sealPurdue News
_____

January 1998

Expert: Study now to pay for college later

WEST LAFAYETTE, Ind. -- As college costs continue to rise, most experts advise families to start planning early for the bills.

Download Graph Here
Graph caption below
Joyce Hall, director of Purdue University's division of financial aid, says: "Starting an education fund as soon as your kids are born is the best way to make sure you can pay for college. In addition, the federal government has made some changes to make the financial load a bit lighter."

New tax laws enacted late in 1997 provide $91 billion over five years in higher education tax deductions and credits. Hall urges families to read the new laws and to take advantage of the savings.

"Although information about these credits is still forthcoming, several provisions of the tax package are encouraging for students entering college this fall. One of the provisions worth noting is that interest rates on student loans will be deductible on federal tax returns."

Students and their families also may qualify for tax credits for college expenses, but they should consult their income tax return preparer or the Internal Revenue Service to determine eligibility, Hall says. Parents are eligible for the tax credits if they claim their students as dependents on their tax returns. Students who are not considered dependents can take the credits on their tax returns. The new tax credits are:

In addition, Congress approved, and President Clinton signed into law, a spending bill increasing the maximum award amount of a Pell Grant from $2,700 to $3,000 per year. The Pell Grant, the main federal undergraduate grant program, is the foundation around which many other types of aid are awarded.

Some states also are helping by providing special college savings plans. However, Hall urges families to look closely at the flexibility of the plans before investing.

"Think about the consequences if the plan only allows savings for in-state schools," she says. "You may want to make sure the money is available for whatever school your kids choose."

Hall says one of the most flexible savings plans on the market is the Indiana Family College Savings Plan, a plan created by the Indiana General Assembly and managed by an affiliate of NBD Bank. Account funds are invested in the Pegasus Managed Assets Balanced Fund, which invests in both stocks and bonds and provided a return of 15.96 percent for the 12 months ending Oct. 31. Income taxes on earnings are deferred until withdrawals are made for eligible higher education expenses. At that time, the tax consequences apply to the student, who has a lower tax rate than adults.

Any family across the country can enroll in the program, and students may use the money to enroll in any accredited, U.S. college or university and some technical schools. Eligible expenses include tuition, books, room and board. If the beneficiary of the account chooses not to pursue higher education or if the funds are needed for emergency purposes, the funds may be withdrawn. In those cases, there is a 10 percent penalty on earnings, but not on principal.

Early savings allow for compound interest to go to work on account contributions and earnings. For example: $100 a month stashed in a cookie jar for 15 years equals $18,000. The same $100 a month deposited in an account with a 10 percent annual rate of return equals $41,447.

Interest rates will vary depending on the type of account used. Two typical options are bank savings accounts and mutual fund accounts. Savings accounts are the safest investment because they are insured by the Federal Deposit Insurance Corp. (FDIC).

Mutual fund accounts, a collection of stocks and bonds managed by investment professionals, have the potential for a high rate of return but are not FDIC insured. With these accounts, rate of return often is related to the riskiness of the investment: the higher the risk, the higher the potential for a large profit.

Hall advises families to gather information from the Internet, company savings plans, community banks, library reference books and financial planners to find the best program for their money. She recommends that after establishing a plan, a family do some research on actual college costs.

"Be sure to compare apples to apples when looking at information from different schools," she says. "Costs go beyond tuition and fees. Room and board, books, transportation and personal or miscellaneous expenses all have to be paid. We're not trying to cause sticker shock, but parents need to be realistic."

Aside from savings plans and tax credits and deductions, there are other options for paying the bills. Scholarships, loan programs and payment plans are common on most college campuses:

Financial awards typically are need-based or merit-based. Need-based is for families who need financial help. Merit-based is for students with a talent, such as academics, athletics or citizenship.

"Scholarships are available for almost any talent under the moon. It's just a matter of finding them. Even if it's a $500 or $1,000 award, it is worth the effort. Students can add two or three small prizes together to make a big difference," Hall says.

High school counselors, library reference books and the Internet are great resources for finding scholarships. Anyone can check Purdue's financial aid home page at http://www.purdue.edu/DFA/ to access electronic scholarship searches and financial aid information. Also, some companies provide scholarships for their employee's children.

To be eligible for need-based aid, parents must fill out the Free Application for Federal Student Aid (FAFSA) and mail it by a specific time. The previous year's income tax figures are needed on the forms, so Hall recommends getting taxes done as early as possible. Most priority financial aid deadlines are much earlier than the April 15 tax deadline. For example, Indiana's deadline is March 2.

"You would be amazed at how many students miss this deadline every year," she says. "Financial aid is really a first-come, first-served situation. In order to have a shot at gift assistance, that deadline must be met. Students will still be eligible for federal Pell Grants, if they have need, and student loans if forms are turned in late."

Hall urges families to avoid taking out home equity loans or borrowing from retirement accounts before checking out other sources of assistance.

"You run the risk of never paying your retirement account back or getting into equity problems. Both plans are commonly discussed but are very risky, especially since there are better options available. If you can do nothing else, start a college savings plan as early as you can," she says.

For more information about the Indiana Family College Savings Plan, contact the plan at (888) 814-6800.

Source: Joyce Hall, (765) 494-5050; e-mail, jhall@dfa.purdue.edu
Writer: Jenny Pratt, (765) 496-3133; e-mail, jenny_pratt@purdue.edu
Purdue News Service: (765) 494-2096; e-mail, purduenews@purdue.edu

CAPTION:
With the magic of compounding, saving $100 per month for 15 years equals $41,447. Without compound interest, saving $100 per month for 15 years equals $18,000. This assumes a 10 percent annual rate of return. The difference is that the interest paid one year earns interest the next. (Graph reprinted with permission from the Indiana Family College Savings Plan.)


* To the Purdue News and Photos Page