The Wall Street Journal-20080130-What Ivies- Newfound Largess Means for Your College Savings

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What Ivies' Newfound Largess Means for Your College Savings

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Getting into a top-flight college is still tough. Paying for one just got easier.

With Harvard, Yale and others replacing loans in their financial-aid packages with outright "grant" money, applying for aid is suddenly far more enticing, and even families with six-figure incomes could qualify.

Here's a look at the new aid policies -- and what they tell you about the financial-aid system.

-- Plugging gaps. Many families assume that the higher a college's price tag, the more they will pay. But as the new policies make clear, it doesn't necessarily work that way.

Once you figure in financial aid, "the price to go to Harvard should be the same, or less, than the price to go to the flagship public universities," says Bill Fitzsimmons, Harvard's dean of admissions and financial aid.

Suppose that, based on your income and assets, the financial-aid formulas put your "expected family contribution" at $20,000. If your child goes to a $20,000-a-year college, you likely won't get any financial help. What if a college costs $50,000? You should receive $30,000 in aid.

True, that aid may consist largely of loans. But with private colleges increasingly reluctant to saddle students with debt, you could get substantial grant money -- and a $50,000 college might prove no more expensive than a $20,000 institution.

-- Deciphering formulas. Many folks also assume the federal government is the big source of grant money. But according to the College Board, colleges awarded $20.6 billion in undergraduate grants in the 2006-07 academic year, versus $16.5 billion from the federal government. With some colleges planning to dole out more grants, the gap should be even bigger in the years ahead.

The implication: You need to pay attention both to the federal-aid formula and to the formulas used by the colleges themselves. There are some key differences.

For instance, while the federal formula ignores home equity, many private colleges consider it -- though Harvard no longer will. Similarly, with divorced couples, the federal formula ignores the "noncustodial" parent, but many private colleges will look at the finances of both parents.

-- Assessing income. Under Harvard's new policy, the typical family earning between $120,000 and $180,000 will be expected to put 10% of its income toward the college's costs. Yale's policy is similar.

That's a low percentage of income compared with what a high-earning family will likely pay elsewhere. But take note: The emphasis is still on income. What about assets? To improve aid eligibility, parents often shift money into retirement accounts, which typically aren't looked at by aid officers, while minimizing taxable-account assets. This finagling should help -- but it may not help a whole lot.

"Your available income is assessed much more heavily than your assets," explains Kalman Chany, author of "Paying for College Without Going Broke." "The marginal assessment rate on available income can be as high as 46% or 47% for parental income. By contrast, the maximum assessment rate on parental assets is 5% in the institutional formula and 5.64% in the federal formula."

That said, there is one asset that could badly hurt aid eligibility -- and that's money in a child's name. Want to save for college? Favor 529 college-savings plans and Coverdell education savings accounts, which are usually considered parental assets.

-- Losing slowly. More income and assets will likely reduce the aid you receive. The impact, however, isn't as severe as parents imagine. "It's not like suddenly you go from qualifying for $30,000 to getting nothing," Mr. Chany says.

Indeed, some parents seem to believe they're better off spending their savings and turning down a pay raise. But as Harvard and Yale have spelled out, families are expected to contribute only a slice of income.

"You're always better off having the income and the assets," says Sandy Baum, an economics professor at Skidmore College. "Colleges are never going to say, 'You earned an extra $100, you have to pay an extra $100.'"