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10 Costly Myths About College Financing


Funding for college can be complicated, students and parents alike can be confounded by the process. One thing everybody is sure about, college is far from cheap. The amount of money owed on federal student loans eclipsed the $1 trillion mark in 2013.

According to The College Board, the average yearly tuition for a public, two-year college for in-state students is $3,131. For a public, four-year college for in-state students it's $8,655. The cost for a public, four-year college four out-of-state students jumps to $21,706, and to $29,056 for a private four-year college.

With that kind of price tag, knowing the facts about college financing is essential. There are plenty of myths that can cost you money.

Here are some myths and truths.

Myth: The college that gives the most grants will necessarily be the lowest cost college

Truth: Families need to focus on the net price, the difference between the full cost of attendance and the grants, scholarships and other forms of gift aid. A high-cost college that gives out a big grant may still be more expensive than an in-state public college. On the other hand, there are about six dozen colleges with generous, "no loans" financial aid policies that may be even more expensive on a net basis, says Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a group of web sites about planning and paying for college. Princeton University, which started the trend, has an average debt at graduation of between $5,000-$6,000, says Kantrowitz.

Myth: My child can cover all college costs with scholarships

Truth: Parents tend to overestimate their child's ability to win private scholarships and underestimate eligibility for need-based financial aid. Only about 1 in 8 undergraduate students uses scholarships to pay for school, and the average amount is less than $3,000 per year, says Kantrowitz.

Myth: Saving in a 529 plan limits my options

Truth: Hardly. You are not limited to attending a state school. While it depends on the plan, money from a 529 plan can often be used at any accredited college, university, or vocational school in the country – and even some overseas schools. "Many plans also do not restrict the funds for use within the state sponsoring the 529 plan," says Stuart Ritter, a senior financial planner with T. Rowe Price.

Myth: If I don't use my 529 plan, it's money down the drain

Truth. Money unused is not lost. "If the child for whom you opened the 529 plan doesn't go to college, you still have options that allow you to get a lot of bang for your buck," says Ritter. For example, you can always change the beneficiary of the account. If your first child decides not to go to college, you can change it to their sibling, or other family member. You can also withdraw the money for any purpose and a 10% penalty and taxes will be applied against any earnings. You are never forced to withdraw the money.

Myth: I'll never save enough, why try

Truth: Saving something, even if you think the amount is likely to be small, is always better than saving nothing, says Ritter. That's because borrowing money versus saving in a tax-advantaged plan can potentially double the cost of a family's total expenditure. Every dollar saved ahead of time is like $2 a family doesn't have to pay in debt later, explains Ritter.

Myth: Community colleges don't offer the same quality as four-year schools

Truth: Students can save tens of thousands of dollars by attending a community college the first two years of their education, says Cynthia Grunden, associate vice chancellor of student financial services for City Colleges of Chicago. "Students currently enrolled at four-year colleges can still save by taking transferable courses at their local community college during the summer. Not all classes are transferable, check before you enroll in a course."

Myth: Living on campus is always essential

Truth: Commuting from home eliminates the cost of residence on-campus. Many students view living on campus as part of the education. If the student is flexible on that point, living at home saves thousands of dollars, says Don E. St. Clair, vice president, enrollment management and university marketing at Woodbury University.

Myth: I won't apply for financial because I won't quality for anything

Truth: Unfortunately, by not applying a student greatly reduces most types of financial assistance, whether federal, state or institutional, says Cynthia Butler, executive district director, financial aid for Dallas County Community College District Office. Typically, federal, state and institutional funds require a determination of financial need, normally fulfilled by completing the FAFSA (Free Application for Federal Student Aid), and most students quality for some type and amount of financial assistance, she says.

Filing the FAFSA guarantees all students, regardless of assets and/or income, the ability to qualify for a minimum of $5,500 of preferred loans in year one, $6,500 in year two, $7,500 in year three, and $7,500 in year four. "Plus, you never know what will influence/motivate a school to provide a student that they want with merit/need aid," says David Slater, co-founder of the College Benefits Research Group.

Myth: I should borrow the maximum allowed through federal loan programs to cover the cost of a higher cost, prestigious college

Truth: Unless the student is absolutely sure he or she will enter a high paying profession post college, borrowing the maximum allowed is not a wise choice, says Edwin Harris, PhD, director of enrollment management at Eastern Connecticut State University. "There are many quality, lower cost institutions that will serve most students well in entering their chosen graduate school or career, without being saddled with unreasonable, long-term debt. Additionally, a student also need to consider whether they will add to their debt because they need to attend graduate or professional school to achieve their goals."

Myth: It's not worth saving for college because you're penalized for savings

Truth: Kantrowitz says, "There is a slight penalty for saving in the parent's name (worse case scenario, a reduction in aid of as much as 5.64% of the asset's value), but that still leaves you with more flexibility than families who do not save."



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