The Financial Aid Game -- In The High-Stakes World Of College Scholarships, Grants And Loans, It Helps To Know The Rules Before You Sit Down At The Table.

Editor's note: This is the second part of a two-part series on paying for college. Part I ran last Monday.

Your son or daughter just turned 16, and the college dream is keeping you awake at night. You've never had an extra dime to put aside, or you did and chose not to. Adding to the fun, your 13-year-old is already talking pre-law, Ivy League style.

Don't scout the pawnshops just yet. Financial aid abounds, even if it increasingly comes with a price and goes to people who may not need it.

"There are lots of options available to people in the form of scholarships, low-interest loans and work/ study grants," says Ellen Webber, a certified financial planner with George R. Pierce & Associates in Seattle. "Most families I've seen have been able to come up with some package that works. I just tell them to stay reasonably optimistic and explore all avenues."

These days, the avenues lead less often to federal grants. Twenty years ago, federal grants based on financial need made up about 55 percent of financial aid. The figure now is about 40 percent. The value of the average federal Pell Grant, relative to the cost of a year in college, has declined by a half to two thirds, according to the College Board.

That isn't to say financial aid has not gone up. According to another College Board report, over a 10-year period ending in 1997, aid increased 70 percent even after adjusting for inflation. By far the fastest-growing area has been loans, largely unsubsidized loans available to anyone.

Aid provided directly by colleges and universities tells the same story.

"The growth in the past 10 to 20 years has been mostly in the area of academic scholarships, merit-based money," says Jim White, director of financial aid and student employment at Seattle University, who estimates that 50 percent of aid originating with the schools themselves is based on need. "The growth stems from the increased competition among colleges, particularly independent schools, for the best students."

Finally, those with enough income to pay taxes have been helped by a pair of new tax credits.

The process

Getting money for school begins with the Free Application for Federal Student Aid (FAFSA), a document reminiscent of tax forms and standardized tests with its eight pages of bubbles, boxes and references to No. 2 pencils.

The FAFSA will determine how much your family can afford for college, in the eyes of the federal government. You can find it at the Web site www.fafsa.ed.gov or get it by calling 800-433-3243. The form should be filled out as soon as possible after Jan. 1 of the student's senior year in high school, but you don't need to wait to find out approximately how much aid you can obtain.

You will find something called the "expected family contribution" (EFC) calculator at the Web site www.collegeboard.org. Feed in the numbers, and the calculator will give you the size of your "income protection allowance" and how much you'll be expected to kick in. If you're making about $48,000, the household median for Washington, the expected contribution will likely be about $4,500 a year, depending on a number of variables. If you're making double that, the expected contribution may well top $20,000.

Some private schools also require you to fill out the College Scholastic Service Financial Aid Profile.

You can register for the paper version of it at www.collegeboard.org or by calling 800-778-6888 You can gain access to the electronic version at www.profileonline.cbreston.org.

After the federal government figures out how much you can afford, and the colleges you've selected get a copy of the report, those schools will decide how much aid to offer you. For instance, if your determined need is $20,000 a year, Seattle University might offer you a $12,000 grant - free money - a $3,000 loan and a $2,500 work/study award, leaving you with $2,500 to find on your own.

Or, it might not. It depends partially on how badly the school wants to attract your son or daughter. In that regard, the college market is getting more and more like the job market, a trend that hasn't gone free of criticism in higher education. Attractiveness obviously depends on academic achievement but can also depend on special talents, diversity and other factors.

"Students need to market themselves to the college," White says. "They should seek colleges where they will be unique, and certainly be a candidate with academic distinction compared with the typical student."

The school's offer is not final. "The EFC is always, 100 percent of the time, negotiable," says Doug Breithaupt, president of the College Planning Network, a Seattle nonprofit organization that counsels students and their families on getting financial aid.

To compete for the most attractive students, more schools around the country have expressed a willingness to match offers. Even if your top choice doesn't, you may be able to convince the school that your situation is special.

Of course, not all unique circumstances are equally compelling. You'll probably have better luck emphasizing a child's unexpected medical expenses than you will the oppressive payments on your 60-foot boat.

Scholarships

With the number of rich people in the region growing, so is the number of scholarships funded by individuals, foundations and other organizations, says Breithaupt, whose organization publishes the Pacific Northwest Scholarship Guide and does workshops on competing for scholarships,

"We're getting calls almost on a weekly basis from someone about how to set up a scholarship," he says. "Two years ago, it was one per month."

Academic achievement is generally the most important criterion, followed by community activities (in particular, sincere volunteer work for causes such as the homeless or disadvantaged) and career goals and area of study, Breithaupt says.

Be aware that scholarship money counts as income on the FAFSA and that some schools may reduce their own grants, depending on the scholarship amount. The majority of schools do not do that, however, according to Breithaupt.

"First, they reduce any loans in the financial-aid package, then the work/study, and only after the self-help is replaced in the package would any institutional grants be removed," he said. "Colleges need students to bring private scholarships to their campuses, and most cannot afford to negate the student's efforts simply by replacing other grants."

Still, if you are applying for scholarships, White says, it's a good idea to ask schools what effect they would have on their aid package.

In applying for financial aid, not all family income and assets are treated the same. In particular, the student's assets are factored in more heavily than those of the parents. So, if the student needs a computer or a car anyway, it makes sense to use his or her money to pay for that.

Also, public colleges and universities don't count home equity among assets (though private schools may). Stop and think, though, before emptying your bank account to pay down the mortgage.

"You may give up more in tax advantage than you gain in aid," Webber says. "Talk to your tax adviser."

Among Webber's other suggestions: "If you have cash sitting around in savings or investments accounts, pay off your consumer loans. It will make you look poorer without making you poorer. If the family has a business, try to keep as many assets in the business as possible. It's assumed that a much lower portion of business assets are available for college."

Consider the consequences of what you are doing, however, financially and otherwise, and get advice if you need it. Playing fast and loose may be dangerous.

For instance, since a family's expected contribution is reduced if more than one person attends college simultaneously, a parent might consider going back to school.

"Some people have been known to sign up for classes and promptly drop out," Webber said. "Which is unethical, and schools have been known to check back, so (you) can get caught playing that shell game."

Paul Palazzo's phone: 206-464-2277. E-mail: ppalazzo@seattletimes.com

---------------- What's out there ----------------

Some of the types of financial aid and tax relief available through the federal government:

Grants, loans and work/study

-- Federal Pell Grants: Gifts awarded based on need, to undergraduate students. Maximum per year is $3,125.

-- Federal Supplemental Educational Opportunity Grants (FSEOG) Funded by the federal government and administered by schools. Available to students with exceptional financial need, with Pell Grant recipients receiving highest priority. Limit of $4,000 per year. Available to undergraduates only. Different from Pell Grant in that there is no guarantee that every eligible student will receive an FSEOG.

-- Perkins Loan: School contributes. Based on need. 5 percent interest, subsidized, meaning all interest is deferred until nine months after you graduate or leave school. Undergraduate limit of $3,000 per year, up to $15,000 total. Graduate limit $5,000 per year up to $30,000, including the amount borrowed as an undergraduate. May typically be repaid over 10 years.

-- Stafford Loan (subsidized): Based on need. Available directly through schools or from private lenders (Family Education Loans). Interest capped at 8.25 percent. Interest deferred until six months after you graduate or leave school. Undergraduate limits: $2,625 per year for first-year students, higher for upperclassmen and graduate students. Note: Limits are for total Staffords taken, including unsubsidized.

-- Stafford Loan (unsubsidized): Available regardless of need. Available through schools or from private lenders. For loan limits and caps on interest, see above. May defer payments until six months after you graduate or leave school, but interest accumulates in the meantime and is added to principal.

-- Parent Loans to Undergraduate Students (PLUS): Not based on need. Interest capped at 9 percent. Available to full-time students only. Amount limited only by the total cost of schooling, minus other aid received. Repayment scheduled to begin 60 days after disbursement.

Tax credits

-- ## Hope Scholarship Credit: Available during each of first two years in school, for students enrolled at least half time. Maximum credit is 100 percent of first $1,000 paid in tuition and fees, and 50 percent of the second $1,000, for a total of $1,500. Can be taken for each student in the family.

-- ## Lifetime Learning Credit: Available for an unlimited number of years. No half-time requirement. Current maximum of 20 percent of first $5000 in tuition and fees. Limit of one credit per family regardless of how many members of the family are in school.

-- # A tax credit should not be confused with a tax deduction. Whereas a deduction reduces the amount of income on which you must pay taxes, a credit directly reduces the tax liability itself. For someone in a 28 percent bracket, a $280 credit equals a $1,000 deduction.

## The Hope and Lifetime may not be taken in the same year for the same student. Also, neither may be taken in the same year in which a deduction is made from an Education IRA.

---------- Dig deeper ----------

For more information on financial aid and college issues in general:

http://www.collegeplan.org

http://www.fafsa.ed.gov

http://www.collegeboard.org

http://www.finaid.org