Boomers struggling to put their kids through college are finding the challenge even tougher this year, say financial advisors.
Many parents have to pay thousands more for tuition and other expenses in 2005 due to a change in the complicated formula the U.S. Department of Education uses to calculate financial aid.
A recent analysis by the New York Times found middle-class families would have to pay more than $1,700 extra for each college student in 2005, compared to 2001, after adjusting for inflation, under the new formula.
Many middle-income clients rely on college aid. For instance, among students with family incomes from $45,000 to $74,999, 71% to 93% receive financial aid, according to the National Center for Education Statistics, Washington.
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Most federal aid such as Pell Grants and Stafford Loans, as well as a good deal of state and institutional assistance, weigh educational costs against the student’s and family’s ability to pay.
Where the Department of Education’s aid formula has changed is in its calculation of state and local taxes, using data from the Internal Revenue Service. Due to moderation of inflation, those taxes have increased less than expected. So, according to the department, it’s easier for families to pay for college out of their own assets.
For instance, under tables the department used from 1993 to 2004, Montana and Nebraska residents paid an average state tax rate of 7%. Under the tables it uses for 2005 and 2006, the department calculates those same residents are paying a rate of 4%.
Nationwide, the Government Accountability Office calculates the updated state tax allowances will increase expected family contributions to a child’s college costs by $440 on average, for those with an increase.
GAO expects about 35% of students receiving Pell Grants will see their grant reduced and it estimates 81,000 recipients will no longer be eligible for the grants at all.
Robert Kuehl, a financial advisor with H.C. Denison Co., Sheboygan, Wis., generally counsels clients to save as much as they can for college, because even in the best of times, financial aid is always a “very tricky deal.”