Winning the money game

(Fortune Magazine) -- The economic downturn has made financial aid an even more urgent concern for many families. Reporter Beth Kowitt talked with education financing expert Mark Kantrowitz, the founder of FinAid.org, about how the system works and how to get the most out of it.

Q: How is the recession affecting the availability of financial aid?

A: Colleges recognize that a time of economic distress is the worst time to be cutting student aid. On the other hand, there are many more people applying for aid - applications are up 20% this year. Schools are trying to protect their student aid budgets - they've been doing things like laying off faculty and freezing salaries to avoid cutting aid. Some schools that offer both merit- and need-based aid are reducing the academic scholarships and redirecting that money into need-based aid. And they are focusing on the families that need it most. If your 529 plan went down 40% last year, you're probably not going to get an increase in financial aid, because everybody's went down 40%. The schools are more likely to offer additional help to parents who lost a job.

Q: Can families negotiate with colleges to improve their aid packages?

A: Schools are not car dealerships where you can get a better deal through a combination of bluff and bluster. It's a much more formulaic process. The only subjectivity here is in determining whether an unusual circumstance merits an adjustment, and that's up to the discretion of the school, which will look at factors such as, To what extent was this due to circumstances beyond the family's control? If you're having difficulty making boat payments, I doubt you're going to get an adjustment. There is a bit of flexibility there, but generally speaking, it's not a haggling situation.

And you can't get colleges into a bidding war. If you come in and say, "This other school gave us a better financial aid offer," the school will ask for a copy of the other school's offer. Your financial aid package is based on the difference between the cost of education and your ability to pay for it, as determined by standard formulas. If two schools have come up with substantially different estimates of how much you can afford to pay, they will try to understand why there is such a difference.

Q: What are some good college savings strategies for families with younger children?

A: Use 529 plans to save for college. In 32 states plus the District of Columbia you can get a deduction on your state income tax for your contributions. That effectively gives you a slight discount on the amount you're spending on your college education. Even if your child is already in college, it can still be worthwhile to put money into a 529 to get the tax deduction. And you can direct your contributions to a money-market fund, where you don't have to worry about them losing value.

Don't save money in your child's name. The way the financial aid formula works, children are expected to contribute a much higher percentage of their assets to the cost of education than parents are.

If you have money in the bank but you're carrying a lot of credit card balances and other consumer loans, pay off your debt. First, that makes sense because you're paying 18% on your credit card and you're getting 1% on your bank savings account. It also has the side effect of improving your eligibility for need-based financial aid because it reduces your assets. The debt doesn't help you on a financial aid application.