Catch Up on College Savings

Last Updated Sep 8, 2009 11:54 AM EDT

The Kazanjian Family

John and Michelle Kazanjian, small-business owners in Ann Arbor, Michigan, and parents of five girls, are lucky their daughters are as industrious as they are. But the couple still needs to find ways to pay for college — and soon.

Fortunately for their parents, the older Kazanjian girls have won generous grants: Ani, a senior at Johns Hopkins University, has an ROTC scholarship. Mary Beth, who just graduated from Hillsdale College, had a scholarship covering 50 percent of expenses and entered as a sophomore, thanks to Advanced Placement courses and college credits she had accumulated in high school. And Gina, a high-school junior, just qualified for a National Merit Scholarship. (The younger girls are 15 and 11.)

That said, most parents overestimate their children’s ability to win these financial awards, according to Mark Kantrowitz, publisher of FinAid.org and director of advanced projects at FastWeb.com, a scholarship search service. Only one in 10 full-time students at four-year schools gets private scholarships, and their average total is $2,815. And even the most generous scholarships are unlikely to cover college costs completely.

As a result, John needs to regroup. His college savings “plan” had been to rely on the girls “getting good grades to encourage financial aid and scholarships,” with a home-equity credit line to plug any gaps. That’s not likely to be enough, but there are other routes to aid.

Kantrowitz notes that when the Kazanjians have two or more children in college at the same time, financial-aid formulas look more kindly upon them. Specifically, the Expected Family Contribution (the amount a family is expected to contribute each year to tuition, as determined by filling out a federal student-aid form), will be at least $15,000, assuming that there are no substantial assets in the children’s names. That’s about half the expected contribution when just one is in college. “It might qualify them for some institutional aid and perhaps a subsidized Stafford Loan at the more expensive colleges,” notes Kantrowitz.

For example, Harvard caps the parental contribution at 10 percent of adjusted gross income up to $180,000, so a family with that income would pay only $18,000. Yale extends that policy up to adjusted incomes of $200,000. Financial-aid formulas can get complicated; for more information go to the low-income section at FinAid.org.

The Kazanjians might also investigate the TEACH Grant, which provides up to $4,000 per year to students who intend to teach in a public or private elementary or secondary school that serves students from low-income families. And, as all parents should keep in mind, it’s still worth filing the Free Application for Federal Student Aid (FAFSA), even if it’s just to get the unsubsidized Stafford and Parent PLUS Loans (which are available even to wealthy families), since those have low interest rates and a variety of favorable repayment terms, such as loan forgiveness for students who pursue careers in public service.

They should also search for scholarships at Web sites such as FastWeb.com. If they are talented academically, they should look for academic scholarships at less-well-known institutions. The Kazanjians may also be eligible for a tax credit under the Hope Scholarship program.

Jill Schlesinger, CFP and Moneywatch.com editor at large, says the Kazanjians can’t afford to put money away in a tax-sheltered 529 college savings plan, but that parents who can should do so. With a 529, you invest in the plan’s mutual funds and earnings are free from federal income tax if the funds go towards college expenses. Some states — including Michigan — also offer tax deductions for contributions to the plans. But, as Schlesinger points out, John and Michelle Kazanjians’ most urgent priority is to secure their own economic future.

“When you fly,” notes Schlesinger, “the attendants give the spiel about the oxygen masks: Put the mask on yourself first before you help your child. So, too, with education funding. Only after you have taken care of yourself by securing your financial life and planning for retirement, should you fund education.”

For any family with college-bound children, here are three more ways to save big bucks on tuition.

Quick Fixes:

  • Jump-start the scholarship hunt.The earlier parents and their kids begin looking for scholarships, the greater the chance of winning the awards. There are even college scholarships for students under 13 and in grades 8 and below.
  • Earn college credits while still in high school.The Kazanjians should encourage their younger two daughters to emulate their older sisters and take Advanced Placement courses. The girls might also take courses at an inexpensive local community college that will help them earn a degree faster at the school they eventually attend.
  • Consider going local. Starting out with two years at a local community college can yield enough savings in housing and tuition costs to fund a subsequent two years at a private or public four-year institution, notes Kantrowitz. For example, two years at Washtenaw Community College would run the Kazanjians $4,620, while two years at the University of Michigan costs about $23,000. Many colleges, including the University of Michigan, have “articulation agreements” with community colleges that specify which classes are acceptable for transfer or advanced credit. Says Kantrowitz: “In states like Pennsylvania and Florida, students graduating from any two-year college are guaranteed admission to a public four-year college in the state.”

John’s Response:

“We’ve never had a college savings plan because we didn’t start earning enough to consider that option until my oldest was starting high school,” explains John. “But we are completely open to community and junior colleges. We hadn’t heard of those places to research scholarships, so we’ll be looking at them.”

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