Goldman Closes the Door on Subprime (BusinessWeek)

When Goldman Sachs (NYSE:GS - News) bought Litton Loan Servicing, a firm that collects mortgage payments from homeowners, in 2007 for an unannounced price, it seemed like a simple way to get an on-the-ground view of the subprime market. The insight would help Goldman Sachs figure out how much to pay for loans, and Litton would work with borrowers to get them back on track. Other sophisticated investors, including billionaire Wilbur L. Ross and private equity firm Centerbridge Capital Partners, bought mortgage servicers with a similar strategy in mind.

It didn't work out as planned. While there were plenty of distressed mortgages and lots of eager buyers, the loan holders had little incentive to mark down prices because that would mean taking a big loss on their books. "The distressed-asset market never got as hot as people were hoping it would," says Dean H. DeMeritte, an executive vice-president at Phoenix Capital, a Denver brokerage for mortgage servicing contracts.

On June 6, Goldman Sachs agreed to sell Litton to another mortgage servicer, Ocwen Financial (NYSE:OCN - News), for $263.7 million. The sale comes two months after Goldman Sachs wrote down the value of the business by about $200 million. "It really makes sense for them to sell it," says David B. Hilder, an analyst at Susquehanna Financial Group. "They bought it at a time when the business was easier, and it looked like there might be some insights to be gained in the mortgage market from having a servicer." Neither Goldman Sachs nor Litton would comment.

Founded in 1988 by Larry B. Litton Sr. in Houston, Litton was one of the first mortgage servicers to specialize in working with troubled loans, sometimes called "scratch and dent" servicing. It developed that skill during the savings and loan crisis, when it was hired by Resolution Trust Corp. to handle mortgages that were orphaned by failed banks.

Larry Litton Jr., who now runs the company, is known in the industry for his Texas drawl, straight talk, and vocal support for working with struggling borrowers before they get too far behind. Bruce A. Gottschall, the founder of Neighborhood Housing Services of Chicago, a nonprofit that worked with Litton a decade ago, says the company "seemed to me a little bit more flexible in terms of modifications early on." Litton Jr. currently is a member of the Federal Reserve's Consumer Advisory Council, where he has been vocal about foreclosure prevention. Ocwen would not comment on whether he will stay with the company after the sale.

Litton's business grew with the subprime market. In 1995 it serviced $1.2 billion in loans, according to Fitch Ratings. By 2007 its portfolio had ballooned to almost $54 billion; it's about $41.2 billion today. As the boom gave way to the bust, Litton was forced to hire more staff to deal with rising defaults. The company became the target of class actions alleging excessive fees and violations of consumer-protection laws as well as investigations by state and federal regulators. It has agreed to settle at least one of the lawsuits while denying liability; others are pending. It says it is cooperating with government investigations. Goldman Sachs will remain liable for fines and penalties that could be imposed by government authorities relating to Litton's foreclosure and servicing practices before the deal closes.

With the Litton sale, Goldman Sachs will no longer deal directly with homeowners. Gottschall says Goldman's unloading the mortgage servicer is part of a bigger trend: "Wall Street is probably trying to distance themselves from the problems they caused."

The bottom line: By selling Litton Loan Servicing, Goldman Sachs is out of the messy business of working with distressed homeowners.

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States Are Rejecting Millionaire Taxes (BusinessWeek)

Millionaires can breathe a bit easier. While President Barack Obama says he wants to let income tax cuts that benefit only the wealthiest Americans expire in 2013, several states are rolling back tax increases for top earners.

New York's highest tax rate on incomes exceeding $500,000 will fall back to 7.85 percent, from 8.97 percent, this year. Maryland's 6.25 percent tax on incomes above $1 million expired at the end of 2010, while California's top tax rate for millionaires has dropped to 10.3 percent from 10.55 percent.

At least seven states instituted temporary so-called millionaire taxes during the recession. Those levies are becoming harder to justify now that state revenues are rebounding. Overall, state tax revenue grew 12 percent in April compared with a year earlier, which may trim $20 billion from estimated state budget shortfalls, according to a recent Goldman Sachs (NYSE:GS - News) report. The soak-the-rich drive "just petered out," says Joseph Henchman, vice-president for legal and state projects at the Tax Foundation in Washington, a group focused on lowering taxes. "All of these states are backing away now."

Business groups have been vocal opponents of the temporary hikes. The Business Council of New York State has opposed efforts to maintain the tax increase on the grounds that such measures are an indirect tax on business income. Most business owners who are paid by partnerships or S corporations report business income on their individual returns. Kenneth J. Pokalsky, the Business Council's senior director of government affairs, says 25 percent of revenue generated from the state's tax on higher earners came from business income. In California, the Silicon Valley Leadership Group, whose members include Bank of America (NYSE:BAC - News), Apple (NasdaqGS:AAPL - News), and Microsoft (NasdaqGS:MSFT - News), along with 12 other business groups, have told lawmakers that tax increases should be extended only if lawmakers agree to "structural reforms" of the budget.

Republicans, who typically oppose tax hikes, now hold a majority of governorships -- 29 -- and many were elected last year after campaigning against tax increases. New Jersey Governor Chris Christie, a Republican, received national attention after vetoing a bill that would have extended a tax on millionaires in the state.

Some Democrats are also fighting the higher taxes. New York Governor Andrew Cuomo sparked a battle with fellow party members in the legislature earlier this year by opposing legislation that would maintain the higher rates on individuals earning more than $1 million. Maryland Governor Martin O'Malley, a Democrat, didn't push to extend his state's millionaire tax last year. "I would like to think it's because these are not very good policies," Henchman says. "If you're a conservative, you don't really like these taxes. If you're a liberal, these (state) services should be so important that everyone should have to pay for them."

The American public is almost evenly divided on the question of whether the wealthy should shoulder a higher tax burden. A Gallup poll released on June 2 found 49 percent of respondents opposed higher taxes on the rich, while 47 percent supported them.

Kim Rueben, director of the state and local program at the Tax Policy Center in Washington, a nonpartisan research organization, says higher tax rates are tough to sustain in states that have progressive tax codes. New York, for instance, has seven tax brackets, with the highest rate kicking in at an annual income of $500,001. "There are certain places that I think can afford to increase the progressivity of their tax system," she says. "In places that have a more progressive system, like California and New York, it becomes harder to keep raising that revenue."

A few states are bucking the national trend. Connecticut has raised its top tax rate from 6.5 percent to 6.7 percent. Oregon voters approved a measure in January establishing two new tax brackets: 10.8 percent for those earning more than $125,000 and 11 percent for those making more than $250,000. District of Columbia Mayor Vincent Gray proposed raising taxes for residents earning more than $200,000, but the District council nixed the plan. Someone making "$200,000 is not a rich person," says Barbara Lang, president of the D.C. Chamber of Commerce. "It's not a lot of money."

The bottom line: New York, Maryland, and California are knocking down tax rates for high earners, while the District of Columbia has nixed an increase.

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Financing an MBA, With Help From Mom and Dad (BusinessWeek)

Daniel Wesley knew as soon as he started applying to business school that he wanted to avoid student loans. He'd already racked up about $45,000 in loans from his undergraduate days and didn't relish the idea of adding another $200,000 or so to that debt load, he says. When he found out he got into the Weekend MBA program at the University of Chicago's Booth School of Business (Booth Part-Time MBA Profile), he turned to his mother and father, a retired construction foreman, for help. They agreed to pay for his first year of school, which he just completed, and plan to pay for his second year as well.

"It is a huge advantage and definitely a relief to know that I won't have nearly a quarter of a million in debt hanging over my head when I graduate," says Wesley, 33, chief executive officer of Creditloan.com, a website on personal finance.

Wesley is one of a growing number of graduate business school students who are using their parents as a funding source for B-school, either accepting tuition gifts from them or negotiating interest-free loans. A two-year business program at a top school can easily add up to $150,000, after factoring in tuition and fees, room and board, and living expenses. From 2003 to 2007, the number of prospective students who said they expect their parents to help them pay for business school doubled, and was approaching 40 percent in 2010, according to a 2011 survey by the Graduate Management Admission Council. The lingering effects of the economic downturn, coupled with tighter lending standards, have left many students nervous about taking on more student loan debt, says Haley Chitty, a spokesman for the National Association of Student Financial Aid Administrators. The average debt of a college graduate is about $23,000, making the class of 2011 the most indebted class ever, according to the financial aid website Finaid.org.

"Any time there is economic uncertainty like there is now, there is a general reluctance to borrow," Chitty says. "Borrowing from Mom and Dad is going to seem a lot safer than borrowing from the government and taking on a loan which likely can't be discharged in bankruptcy and can follow you for the rest of your life."

Vital>

For most students, parental support is just one of several funding sources they use to cover the cost of their graduate education; they also depend on loans, personal savings, employer assistance, and grants and fellowships. But recently it has become a more important part of the financing puzzle; on average, prospective students who plan to receive help from their parents expect them to finance 37 percent of the cost of their degree through loans, gifts, or both, GMAC says.

Driving the need for parental aid is an uptick in the business school pipeline of younger students, especially those in the 24-years-and-under age bracket, says Michelle Sparkman-Renz, GMAC's director of research communications. Increasingly, they are interested in one-year specialized degree programs that require little or no work experience, she says. In 2005, only 22 percent of prospective students who took the GMAT exam were younger than 24. Today, 29 percent fall into that age bracket, she notes.

Schools are catching on to the fact that parents are increasingly paying for a significant portion of their adult children's graduate degrees, Sparkman-Renz says, noting that some business programs have information for parents on their websites and even invite them to orientation.

"Parents are really considering higher education, not just the university undergraduate degree but even a graduate degree, as an investment," she says.

The dependence on parental support is most pronounced among younger European and Asian residents, according to GMAC. European students under 24, who gravitate toward the popular one-year business master's degree programs in Europe, use parental resources to fund about 42 percent of the cost of their degree. Meanwhile, Asian students in this demographic expect parents to foot about 46 percent of their tuition bill. Much of this increase is driven by students from China, where more than a third of the GMAT test-takers are under 24, with younger women outnumbering Chinese men by a ratio of 2-to-1, Sparkman-Renz notes.

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U.S. students are less dependent on parental support than their European and Asian counterparts, but those under 24 still expect to finance about 20 percent of their degree with help from family. Students from ages 24 to 30 intend to have parents pay for about 10 percent of their tuition, GMAC says.

Some students are lucky enough to get their parents to pay for the full cost of their MBA, like Kathryn Palmer, 27, a student in Penn State's online MBA program (Penn State Distance MBA Profile). When she was a teenager, she told her mother that she'd rather have her pay for her education than for her wedding. It's a choice she doesn't regret, says Palmer, who is getting married this September and plans a low-key wedding.

"I'm learning now how good my decision was because school is a lot more expensive than a wedding," says Palmer, who works in marketing at a casino in Atlantic City, N.J. "A lot of kids I know have loans and I really didn't want to have to graduate with a huge burden like that."

Her mother, Carol Pride, chief information officer at Mohegan Sun Casino & Resort in Uncasville, Conn., says she always intended to help her daughter pay for graduate school if she decided to go that route. The tuition payments are intended to be a gift for her daughter, not a loan, and have not impacted her and her husband's retirement plans, she says.

"I think us paying for school allowed her to be a little more reflective about the schools she could choose from," she says. "We think education is important and that it is something that will be a lifelong differentiator for our children, so we are comfortable investing in it."

Unconventional>

Some students use their parents in unconventional ways to help them pay for school. Brooke Henze, 28, and her husband, who both recently graduated from Duke University's Fuqua School of Business(Fuqua Full-Time MBA Profile), used their personal savings to pay for their first year of business school. But when it came time to finance the second year of their MBA, she turned to her parents, with whom she co-owns her house, for help.

"We both wanted to go to a top business school, but there was no way we could afford to pay $46,000 each for tuition," she says. "I knew my parents couldn't pay for me, but I thought maybe I can score a deal with them to use a home equity line (of credit)."

Her parents subsequently restructured the mortgage on the home so that Henze and her husband were able to obtain a home equity loan of about $100,000, with an interest rate just 0.75 percent above the prime lending rate. That's far more favorable than typical federal graduate school student loans, which can carry interest rates of nearly 8 percent, she notes. She's confident she'll be able to pay off the loan in the next five years.

"We were thinking outside the box," says Henze, who is now launching a consulting business, Red Wagon Venture.

Spiraling>

The spiraling cost of tuition is one of the reasons students may be relying more on parents to pay for business school, says Dan Thibeault, president and co-founder of Graduate Leverage, a student loan consolidation and debt management company in Waltham, Mass. Of the MBA students he works with, about 15 percent to 20 percent have $150,000 worth of debt when they graduate, he says.

"That was unheard-of five or six years ago. Maybe a student in a four-year dental program would borrow that much, but for a student to come out of a two-year MBA program with that much debt is almost shocking," he says. "It may lead a sympathetic parent to say, 'Wow, that is a suffocating amount of debt. I have to get involved.' "

Increasingly, financial aid officers at business schools are trying to help students curb the amount of debt they take on to finance their education. At Dartmouth University's Tuck School of Business (Tuck Full-Time MBA Program), Assistant Dean of Administration Steven Lubrano says the school has made a conscientious effort this year to minimize the student debt load, asking applicants to explore other avenues of financing before taking out loans. For some students, that may mean asking Mom and Dad for help, he says.

"It is a major concern for us, frankly, and we are more and more cautious about students taking on too much debt," Lubrano says. "Historically, we would probably be more flexible, but this year is the first time we are being strict about debt limits. We're asking students to have more skin in the game and invest in their education by using more of their personal resources."

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Home Sellers Provide Last-Resort Loans (BusinessWeek)

Sue and Douglas Reed knew no bank would give them a mortgage -- not with a bankruptcy and two foreclosures fresh in their credit history. They turned to Hilarie Walters, whose childhood home on 15 acres in Marshall, Mich., had been on the market since 2009, a year after she inherited it. Walters agreed in December to sell the property to the Reeds for $105,000. She also consented to a risky payment plan that in effect makes her the couple's mortgage lender. "They're paying me interest every month, but I'd rather have the money and be done with it," says Walters, an unemployed single mother who is using their payments to cover the mortgage on her Battle Creek (Mich.) residence. "It does make me nervous."

Financing provided by sellers, popular in the 1980s when mortgage rates reached 18 percent, is making a comeback in markets such as Michigan that have been hit hard by foreclosures and where tightening lending standards and years of economic distress have drained the pool of creditworthy buyers. For a small but growing number of people, it's the only way to get a deal done. "Anytime the market is in this much trouble, people have to find ways to get it to function," says Dennis Capozza, a professor of finance at the University of Michigan in Ann Arbor. Capozza has direct experience with seller financing: He purchased a friend's foreclosed home a couple of years ago and then allowed him to buy it back in installments.

Last year 52,991 U.S. homes were purchased with owner financing, up 56 percent from 2008, according to Realtors Property Resource, citing data collected from county record offices. Such deals accounted for 1.5 percent of all transactions in 2010. Michigan, which has a 10.3 percent unemployment rate, leads the nation with about 1,600 home listings that advertise seller financing, followed by Florida, Ohio, California, Wisconsin, Minnesota, and Texas, according to property website Trulia.

The risks in such deals are significant for both buyer and seller, says Jason P. Hoffman, a Faribault (Minn.) real estate attorney. "Each of them is seeking an advantage in an otherwise difficult situation, and they're hoping everything will work out as envisioned," Hoffman says. "It's an act of faith."

The Reeds, who put $25,000 down, make monthly payments of $565, reflecting a 7 percent interest rate, with the full balance due in five years. "This is the American dream, and we're going for it no matter what," says Sue, 56, who sells snacks from a trailer at estate auctions and going-out-of-business sales. "We'll either make it or it will break us."

The riskiest deals involve sellers who have bank loans on the properties, Hoffman says. Most mortgages contain a "due on sale clause," meaning the lender can call the loan if the home is transferred. While community banks sometimes grant exceptions, many homeowners take their chances, hoping lenders won't ask questions as long as the payments stream in, he says.

Some investors see seller financing as a marketing tool. Mark Cook, 30, a real estate agent in Lake City, Fla., says he sees an untapped market in people who have had their credit ruined by a foreclosure or short sale. Cook is working with a Canadian investor who bought and renovated four homes in Florida's Cape Coral and Fort Myers areas since September, selling them to buyers who needed financing. One more is for sale now, another is under renovation, and they have contracts to buy another handful of homes.

Cook markets homes to buyers with foreclosures in their credit history, as well as second-home purchasers and self-employed borrowers who don't show enough income on their tax returns to qualify for traditional financing, he says. He offers an interest rate of 9.95 percent and a balloon payment after seven years to buyers who can put down 20 percent in cash. "We are advertising in markets that are cheap, and we're satisfying the consumer's appetite for a bargain," Cook says. "Assuming you're not creditworthy and have cash, we are your avenue for buying a home."

Rebecca Hill, a 33-year-old high school science teacher, and her fiance, Nicholas Lehman, bought an almost 2,000-square-foot house in Cape Coral through Cook for $107,000 on May 4. Her credit was damaged a year ago when her ex-husband lost a home they had purchased together in foreclosure, according to Hill. While they paid a premium for a seller-financed home, the monthly mortgage costs are $175 less than the rent they previously paid for a unit half the size, she says. "If I wait for my credit to be restored and then purchase, I'm not going to get a $107,000 four-bedroom home," Hill says. "That's not going to exist anymore."

The bottom line: In 2010, almost 53,000 homes were purchased in the U.S. with owner financing -- sales that might not have happened otherwise.

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Delays in Short Sales Frustrate Home Buyers (BusinessWeek)

By Kathleen M. Howley Kathleen M. Howley – Fri Apr 15, 8:08 am ET

Charles Wright of Henderson, Nev., fell behind on his mortgage last year after a divorce squeezed his finances. He twice arranged to sell his house for less than its loan balance, a so-called short sale, only to see the buyers walk away because it took too long to get approval from the holder of the mortgage. "I couldn't even get a call back, never mind a yes or no," says Wright, 30, whose loan was owned by Fannie Mae (fnma.ob.OB), the government-run mortgage-finance company. "Why make it so hard to sell when the alternative, foreclosure, means an even bigger loss for lenders?"

Good question. Thomas Popik, research director for Campbell Surveys in Washington, which conducts national monthly surveys of 3,000 real estate brokers, says more short sales could stem steep home-price declines. Although the home is sold for less than the mortgage in a short sale, it stays out of foreclosure, where the holder of the loan seizes the house and auctions it off at a steep discount to current value. "Any time a short sale can be substituted for a foreclosure, it's extremely good for the housing market," says Popik.

There were 243,000 short sales in the first 11 months of last year, according to CoreLogic (NYSE:CLGX - News), a research firm in Santa Ana, Calif. That compares with 1.2 million notices of pending auctions in the same period. A lengthy consent process by loan holders deters potential buyers from agreeing to a short sale. In a normal home sale, people make an offer and get a decision from its owners within days, if not hours. For a short sale, the average time between a price bid and response is three and a half months, according to Campbell. The California Association of Realtors estimates that delays kill about half the short-sale deals in the state.

The biggest mortgage holders, Fannie Mae and Freddie Mac (fmcc.ob.OB), completed 7,768 short sales in January, down from 9,373 in the prior month. "I get the sense that Freddie and Fannie have been trying harder to make things work, say, over the last 8 or 10 months, but it still is a fight to get these deals through," says Ron Wilczek, owner of Metro Phoenix Homes, a real estate agency in Tempe, Ariz.

Fannie Mae approved a short sale for Wright, the Nevada homeowner, after he found a third buyer. A deal went through on Feb. 15, two weeks before the house's scheduled foreclosure auction. The price was $265,000, 37 percent less than what Wright paid in 2007 and about $125,000 short of what he owed Fannie Mae.

If Wright's property had ended up in foreclosure and got sold at the local auction venue -- a parking lot near the casinos and wedding chapels of the Las Vegas Strip -- Fannie Mae's loss might have been greater. Foreclosed properties typically sell at a 28 percent discount to current market value, according to RealtyTrac, a real estate data company in Irvine, Calif. At least Wright, in his short sale, sold his house for close to its current value.

When it comes to approving short-sale offers, what seems like dawdling to buyers and sellers may be lightning speed to the mortgage industry, says Faith Schwartz, executive director for the HOPE NOW Alliance in Washington, a group of home-loan investors, lenders, and mortgage servicers including Bank of America (NYSE:BAC - News) and Wells Fargo (NYSE:WFC - News). Before a short-sale offer can be approved, the holder of the home loan must agree to the price, she says. Other parties may have to assent as well. About half of troubled mortgages involve homes that have so-called second liens such as home equity loans, according to the Treasury Dept. Mortgage insurers may get involved, too.

"All those pieces have to fall together, and that takes time," says Schwartz. Fannie Mae has set up a program that lets real estate agents talk directly with Fannie when they run into roadblocks during a short sale, says Marcel Bryar, a vice-president at the mortgage financier.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, wants short sales to be "consummated efficiently," says Corinne Russell, a spokeswoman. Short sales can prevent neighborhood decay by limiting the number of vacant homes and can "ultimately help save taxpayer dollars," she said in an e-mailed statement.

Marie McDonnell, owner of Truth in Lending Auditing & Recovery Services in Orleans, Mass., says loan servicers may be responsible for the delays in short sales. Servicers earn fees by sending the monthly bills and collecting mortgage payments, though they typically don't own the mortgage. They also are in charge of communicating with the mortgage holder when the homeowner wants a short sale. That power gives the servicers the motivation to drag their feet as they rack up additional late fees. In Wright's case, Fannie Mae says it acted in a timely manner once it was told by the servicer of Wright's request.

Chris Killian, a vice-president at the Securities Industry and Financial Markets Assn. in New York, says servicers dealing with an avalanche of defaulted mortgages generally don't have an interest in keeping loans in limbo. Says Wright: "Everyone could save a lot of headaches if the process could be speeded up."

The bottom line: Short sales could accelerate the resolution of the housing crisis -- if the process is streamlined by the big federal mortgage lenders.

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IRA Monte Carlo (BusinessWeek)

High-income taxpayers can now convert traditional IRAs, which allow contributions to be deducted from taxes but incur taxes on distributions, into Roth IRAs, where the contributions are taxed but the distributions are tax-free. The conversion triggers a one-time tax bill based on the value of the newly converted Roth IRA. As one might expect, tax experts are recommending that high-net-worth individuals convert their traditional IRAs to Roth IRAs before 2013, when ordinary income rates are likely to go up.

1. Let's say an investor has one traditional IRA with a value of $4 million.

2. The traditional IRA is split up into four traditional IRAs, each worth $1 million.

3. The investor converts all four to Roth IRAs at the beginning of the year.

4. The IRS effectively allows taxpayers to undo the conversion for up to 21 months. So in 21 months the investor looks at the performance of the IRAs. Say two of them go up from $1 million to $2 million and two drop from $1 million to zero. Because the IRAs were split into four, the investor can change her mind on the two that went down and revert those back to traditional IRAs. Thus, she owes taxes on only the two contributions that went up in value, and nothing on the two that went down, cutting her tax bill in half. This lops 21 months of risk off the bet that paying taxes now will be paid off with tax-free appreciation later.

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Q&A: Aid Guru Mark Kantrowitz (BusinessWeek)

When it comes time to finance a college education, students and families often bypass scholarships in favor of student loans. That can be a mistake because unlike loans, scholarships are essentially "free money for your college education," says Mark Kantrowitz, a financial aid expert and author of the new book Secrets to Winning a Scholarship, published in February. The typical student is eligible for anywhere between 50 and 100 scholarships, and every year more than 1.5 million scholarships worth more than $3.5 billion are given to students by donors, philanthropists, and corporations, according to Kantrowitz, who is also publisher of Fastweb.com, a free scholarship-matching website, and FinAid.org, an online provider of student aid information.

Only a small percentage of college-bound students receive enough scholarship money and need-based aid to pay for the entire cost of college, but that shouldn't discourage students from applying, Kantrowitz said. The vast majority of full-time college students using scholarships at four-year colleges, or 69 percent, used less than $2,500 in scholarship funds to pay for a year of school, according to the book. That may seem like a small amount, but as Kantrowitz writes, "every dollar you win in scholarships is a dollar less you have to borrow."

Bloomberg Businessweek's Alison Damast recently spoke with Kantrowitz, who shared tips on how students can maximize their chances of winning a scholarship. Here is an edited transcript of their conversation.

Alison Damast: The title of your book is Secrets to Winning a Scholarship, so students and families who pick it up will be looking for some inside tips. What do you think is one of the best-kept secrets about the scholarship world?

Mark Kantrowitz: One of the best tips in the book tells you how to double the scholarships you match on scholarship search sites, which in turn doubles your chances of winning a scholarship. Students who answer all of the optional questions, in addition to the required questions, on the personal profile form on these sites get double the number of awards as students who just do the bare minimum. For example, it takes half an hour to fill out the full personal profile on the Fastweb scholarship site, but not everyone does it because there is a long laundry list of questions. It is important to answer all of them because each question triggers the inclusion of a specific award on a scholarship database. For example, the search engine is not going to show you a scholarship oriented toward single parents, for example, unless you tell us you're a single parent. It can be a little tedious to answer all the questions, but it doesn't take that much time and it doubles your chances.

Students are often overwhelmed during the college application process and don't get around to applying for scholarships until later in the academic year, a tactic you don't recommend. How early should students and their families start investigating and applying for scholarships?

A lot of families start trying to figure out how to pay for school after they get their letters of admission. That is a mistake. Some of the scholarship deadlines can be as early as August or September of a student's senior year, and half of them are in January. Even if they start applying for scholarships their spring semester, they've still missed half of the scholarship deadlines for their senior year of high school. Another thing people tend to forget is that scholarships are available not just for high school seniors, but juniors, sophomores, and freshmen. There are even scholarships for kids in kindergarten through eighth grade, like the Jif Most Creative Peanut Butter Sandwich and the National Spelling Bee. You're not going to find scholarships for younger children on online free scholarship databases like Fastweb because of federal privacy law, but you can see a list of them on FinAid.org.

Contrary to popular belief, minority students are less likely to win scholarships than white students enrolled at four-year universities. As you note in your book, minority students represent 33.8 percent of applicants, but only 28.5 percent of scholarship recipients. Why do you think this is the case?

My educated guess is when someone establishes a new private scholarship, they are establishing it for people to participate in activities that they have an interest in. Wealthy Caucasian individuals are going to create scholarships that match their interests, which in turn will have a greater affinity for Caucasian students. For example, there are a number of equestrian scholarships out there. Minority students don't participate in equestrian sports to the same extent as Caucasian students. I don't think there is any explicit discrimination going on. It is just how it tends to (work out). The reality is even with high-profile organizations, the share of scholarships that minority students get is disproportionately low.

Many of the scholarships today are fiercely competitive, especially the larger, more lucrative ones. What are the odds that a student will actually win a scholarship?

People overestimate their ability to win merit-based awards and underestimate their eligibility for need-based aid. The odds of winning a private scholarship are slim. About one in 10 students receives a private scholarship, and the average amount received is $2,800 per year. But students have this impression that private scholarships are much more abundant than they really are, and when they don't win, they feel they are being cheated. The reality is that every scholarship sponsor is trying to find the students that best match their criteria. If you happen to have a B average, no interesting hobbies or extracurriculars other than watching TV or video games, well, you are probably not going to win a scholarship.

If the odds are really so slim, is it worth a student's effort to apply?

I recommend to every applicant that they apply for every scholarship they are eligible for. For some, it might be a half dozen; for other students, it might be 200. Typically, a high school senior matches for between 50 and 100 awards on scholarship-matching services. That does sound daunting and a lot of students think it is too much work to apply for scholarships. The things students don't even realize is that after you've entered your first half-dozen scholarships, it becomes much, much easier because you can start to reuse your previous essays. You'll probably have to tailor them to each scholarship application, but it doesn't take all that much time and you could easily churn out all of your scholarship applications in a few weekends. For every scholarship you win, you will probably get eight or nine denials. Some of the time, students just won't understand why they didn't win because they may think they have a really outstanding application. It is not just a matter of skill. There is an element of luck there. It is a bit of a roll of the dice.

In the book, you list a number of common myths about people who win scholarships. What is the most commonly held one?

One that is pernicious is that smaller scholarships are not worth the effort. I often hear from students who say a $500 or $1,000 scholarship is too small to be worth their time. That makes the scholarship easier to win because probably fewer students are going to be applying. The scholarships you get do add up and they add lines to your resume that can help you win other scholarships. Winning a scholarship is a stamp of excellence. It tells the other scholarship providers that someone thought highly enough of you to invest their money in your future. If they have two students -- one with a lot of little scholarships and one who has won nothing -- the scholarship committee will probably go with the one who won a lot of little scholarships because that is the more proven student.

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