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The new rates will save a four-year college student with a $12,000 average debt about $600 in interest over 10 years. That's a real boost, considering the average debt of college graduates is $12,866, and almost 1 in 7 alums owes more than $20,000. Additionally, the interest paid on any loan used for education expenses is deductible for borrowers with an adjustable gross income of less than $55,000 a year, or $75,000 for joint filers.
PLAYING THE MARKET
If your child is accepted at Princeton, you're doubly lucky. Not only is it an elite university, but in January, Princeton announced it would begin to dip into its endowment (the nation's fourth richest, valued at nearly $5 billion) specifically to help students from middle-income families offset more of its $33,040 annual price tag. Since then, Yale, Stanford and M.I.T. have announced similar plans.
Rather than stick to traditional financial-aid formulas that consider the value of your home, cars and other assets, these colleges will provide more grants and disregard at least $90,000 of income in calculating need. For a family earning $65,000 with college savings of $20,000, that could equal $3,500 more in grants than was possible under the old formula. Families with an annual income of less than $40,000 will receive substantially more in grant aid. "This new formula answers a question schools have heard middle-class students asking," says Tim McDonough of the American Council on Education (ACE): "'What about us?'"
These new breaks for the middle class are indicative of an important trend in college finance. As the cost of a four-year education climbs out of reach for more and more families, the colleges themselves are looking for ways to balance their desire for the best students with their need for paying customers. Depending on your own circumstances and the quality of your child's academic record, you may well benefit from this trend.
A bit of history: For more than three decades, something called the Overlap Group, a collaboration of financial-aid officials from the Ivy League and a few other top private colleges, compared notes on scholarship applicants to equalize aid offers and thereby prevent bidding wars over the best and brightest students. Then in the early '90s, the U.S. Justice Department argued that the Overlap Group was essentially engaging in price fixing and forced an end to the program. Now only the government monitors need, through its FAFSA process, and, though the colleges claim their policy is not to award scholarships purely on merit, there is a lot of juggling around the fringes of that policy.