Archived - Other Things You Should Know--Managing the Price of College

Archived Information

Other Things You Should Know	Understanding Student Financial Aid The major federal programs providing financial assistance to students fall into three categories: grants, loans, and tax incentives of various kinds. Most of these are directed to low- and middle-income students with financial need.²⁰
Grants and Work-Study	The Pell Grant Program provided a maximum of $3,125 during the academic year of 1999-00. The amount of money available each year varies, depending on the funding allocated to this program in the federal budget. Pell Grants are targeted toward low-income students, most of whom are from families with annual incomes below $20,000. The Federal Supplemental Educational Opportunity Grant Program (FSEOG) provides additional grant aid to students from extremely low-income families. The Federal Work-Study Program helps to pay for jobs on and off campus as part of need-based financial aid packages. Unlike the Pell Grant and the FSEOG program, which are available only to undergraduate students, Federal Work-Study aid also assists graduate and professional students.
Loan Programs	A variety of loan programs exist to help cover college tuition and other expenses. Many of these programs are quite helpful; they have very low interest rates and allow payments to be put off until you leave college. The Perkins Loan Program (formerly the National Defense Loan Program) provides low-interest loans to low-income students. Stafford Loans are available to students from all income levels. Students who demonstrate financial need are eligible for interest subsidies; students who do not demonstrate financial need, while not eligible for interest subsidies, may defer loan and interest payments while in school and under certain special circumstances. PLUS loans provide assistance to parents of students or dependent undergraduate students in an amount up to the cost of college attendance, minus other financial aid. Both the Stafford and PLUS loan programs are available through banks (called the Federal Financial Education Loan Program) or directly through the federal government (called the William D. Ford Direct Loan Program).
Tax Incentives	The budget reached by Congress and the White House in August 1997 provided about $40 billion over 5 years in tax breaks to help students pay for higher education. These tax breaks are described below. Hope Scholarships provide a dollar for dollar tax credit for 100 percent of the first $1,000 of tuition and fees and 50 percent of the second $1,000. This credit phases out for joint filers with incomes between $80,000 and $100,000 and for single filers with incomes between $40,000 and $50,000. Tax credits are nonrefundable, meaning that if you don't pay enough income tax to take advantage of the credit, you do not get the benefit. College juniors, seniors, and graduate students may receive a nonrefundable 20 percent tax credit on the first $5,000 of tuition and fees through 2002 (and the first $10,000 thereafter). To encourage lifelong learning, the credit is also available to working Americans. The credit is phased out at the same income levels as the Hope Scholarship. Unlike the Hope Scholarship, the Lifetime Learning Credit is calculated on a per family, rather than a per student, basis. Education and Retirement Savings Accounts allow penalty-free IRA withdrawals for undergraduate and graduate programs and postsecondary vocational programs. In addition, eligible taxpayers can deposit $500 annually into an education IRA which will accumulate earnings tax-free, with no taxes due until withdrawal for approved purposes. Other Major Provisions: Workers can exclude $5,250 of employer provided education benefits from taxable incomes; eligible taxpayers can deduct up to $2,500 per year of interest paid on education loans and exclude from taxable income loan amounts forgiven for participating in community service jobs; and taxpayers are exempt from taxation on some earnings on prepaid tuition plans. In addition to these federal sources of financial aid, many students receive financial assistance from non-federal aid sources.
Other Sources	Grants from colleges themselves are available at most private and many public colleges. These awards are made on both a need and non-need basis. Need-based awards at private colleges can dramatically reduce or even eliminate the price difference between the public and private sectors of higher education. Many 4-year colleges and universities compete for the best students by awarding Merit Scholarships that may not consider a student's financial need at all. Many states have their own state grant programs. The nature of these programs varies. Some states offer need-based grants for students attending public colleges only. These grants often help offset relatively high public tuition levels. Other states make grant funds available to state residents attending private colleges within their boundaries. A number of private community organizations and businesses also offer grants (scholarships) to students based on a number of criteria. These criteria could range from outstanding citizenship activities while in high school to being the child of an organization's member. In addition to federal loan programs, there are private loan sources. Many banks, savings and loans, and credit unions offer unsubsidized loans for college to families with good credit. Furthermore, families who own their homes can often get a home equity loan to finance a child's college education. Such unsubsidized loans must be paid back at regular rates of interest. That could make them more expensive in the long run.