Even though your savings got clobbered

The recession is hitting everyone, including the parents of college-age kids who thought that they were all set to pay big tuition bills. Savings have been decimated, and loans are harder to get than ever before. On top of all this, tuition costs continue to rise faster than inflation. Here’s what to do…

…If you have been laid off or had a reduction in pay… 

Don’t hesitate to contact the school’s financial aid office. With your former financial situation, you might not have qualified for aid. Now you might. So, if you haven’t already done so, fill out all the required aid forms specified by the college, including the Free Application for Federal Student Aid (FAFSA), www.fafsa.ed.gov, the form all colleges use to award need-based aid. Send a letter of explanation describing your changed circumstances directly to the financial aid office of the school. In most cases, you can contact the financial aid office at any time of the year.

…If you didn’t expect to need loans, but now you do…

Get familiar with education loans, especially the Stafford program, the most common federal student loan. These have maximum fixed interest rates set by the government — and are generally better than nongovernment loan programs.

What you need to know: Stafford loans may be subsidized or unsubsidized. With a subsidized loan, the government pays the interest while the student is in school and for the first six months after the student leaves school. These loans are offered based on need as determined by the FAFSA and the school’s financial aid office. Some families with incomes of more than $100,000 may qualify. Whether or not a student qualifies, a dependent undergraduate student may also apply for an unsubsidized loan in addition — as long as the total amount does not exceed the annual loan limit. For freshman year, the loan limit is $5,500 (of which no more than $3,500 can be subsidized)… for sophomore year, $6,500 (no more than $4,500 subsidized)… junior year and beyond, $7,500 each year (no more than $5,500 subsidized each year).

Helpful: For the 2009–2010 school year, the rate for subsidized Stafford loans is 5.6%. Unsubsidized Staffords are 6.8%. Details on Stafford loans: Visit http://studentaid.ed.gov (choose “Stafford Loans” under “Federal Student Aid Programs”).

If you still need to borrow additional funds, there are other options available…

Federal PLUS loans. This federal loan program allows parents to borrow the full cost of a dependent child’s college education minus any financial aid. The PLUS loan fixed interest rate is 7.9% if the college participates in the federal Direct Loan program (the money is borrowed directly from the government through the school’s aid office). If the college does not participate in the direct-lending program, you must select a lender (usually a bank), at a maximum interest rate of 8.5%. Details on PLUS loans: Visit http://studentaid.ed.gov. Choose “Plus Loans (Parent Loans)” under “Federal Student Aid Programs.”

Alternative loans. These private loans are offered by lenders, such as Sallie Mae and Citibank… or the school itself. There are also state government-affiliated programs for students, where eligibility is restricted to state residents or to students attending college within a specific state. Check CollegeScholarships.org for information about loans in each state.

If you were planning on taking out a home-equity loan…

Many people have found that their homes are worth much less than they thought. In addition, lenders have made it harder for families to qualify for home-equity loans. Instead: Look into the PLUS loan and alternative loan options mentioned above.

If your 529 college savings account was too heavily invested in stocks…

Many parents of teenagers got a rude awakening during the recent market downturn when they discovered that their 529 accounts had declined significantly. While it’s too late to do anything about that, keep in mind the following…

  • For a child a few years from college: Consider more conservative fixed-income options within your 529 plan.
  • For a child in college: If you think that the stock market will soon recover, postpone using funds in your 529 plan until the later years of college when your account’s value may have bounced back.

It is now easier to make changes to your 529. For 2009 only, you can change the investments in your 529 twice during the year, instead of just once. It’s a rule change that the IRS may extend into future years.

Bigger Tax Break for College

The American Education Opportunity Tax Credit, new this year, increases the federal education tax credit that parents can claim on their 2009 and 2010 tax returns — from $2,000 to $2,500 each year. Also, parents in higher income brackets are now eligible to claim the credit. Details: Visit www.irs.gov.