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Simplifying the College Cost Quest

In last week’s Yahoo!Finance column, I profiled a student who borrowed $200,000 to fund a bachelor’s degree in sociology as part of a larger story on the student debt bubble. (Two years ago I did a piece on a graduate student in arts management who was $135,000 in debt — so the stakes are rising.)

I follow up this Thursday (12/16) with practical tips to finance college on the cheap. For me, the craziest thing in the college search madness is that families invest a gigantic amount of time determining the best institution for their child — but don’t know until the spring before enrollment if he or she can afford to go there.

Colleges engage in this weird pricing scheme in which they publish a sky-high “sticker price” that virtually no one pays. Most students pay the net price — which is the sticker price minus merit and need-based grants (think of an auto dealer who offers cash-back). There is a separate figure, the “up-front, out-of-pocket cost” — which is the net price minus work-study and government loans.

Why do schools do this? People tend to think higher price equals better quality (see this piece for more.) But this financial slight of hand has two downsides: very bright, lower-income students don’t even bother to apply — when they might be eligible for aid that makes a private school cheaper than a state school. Those who do apply don’t know what the school will actually cost until the student receives an acceptance and aid award letter in the spring — and at that point, it may be too late in the game to plan. (The earlier you start saving the better!)

To receive financial aid, families fill out the Free Application for Federal Student Aid (FASFA) as soon as possible after January 1 of a student’s senior year in high school. (Some institutions require a different form, the College Scholarship Services Financial Aid Profile Institutional Methodology form — or CSS. Yes, my eyes are glazing over as I write this, so yours probably are too — but stay with me.)

Families who file FASFA’s electronically receive their Student Aid Report within three to five days (if you file snail-mail it’s four weeks). The schools listed on your application will also receive those results. Families are then notified of their aid packages in April.

Fortunately, the feds have mandated all colleges to post “net price calculator” on their web sites by August 2011. The calculator must estimate the amount a specific student will pay to attend the school, based on the family’s finances and the school’s aid budget. The idea is that parents will still go through the same application process in January but it will be more of a formality, as they’ll already have a clear idea of their costs a year before their child matriculates.

Just remember — the more you save the less college costs. For every $1 in borrowing, you’ll pay back $2 on average. So consider opening a 529 plan for your child today. And check out the new book “Debt Free U: How I Paid for An Outstanding Education Without Loans, Scholarships, or Mooching Off My Parents.” Written by Zac Bissonnette, a senior at University of Massachusetts, it’s an eye-opening look at the pitfalls of college planning.

I interviewed Zac in November; at age 21 he understands the risks that many people twice his age don’t take seriously. (If they did they’d have more saved and less debt.) For instance, he opposes parents taking out home equity loans to finance college. “The New York Times had advice on paying for college that was horrible,” he told me. “Someone wrote, ’I am thinking about whether I should use a Parent Plus loan,’ and the advisor said to take out a home equity loan because rates are insanely low.’ But what if you lose your job or get sick? If your financial plan is for everything to keep going the way it’s going, then your financial plan is a piece of crap.”

Now there’s an author with a bright financial future.

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One Response to “Simplifying the College Cost Quest”

  1. Zac Bissonnette Says:

    Great post!

    And a blog about Money & Happiness is such an important place to talk about student loans because few financial obligations can interfere with the ability to build long-term happiness the way that student loans can.

    See, for instance this 2007 study — http://www.nber.org/papers/w13117 — which found that “debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid “public interest” jobs.”

    The battle for intelligent college financing decisions is a battle for the future happiness of Americans, and it’s huge to have Laura Rowley as an ally in it.

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