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*** [9] Financial Planning Tips

Financial planning is the process of designing a plan to meet your financial goals. It involves identifying the goals (e.g., saving for your retirement, paying for your children's education, buying a house), your current position (net worth = assets - liabilities; net cash flow = income - expenses), and the steps you need to take in order to reach those goals. Just knowing how much you spend on monthly expenses can be an eye-opening experience. Given this information, you can then play "what if" games and make better decisions for your future.

1. It pays to save.

Even though the federal methodology need analysis formula will take parent assets into account when calculating the family contribution,
it is still worth saving money for college despite the "savings penalty". Your home equity and retirement savings aren't counted, and an
age-dependent asset protection allowance shelters some of your assets from the need analysis. Moreover, parent assets are assessed
at a very low percentage rate.

Try saving at least $100 a month from the date of birth. This probably won't cover the full cost of the child's education, but it
can make a difference between being able to pay for college and not. If you can afford it, $400 or more a month is a much better target.

When there are many years before matriculation, you can be more aggressive in your investment strategy. As college approaches, however, you should shift from risky investments like stocks to more secure investments like CDs. Two years before college you should sell the securities in order to avoid realizing the capital gains during the tax year upon which need analysis is computed.

Education is one of the best financial investments you can make. A
bachelor's degree yields an increase in lifetime earning potential
of nearly half a million dollars according to Census Bureau data.
This is equivalent to a 20% annual return on investment.

2. Don't play asset shifting games.

The financial need of most families are assessed primarily on
income, not assets. Remember, the value of your home and retirement
plans will usually not be included in calculating the parent
contribution. [Although the federal calculation of financial need
does not include home equity, some private colleges and universities
still consider it when awarding institutional grants.] Moreover, the
federal methodology also ignores the first $30,000 to $40,000 in
savings and investments, depending on the number of parents, their
age, and the family size.

Consult an accountant before shifting parent assets to your
children. Although there can be a significant tax benefit, remember that
the federal methodology need analysis system assumes that children
contribute 35% of their assets to their education each year.
The federal methodology assumes that parents contribute a MUCH lower
percentage of their assets, so it is usually better to leave the
assets with the parents. Saving a few dollars in taxes now may cost
a lot more in aid eligibility later.

Some people may advise shifting assets to grandparents, non-custodial
parents (if parents are divorced) or other relatives. Even if such
asset-shifting games are financially sound, they are at best unethical,
if not fraudulent. You haven't lost control over the assets -- your
relatives cannot spend the money as they wish. When you fail to report
these assets on the FAFSA and PROFILE, you are providing false
information. Such actions are as bad morally as stealing from your
neighbors or cheating on your taxes.

For most people parent assets are not really a factor in parent
contributions. The asset protection allowance prevents a threshold
amount of assets from being included in the calculation of the
parent contribution. Student assets, on the other hand, do play a
significant role in the calculation of the student contribution.

3. Ask about the impact of a second income on aid eligibility.

If the second income is low and introduces additional expenses
(e.g., child care), sometimes it does not pay for the second parent
to work. Examine the tradeoffs very carefully.

4. Don't try to finagle the financial aid regulations and policies.

Many financial aid consultants suggest various ways of taking
advantage of loopholes in the financial aid system. Some of these
strategies are sound, but others have backfired on the families who
follow them. For example, a few years ago some "consultants" advised
parents to amend their previous year's tax returns to remove their
child as a claimed exemption. The idea was to qualify the child as
an independent student when applying for financial aid. Not only can
this trigger an audit, but financial independence is not the only
requirement for determining independent status. Parents who followed
this advice lost a fair amount of money in lost tax savings, not to
mention fees paid to high-priced consultants.

If the advice you receive involves questionable ethics, think twice
before following it. There is good advice and there is bad advice.
Good tips include spending student assets before parent assets,
keeping investments in the parent's name, and reducing family income
below the $50,000 threshold that causes assets to be ignored.
Any financial aid administrator will admit that these strategies
take advantage of genuine loopholes in the need analysis formula.
But there are also strategies that try to circumvent the system,
instead of trying to work within the rules. Unethical tips include
hiding assets, trying to qualify a truly dependent child as an
independent, or providing false information on a financial aid form.

5. Try to bargain or appeal to the financial aid administrator only
when the family financial situation has changed significantly or
where a great disparity in aid offers suggests that an error has
occurred.

Some people may recommend trying to bargain with the school's
financial aid officer to try to increase the aid offer. The only
case in which this will definitely work is if there is a significant
disparity in the net cost of attendance (e.g., more than $2,000) or
if the family's financial picture has changed significantly (e.g.,
death or disability of a parent, fire, serious illness). Most
financial aid administrators will review the award if there is a
good reason for doing so, but all will refuse to get into a bidding
war with other universities. This is especially true at the Ivy
League schools and top research universities.

If you really want to attend a school but are convinced that you
cannot afford it, talk to a financial aid administrator at the school.
They may be able to help, especially if it looks like they will lose
an outstanding student because of a few thousand dollars difference
in the aid package. They may, for example, be able to modify your
financial aid package so that your outside scholarships reduce the
loans and not the institutional grants, or suggest other sources of
financial aid.

6. Don't lie or act in an unethical manner.

If the financial aid administrator believes that false information was
provided on the financial aid forms, they can require additional
documentation or even disallow your claims. Many schools go through
a process known as verification, in which a high percentage of their
students are required to provide full documentation of every piece
of information listed on the financial aid forms.

Read the certification paragraph about providing false information
that appears on the front of the FAFSA form. In particular, the
FAFSA states that

any person who intentionally makes false statements
or misrepresentations on this form is subject to fine
or imprisonment or both under provisions of the United
States Criminal Code

That includes the student and his or her parents. If you received
funds as a result of providing false information, you will be
required to repay those funds.

7. Start looking for aid early.

Start planning for your children's education as soon as possible.
Most parents wait until the beginning of their child's senior year to
start worrying. This is often too late to make a difference. Encourage
your children early on in academics and athletics, and start saving as
early as possible. There are many sources of financial assistance,
but you have to start searching for this aid early. It is never too
early to start planning for your children's education.

8. Plan for the cost of education.

College costs typically increase at about nearly twice the inflation
rate. Plan accordingly.

9. Indicating the wrong tax return form on the FAFSA can negatively affect
eligibility for some aid programs, such as the Pell Grant.

Many parents choose to file the 1040 even though they are eligible
to file the 1040A or 1040EZ. Likewise, companies like H&R Block often
automatically file the 1040 form, regardless of the AGI or earnings.
This can sometimes cause their children to not qualify for the Pell
Grant.

Parents should ask their tax preparers whether they would have
been eligible to file a 1040A or 1040EZ. The question is NOT whether
you would have gotten a bigger refund with the 1040, just whether you
would have been eligible.

11. Loan repayment.

When repaying your educational loans, try to make as large a
payment as possible. The longer you take to repay the loan, the more
interest you will pay. A shorter loan period will save you money in
the long run. There is also never a prepayment penalty for paying
off a loan early.

If you are having trouble repaying your loan under the standard
10-year repayment plan for FFELP loans, consider consolidating the
loan with a longer term. You may want to consolidate your loans
anyway, to reduce the amount of paperwork associated with servicing
several loans. Some graduates have found it necessary to consolidate
their loans in order to qualify for a mortgage. There are other
repayment options that may also help.

If your loans are unsubsidized (i.e., the government does NOT pay
the interest while you are in school), try to avoid capitalizing
the interest. This can significantly increase the size of the loan,
especially if you are in school for an extended period (e.g., for a
graduate degree).

Talk to your bank about setting up an automatic payment plan, where
a fixed amount of money is withdrawn from your checking account
each month to pay for your loan. This may help you manage the
repayment, if you find it difficult to avoid spending money while
it is in your checking account.

Remember, your student loans will show up on your credit report.
Defaulting on your student loans can have serious consequences for
your ability to get credit for purchasing a home. Contact the
lender *before* you stop making payments, not after, since you may
be eligible for a deferment or a forbearance.

11. Divorce and prenuptual agreements do not shelter funds.

Many universities require both natural parents to provide for
their children's education. Only when the custodial parent (the
parent with whom the child lived the most during the past 12 months)
remarries does this obligation shift from the non-custodial parent
to the step-parent.

Thus, if your parents are divorced and the custodial parent has not
remarried, the income and assets of both (natural) parents must be
included
on the university financial aid form. This rule holds even if the
non-custodial parent refuses to supply the required information.
(The financial aid administrator may make an exception in cases of
documented spousal abuse or abandonment. In general, however, getting
divorced is not an effective means of increasing eligibility for
institutional funds.)

If the custodial parent has remarried, the step-parent's income and
assets must be included on any financial aid form, including the FAFSA.
By step-parent, we mean the new spouse of the custodial parent,
not the spouse of the non-custodial parent.
There are no exceptions, even if the step-parent refuses to provide
any money for the step-children's support or to supply the required
financial information. It may seem cruel, but no information, no
aid. If the parent and step-parent do not comply with the reporting
requirements, the student is out of luck. It is the student's
responsibility to get the parents to cooperate.

Likewise, prenuptual agreements are ineffective at sheltering
assets from the calculation of the parent contribution. If a
step-parent is being counted in place of a natural parent, then all
of that parent's assets should be considered subject to the
determination of financial need.

However, any child support and/or alimony received from the
non-custodial parent must be included on the FAFSA.

The federal need analysis system treats step-parents as though they
were natural parents if

+ they are married to the custodial parent (the natural parent
whose information is being reported on the FAFSA), or

+ they have legally adopted the student

The step-parent's income must be reported for the entire base year,
even if the marriage did not occur until the subsequent year.
Likewise, the system does not recognize prenuptual agreements.

*** [10] My School Didn't Award Me Enough Aid!

Most family complaints about insufficient financial aid derive from the
practice of "need gapping" described in section [3]. There is little
that can be done about this, other than applying for scholarships and
fellowships, working during the school year and summer, and applying
for educational loans.

Howerver, if there is a significant discrepancy between the amount of
aid awarded and your financial need, perhaps you didn't bring some
special circumstances to the attention of the financial aid
administrator. Make an appointment to review your financial situation
with a counselor in the financial aid office, especially if your family
circumstances have changed since the financial forms were filed. If the
circumstances warrant, they may be able to adjust the amount of
financial aid for which you qualify. This process is known as
Professional Judgment (PJ). For most families, however, the increase
will be limited to the amount of educational loans, with the
institutional grants remaining unchanged.

There are several special circumstances that families sometimes forget
to mention:

1. Affecting the cost of attendance:

+ Unusually high supply costs (e.g., art students)

+ Child care expenses

+ Expenses related to a disability (e.g., braille machine
and readers for blind students, transportation expenses
for handicapped students)

+ Health insurance for students who are no longer covered by
their parents' health plan.

2. Affecting the parent contribution:

+ Death of a parent

+ Unemployment of a parent for 10 weeks or more

+ Change in income due to a change of jobs, a reduction in
the number of hours worked, or retirement

+ Loss or reduction of alimony and child support received (or an
increase in alimony and child support payments)

+ Divorce or separation of parents after submission of the FAFSA

+ Loss or reduction of disability and unemployment benefits

+ Losses due to natural disasters, such as floods, tornados,
hurricanes, and mine subsidence

+ Unusual medical/dental and nursing home expenses

+ Child care expenses

+ Casualty and theft losses

If you encounter these circumstances, you may need to provide estimated
income information on your financial aid form instead of relying on the
past year's financial information.

If there aren't any special circumstances, but the financial aid
administrators awarded you less aid than you think you need, you're
probably wondering how you will be able to afford your education. Here
are a few suggestions:

1. Consider a home equity loan. A home equity loan lets you borrow
against the equity in your home, and you can deduct the interest on
your taxes. You can use the home equity loan to pay off your
other debt such as credit cards -- a good idea, since the interest
rate will be lower -- and also use some of the proceeds to pay
for your education.

2. Obtain a Federal PLUS and Unsubsidized Stafford Loans. You do
not need to demonstrate financial need in order to be eligible
for these loans. Of course, if you are eligible for a Subsidized
Stafford Loan, you should use it before you rely on unsubsidized
of educational loans.

3. Part-time work. You can get part-time work during the academic
year, and a summer job during summer vacation.

4. Save money by completing your education more quickly. If you can
graduate in three years instead of four, you'll have saved 25%
of the cost of your education. Advanced Placement (AP) tests,
institutional advanced standing examinations, and taking an extra
course every semester can shave a semester or a year off of your
academic career.

5. Cut costs:

+ Sell your car and buy a bicycle, or ride the bus and
carpool. If you must keep your car, increase the deductible
on your auto insurance policy to $1,000.

+ Share an apartment to cut housing costs, or live at home.

+ Make long-distance telephone calls only at night, or cut
them out entirely.

+ Learn to cook and stop eating out. There are a lot of
nutritious but inexpensive meals you can make.

+ Sell your TV and VCR.

+ Shopping tips:
- Only buy what you absolutely need, and only when it is
on sale. Consider buying in bulk.
- Buy generic drugs and store brands.
- Eat a full meal before going grocery shopping. Never go
shopping on an empty stomach.
- Buy used textbooks, or sell your books when you're done
with them.
- Buy your clothing and furniture at Goodwill, Dollar a
Pound, discount stores, and garage sales.

+ Marry a wealthy spouse.

If you're majoring in a lucrative field, such as business or computers,
don't worry too much about the size of your loans. When you graduate
and get a job, you'll probably be earning enough money to pay off your
educational loans in a reasonable number of years. For other fields,
you should consider how you will be able to repay your loans before
getting too heavily into debt. Likewise, students who intend to go on
to graduate or professional school should carefully consider how their
finances will affect their future options.

*** [11] Common Questions and Answers

This section contains a list of common questions with concise answers.

General Questions:

1. I probably don't qualify for aid. Should I apply for aid anyway?

Yes. Many families mistakenly think they don't qualify for aid, and
prevent themselves from receiving financial aid by failing to apply
for it. In addition, there are a few sources of aid such as
unsubsidized Stafford and PLUS loans that are available regardless
of need. The FAFSA form is free. There is no good excuse for not applying.

2. Do I need to be admitted before I can apply for financial aid at a
particular university?

No. You can apply for financial aid any time after January 1. To
actually receive funds, however, you must be admitted and enrolled at
the university.

3. Do I have to reapply for financial aid every year?

Yes. Most financial aid offices require that you apply for
financial aid every year. If your financial circumstances change,
you may get more or less aid. After your first year you will
receive a "Renewal Application" which contains preprinted information
from the previous year's FAFSA. Note that your eligibility for financial
aid may change significantly, especially if you have a different number
of family members in college. Renewal of your financial aid package
also depends on your making satisfactory academic progress toward a
degree, such as earning a minimum number of credits and achieving a
minimum GPA.

4. How do I apply for a Pell Grant and other types of need-based aid?

Submit a FAFSA. For student employment, student loans, and parent
loans, you should check the appropriate boxes.

5. Are my parents responsible for my educational loans?

No. Parents are, however, responsible for the Federal PLUS loans.
Parents will only be responsible for your educational loans if you
are under 18 and they endorse your loan. In general you and you
alone are responsible for repaying your educational loans.

On the other hand, if your parents (or grandparents) want to help
pay off your loan, you can have your billing statements sent to
their address. Likewise, if your lender or loan servicer provides
an electronic payment service, where the monthly payments are
automatically deducted from a bank account, your parents can agree
to have the payments deducted from their account. But your parents
are under no obligation to repay your loans. If they forget to pay
the bill on time or decide to cancel the electronic payment
agreement, you will be held responsible for the payments, not them.

6. Why is the family contribution listed on the SAR different from the
family contribution expected by the university?

The federal formula for computing the expected family contribution
is different from those used by many universities. In particular, the
federal formula does not consider home equity as part of the assets.

7. If I take a leave of absense, do I have to start repaying my loans?

Not immediately. The subsidized Stafford loan has a grace period of
6 months and the Perkins loan a grace period of 9 months before the student
must begin repaying the loan. When you take a leave of absense you
will not have to repay your loan until the grace period is used up. If
you use up the grace period, however, when you graduate you will have
to begin repaying your loan immediately. It is possible to request
an extension to the grace period, but this must be done *before* the
grace period is used up.

If your grace period has run out in the middle of your leave, you
will have to make a payment on your student loans.

8. I got an outside scholarship. Should I report it to the financial
aid office?

If you are receiving any kind of financial aid from university or
government sources, you must report the scholarship to the
financial aid office.

Unfortunately, the university will adjust your financial aid package
to compensate. Nevertheless, the outside scholarship will have some
beneficial effects. At some universities outside scholarships are used
to reduce the self-help level. For example, at MIT 40% of the
scholarship amount is applied toward the self-help level, and the rest
replaces institutional funds. At other universities outside
scholarships are used to replace loans instead of grants.

9. Where can I get information about Federal student financial aid?

Call 1-800-4-FED-AID (1-800-433-3243) or 1-800-730-8913 (if hearing
impaired) and ask for a free copy of "The Student Guide: Financial
Aid from the US Department of Education". You can also write to
Federal Student Aid Information Center
PO Box 84
Washington, DC 20044
or read the publication on the Department's web site (www.ed.gov).

FAFSA Questions:

1. I sent in my FAFSA over four weeks ago, but haven't heard anything.
What should I do?

If you haven't received a Student Aid Report (SAR), call the Federal
Student Aid Information Center at 1-800-4-FED-AID or 1-319-337-5665.
You must provide them with your Social Security number and date of
birth as verification.

You can also write to
Federal Student Aid Programs
PO Box 4038
Washington, DC 52243-4038
to find out whether your FAFSA has been processed or to request a
duplicate copy of your SAR.

2. My parents are separated or divorced. Which parent is responsible
for filling out the FAFSA?

If your parents are separated or divorced, the custodial parent is
responsible for filling out the FAFSA. The custodial parent is the
parent with whom you lived the most during the past 12 months.
Note that this is not necessarily the same as the parent who has
legal custody. If you did not live with one parent more than the
other, the parent who provided you with the most financial support
should fill out the FAFSA. This is probably the parent who claimed
you as a dependent on their tax return. If you have not received any
support from either parent during the past 12 months, use the most
recent calendar year for which you received some support from a
parent or lived with either parent.

Note, however, that any child support and/or alimony received from the
non-custodial parent must be included on the FAFSA.

Financial aid applications can be somewhat confusing because there
are several different criteria applied for different kinds of
parenthood:

1. The parent with whom the child lived the most during the past
12 months.
2. The parent who provided the most financial support to the child
during the past 12 months.
3. The parent who provided more than half the child's support (and
will continue to do so).
4. The parent who has legal custody.
5. The parent who claimed the child as a dependent on their tax return.

As noted above, criteria 1 and 2 are used for determining the
custodial parent, with the first criteria being primary.

For determining household size (the number of family members),
criteria 3 is the most important. However, the student's custodial
parent gets to list him or her even if the custodial parent does not
provide more than half of the student's support. This leads to the
anomalous situation where a student can be counted as belonging to
two different households. For example, suppose the non-custodial
parent remarries and has college-aged children of his own. If the
non-custodial parent provides more than half of the student's support,
he gets to list the student as a member of his household even though
the custodial parent has also listed the student as a member of her
household. (The IRS tax return instructions prevent this kind of double
dipping on tax returns, but the FAFSA instructions apparently don't.)

Criteria 3 is also used to determine whether the student has one or
more dependents, in the rules for specifying whether the student is
an independent student with dependents.

Criteria 4 and 5 are not used in the financial aid formulas, but are
sometimes used to give an indication of the right choice when the
other criteria are insufficient. Criteria 5 is also sometimes used to
substantiate claims made under criteria 3. For example, a financial
aid administrator may ask a parent for a copy of their tax return, to
see whether they claimed the child as a dependent. Criteria 5 usually
implies criteria 3, because the IRS definition of a dependent includes
a 50% support test. There IRS definition includes a few exceptions
where the parent isn't required to provide more than half the child's
support in order to claim the child as a dependent, but in almost
every case, if the parent could not claim the child as a dependent
(criteria 5), they did not provide more than half the child's
support (criteria 3).

3. My parents are divorced, and the parent I'm living with has remarried.
Does my step-parent have to report his or her income and assets on
the FAFSA?

Yes, provided that the parent you're living with is the one filling
out the FAFSA (your custodial parent). If your step-parent is
married to them at the time you fill out the FAFSA, they must report
their income and assets even if they weren't married to them in the
previous year.

Myths About Financial Aid:

1. Won't the government take away our home if we apply for aid for our children's education?

No. Absolutely not. This myth seems to be pervasive, and causes
many families to avoid applying for financial aid. The government
does NOT take away your home when you apply for financial aid.

2. All financial aid packages include term-time work, and working
while trying to study is bad.

First of all, numerous studies have shown that a small amount of
term-time employement (10 hours per week) improves academic
performance. Secondly, you can always refuse the work-study aid and
pay for the expenses covered by that aid through other means, such
as loans and summer employment.

*** [12] Answering Your Questions

The FinAid site includes much more information than could be presented
in this brief FAQ. It includes, among other things, a glossary of
financial aid terminology, information about the taxability of
financial aid, information about bankruptcy and financial aid, and
anything else you might want to know. If the answer cannot be found on
the site, you can use the FinAid Ask the Aid Advisor service to ask a
question of one of more than 100 financial aid professionals who have
volunteered to answer student questions.

For questions about federal student aid, call 1-800-4-FED-AID (1-800-433-3243). The TDD number for hearing impaired individuals is 1-800-730-8913.

If you never received your Student Aid Report (SAR) after submitting
the FAFSA, or want a duplicate SAR, call 1-800-4-FED-AID or 1-319-337-5665.

If you want to report fraud, waste, and abuse of federal student aid
funds, call 1-800-MIS-USED (1-800-647-8733) to reach the office of the
Inspector General at the US Department of Education.

Selective Service can be reached at 1-847-688-6888. Immigration and
Naturalization Services (INS) can be reached at 1-415-705-4205. The
Internal Revenue Service (IRS) can be reached at 1-800-829-1040.
The Social Security Administration can be reached at 1-800-772-1213.
The National and Community Service Program (AmeriCorps) can be reached
at 1-800-94-ACORPS (1-800-942-2677).

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