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Some hope for financial aid in a bad economy

From the success of a bailout to the federal student loan system, to the tuition "deals" some colleges are offering, there's more good news out there on college costs and financial aid than some families recognize.
/ Source: The Associated Press

True, it's not a great time financially to be going or sending a kid to college. But from the success of a bailout to the federal student loan system, to the tuition "deals" some colleges are offering, there's more good news out there on college costs and financial aid than some families recognize.

A look at the good and the bad for the college-bound:

The bad news about tuition: State budgets are still in flux, but when they're done, many public universities are likely to impose sharp tuition increases. During the last decade, tuition at public colleges has been rising at a rate of 4 percent per year — above overall inflation.

The good news about tuition: With help from federal stimulus money, some public colleges will manage more modest price increases as they drastically cut spending. Maryland will try to freeze in-state tuition for a fourth straight year. Others will keep it closer to their usual increases, like Kentucky, with increases set for between 3 and 5 percent.

Many private colleges have announced their smallest increases in years. Becker and Merrimack colleges in Massachusetts are among those freezing tuition, room and board. William Jessup University in California will cut tuition 2.5 percent.

Some are offering "specials." Laid-off employees get one-time tuition and application fee waivers at Kent State-Trumbull in Ohio. Mercer University in Georgia and Manchester College in Indiana promise to cover the costs of additional time if students stay on track but are unable to graduate in four years. Manchester will even refund a year's tuition if you don't have a job or a slot in grad school within six months of graduation.

Financial aid from colleges
Bad: The average college endowment is down around one-fourth. Many colleges, particularly regional universities, will be unable to offer as much scholarship support.

Good: The National Association of Independent Colleges and Universities says more than 90 percent of private colleges will increase aid next year. The group recently surveyed about 200 institutions and found they planned average tuition increases of 4 percent, but aid increases of 9.8 percent.

In recent years, some of the priciest colleges have announced significant increases in aid. Many are determined to keep their promises. Harvard, for example, will increase total fees 3.5 percent to $48,868 next year, but expects to spend 18 percent more on financial aid, which in some cases goes to families earning as much as $200,000.

Government grants
Bad: State budget cuts will hit a range of programs that support students at both public and private colleges. Criteria for merit scholarships in some states have already tightened.

Good: The federal government is expanding college aid, particularly for low-income students. The stimulus package raises the maximum Pell Grant from $4,731 to $5,350 starting July 1, and $5,550 in 2010-2011. An extra 800,000 students are expected to get Pell funding.

Federal student loans
Bad: There are two major components of the giant federal loan program — direct lending by the government and the Federal Family Education Loan Program. Under the latter, lenders including banks and non-profits provide student loans that are guaranteed by the federal government. The program accounts for more than $50 billion in new student loans annually to more than 10 million students, but hundreds of lenders have dropped out.

Good: Considering the upheaval in family loan programs, the flow of federal loans has held up remarkably well. In fact, if the system that lends money to businesses, homes and automobiles had held up half as well as the one that provides government-backed loans to students, the economy might not be in such a mess.

Since last year, the federal government has bought up nearly $25 billion in student loan securities to provide lenders with capital for new loans. That helped keep the family loan program moving. Even as lenders dropped out of the program, the volume of loans is up this year and some loan providers are returning to the market. The direct lending program has picked up slack with an additional $7 billion in lending so far this academic year as more colleges sign up.

Private student loans
When students max out on their eligibility for federal loans and still need more money, many turn to private loans that don't have government guarantees and are usually more expensive. This year, there is less money available. Tim Ranzetta from Student Lending Analytics estimates the "supply" of loan capital from private lenders has declined by around one-third, or between about $6 billion and $7 billion.

Predictably, getting that money is harder — particularly if you plan to attend a for-profit college, have bad credit or can't get someone to co-sign a loan.

Good: The federal government accounts for five times as much student aid as do private loans. Increased limits for federal programs like Stafford loans have lessened students' need for private ones.

True, if you still need a private loan and can't get one, you may have to choose a cheaper school (or one with a higher graduation rate). But that may not be such a bad thing. Clearly, some students were borrowing too much. It's even becoming clear that some students, seduced by advertising, were taking out private loans before maxing out on federal ones. The current surge in demand for federal loans suggests they've now realized their error.