Bear Market Sends Many in Search of College Aid

There’s nothing like a bear market to derail a college savings plan. Just ask Terry Hartle, who’s wondering whether his portfolio can survive long enough to pay his 17-year-old-daughter’s way into school next year.

Hartle, who helps advise parents about college finance as senior vice president of the American Education Council, says he’s not even sure how badly his daughter’s college fund has been worn down by the slide in stock prices.

“I’ve stopped looking at the statements,” he said, adding that he’s hoping for a market rally during his daughter’s final year of high school. “When you’ve put money aside for a long time, it’s very difficult to see it decline like this at the eleventh hour.”

He’s not alone. Although no one has statistics on precisely how much American parents have saved for education--or how much they may have lost in the 2 1/2-year-old bear market--anecdotal evidence indicates that Americans’ college savings, like their retirement portfolios, have been hit hard by the market’s long slide.

Like workers who are nearing retirement, parents with children in their late teens don’t have time to wait for stock prices to recover before they’re forced to tap into their savings. Many kids are already packing to attend colleges and universities that accepted them last spring.

“A lot of parents are seeking advice and help on ways to pay for college this year without having to pull money out of already devalued college funds,” said Youlonda Copeland-Morgan, associate vice president for admissions and financial aid at Harvey Mudd College in Claremont.

“Even full-pay parents, who normally wouldn’t qualify for aid, are coming in because their investments are so low.”

But all is not lost. There are several steps parents can take to manage this year’s college costs, no matter how their education-related investments have fared.

* Talk to a financial aid counselor. Most scholarships and grants already have been awarded. But in some cases, colleges with their own endowments are able to tap additional aid for students--even at this late date, Copeland-Morgan said. The bulk of this aid is likely to be in work-study and loans, however, rather than outright grants.

About 10% of Harvey Mudd’s students have asked for more aid this year, double last year’s number, she said.

* Borrow. The one type of financial aid available to all college students--and still readily available today--is federally backed student loans, said Judy Miller, owner of financial planning firm College Solutions in Alameda, Calif.

But before any type of federal aid, including loans, is granted, the student or parent must fill out what is known as the Free Application for Federal Student Aid.

The fastest way to complete this application is on the Internet. The first step is getting a personal identification number at www.pin.ed .gov. That allows applicants to electronically sign loan forms, which eliminates about 10 days of back-and-forth mailing.

After receiving a PIN, go to www.fafsa.ed.gov to complete and transmit the application. Filling out the application requires tax information for the parent and child, as well as a school code for the college or university that the child will attend.

The application will be processed in a few days and electronically transmitted to the school’s financial aid office, which will help you start the process of applying for a loan.

* Consider monthly tuition payment plans. Most colleges provide a monthly payment option, which allows parents to spread the cost of tuition over 10 months rather than pay in advance. There is usually an enrollment fee of about $50, but no financing charges.

* Claim college-cost tax breaks. Although these won’t help until parents file their 2002 income tax returns, many individuals can recoup a portion of their college expenses by claiming one of several new and improved tax deductions and credits for people who need to pay college costs as they go, said Brenda Schafer, senior tax research coordinator at H&R; Block in Kansas City, Mo.

There are three relevant tax breaks. However, each is income-tested and excludes those whose income exceeds certain levels from claiming them.

The most lucrative is the Hope Tax Credit. The credit, available only to college freshmen and sophomores, gives parents a 100% credit for the first $1,000 in tuition and fees paid and a 50% credit for the next $1,000. The credit can’t be applied to room and board or book costs. It also phases out for single taxpayers earning more than $41,000 or married taxpayers with a combined income of more than $82,000.

Those who can’t claim the Hope credit this year can use the Lifetime Learning Credit, available to all college students, including adults who go back to school. It provides a tax credit equal to 20% of the first $5,000 of eligible education expenses--tuition and fees. Eligibility for this credit also phases out for those earning more than $41,000 if single or $82,000 if married filing jointly.

Those whose income exceeds these limits may be able to claim a new tax deduction. (A tax credit provides a dollar-for-dollar reduction in the tax paid, while a deduction reduces the amount of a person’s income that can be taxed.) The deduction, available to singles earning less than $65,000 and married couples earning less than $130,000, can be claimed for as much as $3,000 in tuition and fee expenses paid during the year.

The deductions and credits can’t be used in concert for a single student--taxpayers who qualify for more than one must make a choice. In addition, if a student uses money from a tax-favored savings plan, such as a Coverdell Education Savings Account or a 529 plan, the deductions or credits may be reduced.

Parents and students should not give up on a college education just because the bills seem daunting, Hartle said.

“If you are in a situation where you simply can’t put together the resources at the present time, you need to talk to the college,” he said. “Ultimately, a college is a business. They want people to purchase an education, and they are going to work with families to make it possible for them to afford it.”

Hartle says he’s praying for a rapid market rebound, but parents who have a year to go before their kids are ready for college should also make sure that a least the first year’s worth of expenses is in safe, short-term investments such as certificates of deposit or money market accounts. It’s never too late to diversify your holdings--the long-running bear market has proved that. And even though fixed-income investments aren’t paying much, you at least know the money will be there come September.

Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit The Times’ Web site at www.latimes.com/perfin.