Updated: May 3, 2013 12:14PM
President Bush recently signed the College Cost Reduction Act -- a law designed to make more financial aid available to the poorest students, as well as to lower interest rates for some new borrowers. As a bonus, the new law also creates an opportunity for students to avoid repayment of some loans -- if they engage in certain public service jobs.
Tracking the benefits
While the headlines sound great, the actual benefits will affect relatively few students. Pell grants made to the lowest income students increase from $4,310 in 2007 to $5,400 by 2012 -- an additional $11 billion in funding over the next five years.
But rate reductions on subsidized Stafford loans will phase in only for new loans made after July 1, 2008 -- and don't apply to existing loans, unsubsidized loans or loans made to graduate students.
Similarly there are restrictions on offers such as "Teacher Grants" -- a program that gives $4,000 per year (with a maximum of $16,000 for undergrads) to those who agree to serve as full-time teachers in certain disciplines for at least four years in a "high-needs" school, and loan forgiveness programs for grads employed in public service jobs.
Unfortunately, the same bill reduces certain federal subsidies to lenders.
Lenders who will face a squeeze on profits because of reduced payments from the government to subsidize their activities are already taking action, according to Kevin Walker, CEO of SimpleTuition.com.
"We're finding, in general, that many lenders have had to cut back on incentives such as interest rate reductions and principal reductions for on-time payments, since the loans are no longer as profitable."
The real story behind these headlines is the fact that many are suddenly waking up to the fact that college has become unaffordable. Middle-income parents despair of receiving financial aid. Students graduate with huge debt burdens -- larger than their parents' original mortgage.
As a result, many colleges are reassessing their aid formulas, and are willing to give out more grants -- even to higher income families -- to attract the best students. That's the conclusion of college financial aid expert Reecy Aresty, author of How to Pay for College Without Going Broke. Aresty runs www.paylessforcollege.com. -- a Web site filled with with suggestions to help families qualify for more financial aid.
Aresty's formula: "By doing income-planning and asset-repositioning strategies, any family can reduce their expected contribution, thus qualifying for more financial aid -- such as scholarships, grants, loans and work-study programs."
But you must start early to reduce your "expected family contribution," thus increasing the opportunity for financial aid.
**Don't have any money in the name of the student, such as in a custodial account. Those funds count much more heavily than parents' assets when colleges calculate a student's need.
**The family home does not count in the federal formulas. Excess funds can be stashed by paying down your mortgage. Assets of a small business are not included in the federal formula, and thus they are also a good place to reposition excess funds, perhaps by reducing your salary and taking a loan from your business.
Don't take no for an answer
Aresty says there's another huge window of opportunity even after the school has made its initial offer of financial aid. You can appeal, and ask for more, a process at which he's an expert.
So he has a free offer for readers of this column: If any family has received a financial aid offer that will not solve their problem, he'll review it at no charge and make recommendations. Just send him an e-mail at firstname.lastname@example.org.
Yes, you can qualify for more aid, and appeal the measly offers you receive. Plus, with schools now more motivated to help good students afford an education, you could be a big winner.
And that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.