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Mailbag Monday: College Savings Took a Hit? Here’s How to Recover

iStock_000011584618XSmall-300x225We now have 2 kids in college. Both had college funds, but thanks to the stock market, they ended up small. Both are receiving some merit scholarship help, but we are, like many parents, in that middle ground where we make too much to qualify for help, but not enough to really afford it. Any tips for keeping our parent loan amounts from getting too out of control?

— Judy

Hi Judy — unfortunately, this happened to a lot of families who weren’t in age-based allocations within their 529 plans. A 40% reduction in 2008 if you were in all stock could’ve wiped out all of the gains to date, and some people reacted by pulling out their money, locking in losses.

We also hear about your scenario a lot — people who have too much money to qualify for aid, but too little to afford college. But the reality is that the poor pay a greater share of their total family income toward college than middle income families, and middle income families pay a greater share than higher income families. So this idea is actually a myth.

That said, if you have specific financial circumstances that make footing your expected tuition contribution difficult — job loss, salary reduction, special needs child, caring for elderly parent — you should bring them up to the school because it may merit an adjustment in financial aid. Talking to the school is always the first step. Scholarships are also a great option — I know you mentioned your children have a few merit scholarships, but I’m sure they haven’t come close to maxing out what is out there. Your children can continue to search for scholarships even after they’ve started school. Academic advisors and department heads are good sources of information, as are websites like fastweb.com and The College Board’s Scholarship Search.

As for how much money a parent should borrow, there are a few rules of thumb. I don’t want to see you borrow for all of your children combined more than you can afford to repay in 10 years or by retirement, whichever comes first. Total amount borrowed should be less than annual income, and if you want to retire in less than ten years, it should be significantly less. Your children should be borrowing student loans as well, looking into federal options first because they carry lower interest rates and better terms.

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