Alba Martinez: Hello and welcome to the latest episode in our ongoing podcast series on saving for college. I'm Alba Martinez of Vanguard's Education Markets Group, and I thank you for joining us today. In this episode, which we're taping on February 18, 2010, we want to help you understand that despite the rising cost of higher education, a college diploma can still be within reach, no matter what your finances are.

We are fortunate to be joined by phone today by Jackie Williams, director of the College Savings Initiative at the New America Foundation. Jackie develops and promotes 529 college savings plan enhancements that give more families access to higher education. She's also an expert on the subject of finding ways to help you finance college. Jackie, we really appreciate your taking the time to speak with us today about such an important topic.

Jackie Williams: It's my pleasure, Alba. As you know, I'm passionate about spreading the word that just about anyone can get to college, especially if you plan and think ahead.

Alba Martinez: Let's get right to the core of the matter, Jackie. These days, parents and students are feeling pretty overwhelmed by college costs and some of them want to give up before they start. But they don't have to feel hopeless, because paying for college is doable for almost anyone. Is that correct?

Jackie Williams: That is correct, Alba. Yes, college is expensive, but most students and parents can get help through loans and other forms of financial aid. First and foremost, of course, it's always best to save regularly in a college savings account. You can save through a variety of tax-advantaged college savings options. Some of them—like 529 college savings plans—allow state-tax-deductible contributions and federal- and state-tax-free withdrawals for qualified expenses. You should keep in mind, however, that earnings on nonqualified withdrawals may be subject to federal income tax, a 10% federal penalty tax, and state and local income taxes. And additional tax and other benefits may hinge on meeting certain requirements.

But the key to successful college financing overall is identifying your options, understanding how to use them, and starting as soon as possible to save whatever you can afford.

Alba Martinez: So it's always a good idea to invest regularly in a plan like a 529 plan, for example, even if you can't save a lot of money each time?

Jackie Williams: That's absolutely correct. Let's say you set aside around $1,200 a year or $100 a month in a tax-free account such as a 529 college savings plan, for a total invested over 18 years of $21,600. If this investment earns 8% a year, you should have about $48,300 in your account—more than twice what you've invested. But if you don't save, and instead borrow $48,300 over 10 years at a 6% interest rate, you'll have to pay back about $64,300 in principal and interest—almost 3 times the original amount that was required to raise the $48,300 through regular investing.

Of course, this is a hypothetical example and doesn't represent the return on any particular investment. Plus, the final account balance doesn't include taxes or penalties that might be due upon distribution. But I think it clearly illustrates that even if you don't start until your child is older, saving for college can be a lot more practical than borrowing for it.

Alba Martinez: So I understand that some parents tend to dip into their retirement accounts when their child is ready for college. This doesn't seem to be the best idea to me, but what's your take on such a step?

Jackie Williams: Of course, when we urge you to turn to your savings to help pay college bills, we don't mean that you should raid retirement accounts, like 401(k)s or IRAs. Not only could you take a big hit on withdrawal taxes, you might also have to pay an added 10% penalty tax if you're under age 59½. Besides, once you've taken from your account, it's very hard to put it back, and you could lose years of compounding. And who's going to loan you money in retirement? It's really a lot easier to get a student loan than a retirement loan.

Alba Martinez: I agree, but let's face it, Jackie, parents can be thrifty and disciplined and still find it hard to save for a state school, let alone strive for a pricier private college degree.

Jackie Williams: You're right, Alba. Actually, few students can afford college without some kind of educational financing. But the good news is that there are many strategies available, even if you have little savings to fall back on. Although you may have to be somewhat flexible.

Alba Martinez: So can you discuss some other financial tools? Where should parents and students look for more tuition help, for example?

Jackie Williams: The very first step is to apply for financial aid. And financial aid can come in the form of loans, grants, or scholarships. Educational loans, as the name implies, have to be paid back—and with interest. Scholarships and grants, on the other hand, do not.

Loans really are the largest and most widely available source of financial aid. Numerous low-interest options are available for parents and students, including federal, state, and private loans. It's usually best to start off with the least expensive money, and that would be a federal loan. These loans carry low fixed-interest rates and have a more flexible repayment schedule.

Alba Martinez: So can you explain how one gets started with the process? I'm aware that there's a type of universal application that needs to be completed. Can you talk a little bit more about that?

Jackie Williams: To begin the process of finding financial aid, the very first step is to submit the Free Application for Federal Student Aid—which is commonly referred to as the "FAFSA"—and you should complete that as soon as possible after January 1st of the year that the student will be attending college. It's free and it's the very first step towards money from the government, most colleges, and from states that offer state grants and scholarships in many cases. It'll give you a ballpark figure of what kind of financial assistance your child might be able to receive and your expected family contribution—the minimum of how much your family will be expected to contribute towards the tuition bill. Unfortunately, many people skip this first step and actually leave money on the table that they could use to help finance college.

You can submit this application annually even if you didn't qualify the year before, and the reason is that family circumstances often change from year to year. The FAFSA is available in paper and electronic formats, and you can get more information by calling the Federal Student Aid Information Center, or talking to your school guidance counselor.

Creditworthy parents can also borrow up to the full cost of college through the federal Parent Loan for Undergraduate Students, known as the PLUS loan program.

Alba Martinez: This is definitely information that every parent should know, so I appreciate your sharing it. But what happens if one is not able to meet tuition needs even with a federal loan? Do you recommend private loans?

Jackie Williams: Well, in the current economy, private loans have become harder to get, and overall they're more expensive than those that are offered by the government. On the other hand, they cost a lot less than credit card debt which, unfortunately, some people have used to finance college. But since federal loans are even cheaper and offer better terms, I'd really advise that you exhaust your eligibility for federal loans before you turn to a private loan. A private loan would probably be my last resort.

Alba Martinez: So, Jackie, what about scholarships? We can't ignore them, is that correct? And don't they have a reputation of being hard to get?

Jackie Williams: Every year thousands of scholarships are awarded for a total of more than $3 billion, and you don't have to be a valedictorian or star football player to get one. You can find scholarships given for artistic talent or pursuit of a particular career path, for instance. And scholarships are also handed out for members of particular groups, or to those living in certain areas or for those with particular financial need. Many corporations, communities, and community-based organizations give scholarships as well.

Alba Martinez: Where can parents and students learn about what scholarships are available to them?

Jackie Williams: You can find scholarship listings on the CollegeBoard and College Scholarships.org websites, as well as other personalized sites, like the FastWeb Scholarship Search that identifies your profile with an appropriate scholarship. These sites are free. And I would advise you not to waste time and money on fee-based services because you won't get any better information from them. Public libraries and high school and college counselors are also good sources of information. But there's a lot out there, so you'll need to give yourself plenty of time to gather information and make a decision about which scholarships might apply to your circumstances.

Alba Martinez: So I've heard that scholarships and even 529 college savings accounts can lower the chance of qualifying for financial aid. Is this a true fact?

Jackie Williams: Well, if you're awarded a scholarship and you're already receiving financial aid, you have to report the scholarship to the college financial aid office, and they may adjust your financial aid package accordingly. However, your scholarship will still have a beneficial effect. Obviously, those are monies that don't need to be paid back. 529 plan assets have a relatively small effect on federal financial aid eligibility because they're considered assets of the family and are counted at approximately 6%, like other family savings. On the other hand, 529 plan accounts that are set up by grandparents for their grandchildren have no effect on financial aid eligibility—and that's a point that you may want to make with grandparents.

Alba Martinez: This has been incredibly helpful advice, Jackie. But if we'd like to dig a little deeper, is there a resource you'd suggest that would give us more details about how to finance college?

Jackie Williams: The financial aid site that I would recommend is simply known as FinAid.org, and that website has some of the most conclusive information that you'll find. It also provides cost calculators to help you project what college costs will be and to determine how you'll manage college loans. The website called Student Aid on the Web is also a good resource.

And let me add, Alba, that there are other methods for funding beyond what we had time to discuss today. For example, many students work part-time through the Federal Work-Study Program or through a college's own employment program. Still others opt for a less-expensive first two years at a community college. I'm sure that the more you investigate, the more ways that you will find to manage these costs. It all comes down to the fact that if you start early and do your homework, college can be within reach of almost anyone who wants it.

Alba Martinez: Jackie, this has been a really valuable session for all of us. You've introduced us to tools that we can use in combination to help us handle tuition bills, and I know students, parents, and grandparents as well, will be very grateful to you. Thanks so much for being with us.

Jackie Williams: You're welcome, Alba. I enjoyed it very much.

Alba Martinez: Thank you also for joining us today in this discussion about how you can pay for college. If you'd like more information about 529 college savings plans as well as interactive tools to help you plan and save for college, visit Vanguard.com and type "college saving" in the search box.

Thanks again for listening.

Narrator:

For more information about any 529 college savings plan, contact the plan provider to obtain a program description, which includes investment objectives, risks, charges, expenses, and other information. Read and consider it carefully before investing. If you're not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.

All investments are subject to risks.

You may access and download this podcast only for your personal and noncommercial use. You may not use it in any other manner or for any other purpose without Vanguard's written permission.

Copyright 2010, The Vanguard Group, Incorporated. All rights reserved.