nose dive last fall. Students, families and even schools who thought they were financially secure soon learned otherwise and had to scramble to come up with alternative plans to pay bills. Now that things are beginning to even out and return to a state of normalcy, those affected by the recession are looking towards recovery and assessing their long-term plans. For some college savings plans, especially "guaranteed" tuition savings plans, the future looks particularly bleak, even without further financial setbacks.

Guaranteed tuition savings plans are one of several types of college savings plans, which allow families to save for college tax-free and often involve other incentives, as well. Prepaid tuition savings plans allow families to pay tuition ahead of time at certain schools, ensuring that bills will be paid for students, even if tuition skyrockets, as it seems likely to continue doing. Many families in states where they're offered have purchased them for young children who may not be attending college for another 15 years or more, but some plans have already begun to run out of money due to losses in the stock market and the sharp rise of college costs.

As a result, states including Texas, Alabama and Pennsylvania are struggling with the prospect of not being able to fund their current obligations to these plans. Several prepaid tuition plans have been closed off to new investors, including the plans in Texas and Alabama. Despite this, Alabama may not have enough money to pay tuition for all students currently enrolled in its prepaid plan. Pennsylvania has introduced legislation to remove "guaranteed" from its tuition savings plan's name and make it clear that the state has no obligation to bail out the plan if it doesn't earn enough money to meet its obligations.

Texas has also announced a rule change for people who currently have money invested in its guaranteed tuiton plan. When they invested, families were told that if their children did not go to one of the state colleges whose tuition the plan will fully fund, they would be able to close their account and withdraw the full amount of tuition at those institutions at that time. Now, the Texas Prepaid Higher Education Tuition Board has said that families whose children do not attend one of the schools included in the plan can only withdraw the amount they invested, minus an administrative fee. State legislators have urged the board to reconsider, but so far it appears that those with money invested have three choices: they can pull their money out before the rule goes into effect on October 30, they can limit their children's college choices to those sanctioned by the tuition savings plan, or they can take a guaranteed loss on their "guaranteed" tuition investment.

To help you avoid the problems currently facing Texas parents, US News has a helpful article on questions to ask before investing in a prepaid college savings plan. Prepaid tuition plans, 529 plans, and other college savings vehicles can still be a good idea, even though they've been through difficult times. As with many things, the trick to being successful in your choice is first doing your research and figure out which plan is best for you and your family.

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Students and Families Unprepared for College, Financial Aid Application Process

February 10, 2010

by Scholarships.com Staff

Despite recent trends of more students across the country enrolling at institutions of higher learning, many students and their families remain mostly uninformed and unprepared to navigate the college and financial aid application process, according to a report issued yesterday called "Planning for College: A Consumer Approach to the Higher Education Marketplace."

The report, from MassINC, a think tank in Massachusetts, looked at decisions students and families need to make when applying to and paying for college, and the information they need to make those decisions. It found that students and parents currently have great difficulty "getting the most out of their col­lege dollar," as the price of higher education only continues to rise.

Perhaps even more alarming is that families have started borrowing more to pay for college, without considering risk and the rate of their return. Related to increases in student borrowing amounts, an article in The Chronicle of Higher Education yesterday looks at the idea that doctoral students finish faster if they take out large loans. The most obvious answer why is that taking out more student loans allows the students to take more classes, and quit part-time jobs that may have been reducing their college costs. It's a choice students must make every day - should you sacrifice some comfort to reduce your student loan debt, even if it means taking longer to complete your degree? It's a personal decision, but students should be aware that they'll be expected to start repaying any debt once they graduate.

The Massachusetts study also found that students and families had little knowledge of tax benefits and college savings plans, and how to compare them. For example, there are 118 different 529 Plans, and the resources out there do little in the way of pointing consumers to the advantages and disadvantages of each. Families and students also admit to knowing little about the actual sticker price of colleges, as that often depends on the funds available to assist incoming students, an unknown when those students first apply.

The report's authors suggest families and students must become more like "savvy consumers" who are able to understand and successfully manipulate the college and financial aid application process to their advantage. The process should also be made less complex, an idea that is already being explored by federal legislation such as the Higher Education Opportunity Act. Finally, families need reliable measures about the educational experience that colleges and universities offer beyond the annual rankings we see in the Princeton Review, for example. According to the report, while the U.S. Department of Education is providing increasingly consistent and accessible indicators, such as graduation rates, this branch of the college-bound decision remains the weakest.

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