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YOUR MONEY: A WEEKLY GUIDE TO PERSONAL FINANCE

It's not too late to come up with money needed for college

By Eileen Ambrose, columnist for The Baltimore Sun, a Tribune Co. newspaper

August 8, 2004

College tuition bills for the fall semester are due this month, and for some families it will be panic time: They won't have the money.

It's not unusual, some schools say, to hear from families in this predicament.

"There are all kinds of reasons," said Frank Valines, associate director of financial aid at the University of Maryland in College Park. "They range from `I didn't realize how much tuition was going to be. I wasn't prepared to pay that much,' to `We just had a financial setback and can't pay the bill,' or `We're getting a divorce, and Dad's not going to pay, or Mom's not going to pay.'"

Resources are more limited now, but it's not too late to get help. Students who haven't applied for financial aid, for example, can do so now. Or, if a recent event has caused a family's income to drop, schools will revisit a student's aid.

Aid officials advise families to contact schools as soon as they realize they will come up short. Last-minute assistance will differ among colleges, but here are some options:

- Special circumstances. A job loss, a parent's death or a medical emergency can deplete cash reserves that families had counted on for college.

"We try to save some funds" just for such unexpected hardships, said Ron Shunk, financial aid director at Hood College in Frederick, Md. "We try to be sympathetic."

Not all cases generate sympathy or funds. Forgetting to save money for college or having a lousy quarter in the stock market likely won't open school purse strings, Shunk said.

Families with a hardship should contact the school and request a review of aid. They typically must send a letter explaining the hardship and its impact on finances, while also providing documentation, such as a copy of a layoff notice or a death certificate, experts said.

- Tuition payment plan. Many schools allow families to pay tuition on a monthly basis, stretching payments over, say, 8 to 10 months. The payments are interest free, but the plans charge a yearly application fee of $35 to $75.

Plans also often provide insurance that will pay tuition for the year if a parent dies or becomes disabled, Shunk said.

- Scholarships. Most scholarships for the coming academic year were awarded many months ago. The pickings are slim now, but there are scholarships with deadlines every month, said Mark Kantrowitz, publisher of FinAid, an online source for financial aid information. Search for potential scholarships at www.fastweb.com, Kantrowitz said.

This homework also can give students a jump on scholarships for next year, he said.

- Government loans. Students can apply any time of the year for federal Stafford loans, which don't have to be repaid until months after graduation.

If students meet the needs test, Uncle Sam will pay the interest on the loan while they're in school.

Students whose family income is too high can borrow under the program, but they will have to pay their own interest while in school. They can delay interest payments while enrolled by adding the expense to the loan's principal.

Stafford loans have borrowing caps. Basically, dependent students can borrow up to $2,625 as freshmen, $3,500 as sophomores and $5,500 a year as juniors and seniors. The interest rate is adjusted yearly and is now at an all-time low of 2.77 percent.

If students are independent, such as 24 or older, they can borrow up to an additional $4,000 for each of the first two years and $5,000 for each remaining year, Shunk said.

For parents, there is the federal Parent Loan for Undergraduate Students (PLUS).

Parents can borrow the cost of attending school, minus any financial aid received. PLUS loans are available regardless of income, although parents must pass a credit check.

The interest rate on PLUS loans, now at 4.17 percent, is adjusted annually. Repayment begins shortly after parents receive the final disbursement for the school year.

- Home equity. With rising home values and interest rates still low, families may opt to tap the equity in their houses.

A home equity loan allows parents to borrow a lump sum, usually at a fixed interest rate, and repay it in equal monthly installments over a specific period, like 15 years. For borrowers with good credit, the rate is now around 7 percent.

A home equity line of credit works more like a credit card. Borrowers receive a credit limit and draw down only what they need at the time. Usually, the interest rate is variable--about 4.25 percent now for those with good credit--and monthly payments will go up and down depending on rates and the amount borrowed.

The interest paid on the loan or line of credit is deductible on tax returns, within limits.

Experts recommend parents use a line of credit rather than a loan to cover tuition.

Home equity loan money sitting in the bank for future school years could be viewed as an asset and reduce a student's aid the next year, said K.C. Dempster, program development director with College Money, a New Jersey firm that advises parents on college financing.

- Private loans. There are plenty of private education loans from financial institutions.

"Here is where you have to be a good consumer," said Mark Lindenmeyer, director of financial aid for Loyola College in Maryland. "There are so many alternatives."

Colleges often provide a list of recommended lenders and post a comparison chart of loan options on school Web sites, Lindenmeyer said.

Financing is getting more creative too.

MyRichUncle, the brand name for MRU Holdings Inc. in New York, is testing a program in California that it expects to introduce nationwide next year. Under the program, students borrow money and repay it by promising a percentage of their income once they land a job after college graduation, Chairman Edwin J. McGuinn said.

Terms will vary based on the amount borrowed and other factors. But students, say, could end up paying 2 percent to 5 percent or more of gross income for 10 to 15 years.

"There is clearly a risk," McGuinn said. If a young lawyer decides to become a bartender in Waikiki, for example, the company loses money on its investment, McGuinn said. "If the lawyer becomes a partner in the law firm, that clearly becomes a good investment," he said.

Copyright © 2004, Chicago Tribune