The college choice decision is one of the most stressful, and arguably, one of the most significant financial decisions that a family will ever need to make. Some families just blindly assume that they will pay whatever it takes to get the child into a good school. As the decision deadline approaches, the focus is almost always on admissions, and hardly ever on the outcome. As financial planners, we focus on the outcome, i.e., the student’s projected assets, liabilities, and income, as well as the expected quality of life at age 25. We find that a lot of families don’t realize that college has become big business, and the first task of the admissions office is to get more applications. The more applications they receive, the better the school’s ranking. That means more opportunity for them to be selective. So you are likely to hear the admissions pitch, “We have plenty of financial aid. You should apply.”
Traditionally, financial planners have recommended to clients that they guess early in their child’s life where they think that child will go to college. The planner then looks up the published “sticker price” of the cost to attend that school. He or she then recommends either setting aside enough dollars today, or saving monthly, an amount that will accumulate to the expected total cost of education. Usually, the planner recommends that the savings be accumulated in a tax-deferred or tax-exempt account, such as a 529 Plan or education IRA. To their credit, few people actually do it this way.
The first step for a sound plan is for everyone (both parents and student) to agree upon an education funding goal, and incorporate that goal into the family’s overall long-range financial plan. Some parents tell us that they are willing and able to pay 100% of the cost of higher education at any school their child wants to attend and can get into. Others say that they want to pay only part of their child’s higher education costs. And some put the entire burden on the student. One alternative plan that has become quite popular was developed with a client for their young child. In that plan, the parents planned to have saved 1/3 of the expected cost upon entrance to college, pay 1/3 out of their cash flow as the child progressed through college, and then require the child to come up with the remaining 1/3 via work study, scholarships, or loans.
One of the first steps in the process is to calculate your Expected Family Contribution (EFC). Most people think of the EFC as one number; however, it is four numbers: parents’ income, parents’ assets, student’s income, and student’s assets, and they count toward financial aid very differently. Just because you have an EFC that exceeds the Cost of Attendance does not mean that your child is completely disqualified from any financial aid. In fact, experience has shown that some schools may give a higher merit-based financial aid package because you have a higher EFC.
It is important for everybody to complete the Free Application for Federal Student Aid (FAFSA) if only to become eligible for Direct Student Loans. Even if you are adamantly opposed to borrowing money to pay for school, you probably should consider becoming eligible to do just that. From a purely planning perspective, completing the FAFSA and submitting the application tells the school you are waiting for a response. Furthermore, federal student loans have better repayment and forgiveness situations due to divorce, death, or loss of a job.
The rules recently changed to open the period for completing the FAFSA for the next school year. The 2018–2019 FAFSA form was opened for submission on October 1, 2017. Grants are often awarded on a first-come, first served basis. You need to do this NOW.
Apparently, accurately completing a FAFSA is easier said than done. The Department of Education reports that 91% of FAFSA forms contain errors which can result in paying more for college. Some common mistakes: 1) putting your best foot forward, 2) procrastinating its completion, 3) including retirement accounts as investment assets, 4) including business assets, 5) counting parent assets as student assets just because the student’s name is on the account, and 6) reporting on the wrong parent, if divorced.
I said at the beginning of this article that traditional college planning focuses solely on saving for college. We believe that it is incumbent on every family to take a more holistic, multi-year approach well before the child is ready to head off to college. But even if that wasn’t done, developing a strategy for cost reduction while in school and repayment of loans after graduation is just as important as saving. Isn’t the goal to get the child educated at the least possible out-of-pocket cost? Now is the time for a plan of action to improve your chances of achieving that goal.
It is important for everybody to complete the Free Application for Federal Student Aid (FAFSA) if only to become eligible for Direct Student Loans. Even if you are adamantly opposed to borrowing money to pay for school, you probably should consider becoming eligible to do just that.— Scott Neal
Scott Neal is President of D. Scott Neal, Inc. a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. Write to him at email@example.com or call 1-800-344-9098.