Financial Aid 101: How to Get More

The Wall Street Journal

Even Well-Off Families Can Outwit the College Bean-Counters.

Now that families have sent in their college acceptance letters, reality is setting in.

How in the world are they going to pay the bill?

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Faced with steep budget cuts and slumping endowments, schools are raising tuition and paring back aid, putting additional strain on families still struggling to recoup investment losses suffered during the financial crisis. Earlier this year, for example, Harvard University announced that its tuition, fees and board would increase by 3.8% for the 2010-2011 year, exceeding $50,000 for the first time. Dartmouth College and Williams College announced plans to replace grants with loans in the aid packages of some students.

Many state schools, traditionally far cheaper than private schools, are imposing significantly steeper hikes in percentage terms. Tuition at Washington's four-year state schools is expected to rise by another 14% this fall, on top of a 14% increase a year ago -- while students at the University of California's campuses face a 32% rise in tuition and other costs. Families are likely to see even larger tuition increases at state schools in 2011 as federal stimulus funds run out.

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It adds up to another depressing reminder of how difficult paying for college can be for upper-middle-class families. Many are too affluent to qualify for significant financial aid, but not wealthy enough to afford to pay out of pocket.

Fortunately, there are a surprising number of short- and long-term strategies that parents can use put their finances in the right light to qualify for more aid.

All of them are based on one simple principle: "Neediness" is in the eye of the beholder. "While the money is supposed to go to the people who need it, the reality is that it goes to the people who navigate the process and understand the ins and outs of the formula," says Kalman Chany, author of "Paying for College Without Going Broke."

Short-Term Strategies

If your financial circumstances have changed materially at any time, ask the aid office to review your aid package. Under a "professional judgment review," financial-aid officers can make adjustments to the aid package if there have been material changes to the family's income or assets.

With two sons attending Stanford University this fall, Lynette La Mere of Montecito, Calif., was facing out-of-pocket costs of close to $100,000. She was able to pay the full cost for her older son, Max Oswald, now a sophomore, because her catering business was bringing in about $300,000 a year in profits. But by mid-2009, the recession caught up with her, as people scaled back their wedding plans. "My profit dropped dramatically, probably by about two-thirds," says the 49-year-old single mom.

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Much of Ms. La Mere's wealth is tied up in her business -- the property, building and equipment -- which she estimates is worth about $2 million. "It's scary," she says. "I don't know yet what I'm going to do. The obvious thing is [for her sons] to get loans. But I don't want them to start their [working] lives in debt."

Stanford initially offered her younger son, Lucas Oswald, $5,500 in federal Stafford loans. Then her adviser, Deborah Fox of Fox College Funding, a San Diego firm specializing in late-stage college planning, advised Ms. La Mere to send a letter to the school's financial-aid office explaining her steep drop in profit and the fact some of her business assets, such as commercial real estate, weren't readily available to pay for college. The result: Stanford came up with an additional $9,000 annual scholarship and has indicated that Max will get a similar package.

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Schools say they are seeing a rise in the number of students asking for help. Financial-aid applications at the University of Michigan, for example, are up 4% for the upcoming academic year, on top of a 15% increase last year, and the school is making more adjustments to student aid packages to account for factors such as job losses, says Pamela Fowler, the school's executive director of financial aid.

More than half the undergraduate students at Sarah Lawrence College in Bronxville, N.Y., are receiving grants this year, with an average award of $28,113, up from 46% of students in 2008-09 who received an average grant of $25,908, according to the school. Middlebury College in Vermont, says it plans to cap increases in its "comprehensive fee" -- which includes tuition, room and board -- to one percentage point above the annual increase in the Consumer Price Index.

Families with kids attending private colleges may be able to qualify for help under the College Board's CSS/Financial Aid Profile, which is used to determine how to distribute the school's own funds. The CSS/Profile weighs factors, such as home values, that the Free Application for Federal Student Aid, or Fafsa -- which is used to determine a family's eligibility for federal grants and loans -- doesn't consider. Has your home declined in value? If so, think about getting a market appraisal or a 30-day "quick sale value" to document the loss. In addition to home equity, many private schools' formulas also factor in private school tuition for younger siblings and medical expenses.

"If you can document that the value of your home has decreased by 20% to 50%, it has the potential to make a difference of a few thousand dollars," says Mark Kantrowitz, who runs the website FinAid.org, which offers strategies to help maximize eligibility for need-based student financial aid.

Long-Term Strategies

For financial-aid purposes, the most crucial year is the one that begins on Jan. 1 while your child is a junior in high school -- the "base income year." During that time, and throughout college, income earned or received is counted more heavily than assets in the financial-aid formulas. Try to avoid taking retirement distributions or realizing large capital gains during that period. Load up on contributions to retirement plans before the base and college years, because assets in those accounts aren't counted in the aid formulas.

Some families may want to defer converting an IRA to a Roth IRA, even though new laws now make it possible for wealthier taxpayers to take advantage of the conversion. Many financial-aid offices may use the income generated from the conversion to reduce the students' eligibility for need-based aid -- unless parents appeal the offer through professional judgment.

Since financial-aid forms ask parents to list the funds in their accounts the day they fill out the forms, aim to draw down those accounts as much possible before filing out the paperwork. If you were already planning to make a big purchase -- say, a new car or computer -- just buy it sooner.

Spend down assets in the student's name first, since aid formulas count student assets more heavily than parental assets. Custodial accounts, such as UTMAs and UGMAs, can also be liquidated with the proceeds transferred into a custodial 529 plan, which are currently counted as a parent asset on the Fafsa form.

Some families may want to consider margin loans, passbook loans (which use savings accounts as collateral) or a home-equity loan to help pay for college since such loans reduce net assets in the aid formula, says Mr. Chany. If, for example, you have a $20,000 stock portfolio and a $5,000 margin loan and have no other investments to report, you'd report $15,000 as the figure for your assets on the Fasfa. A major drawback: If the stock market declines drastically, you may be asked to put up additional stock as collateral or pay back part of the margin loan.

Another strategy: Use one of the more than two dozen "prepaid" 529 plans, which allow families to make an upfront payment in exchange for future tuition contracts or credits. The tuition guarantees generally apply to state schools in the state where they are offered, though you can use the money to help pay for out-of-state or private schools. Although many prepaid plans are operating in the red, for now they are still paying tuition as agreed. But the fine print in some state contracts gives them some wiggle room to pay out less than the promised amounts, so read it carefully.

As Steve Berenson's kids got closer to college, he sold some of his holdings in stock-index funds to buy contracts in the Independent 529, a prepaid plan with partnerships with more than 270 private colleges. With his son, Jacob, set to attend one of those schools -- Kalamazoo College in Michigan -- this fall, he was able to dodge some of the recent tuition spikes.

The school also offered Jacob a $17,000 annual scholarship, and Mr. Berenson, a 47-year-old personnel manager in Vienna, W.Va., recently paid off his mortgage. "I timed it so that I would be freeing up cash flow," he says.

Perhaps the most effective tactic is to find a school that really wants your child. Barry Evans of Carmel Valley, Calif., says his and his wife's decision to send their daughter, Paige, to Southern Methodist University in Dallas was swayed in part by the scholarship money the school offered. "My perception is that early on in the process, SMU decided they really wanted her," he says.

Mr. Evans also netted an additional $6,000 grant by approaching the head of the department that Paige, who just finished her freshman year, was interested in. Today, the school is covering slightly less than half of the roughly $50,000 annual cost through a mix of scholarships and grants.

Write to Jane J. Kim at jane.kim@wsj.com

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