By May, the “long wait” is over for most high school seniors. They’ve heard from the colleges or universities they applied to and have made their final choice.
With a September destination locked in, there’s not a whole lot of learning going on in those last weeks of high school. Usually it’s a time for just showing up, having fun and saying goodbye to teachers and friends. Let Senior Week begin!
But not so for their parents and others who care for them. Their education may just be starting when it comes to getting smart about all the ways to pay for tuition, books, room and board. Hopefully, they’ve done some advanced planning, using 529 plans or other savings accounts to sock money away for the four (or more) expensive years to come. However, most families with college-bound children are not able to completely fund their kids’ educations. It’s been estimated that two-thirds of students borrow for college, having approximately $25,250 in debt by the time they graduate.
Recently the Consumer Financial Protection Bureau launched a new tool that shows the true cost of going to college. This financial aid comparison shopper calculates the “sticker price” for a person’s school of choice, how much someone will need to pay or borrow and if they take out a loan, how much they’d pay each month and what they’ll ultimately pay in interest. The tool, which is still in beta testing, also factors in what you and your parents can pay in cash, work study and taking out private loans. The tool and more information about CFPB’s “Know Before You Owe” program can be found here.
To learn about specific financial aid options, your should also visit the Department of Education’s (DOE) website. There you’ll find information about federal grants and loans, the eligibility and repayment terms for these various programs and how to apply for government aid. Get ready to incorporate a near unpronounceable acronym into your daily vocabulary: “FAFSA,” short for the Free Application for Federal Student Aid, is a form that must be filled out by all families seeking aid of any kind, whether it is a “free” grant, a work-study position, or a repayable student or parent loan.
The FAFSA results in a determination of your EFC, or expected family contribution (both what the parent and the student are expected to pay) toward the costs of college. The difference between your EFC and these costs is the portion of college expenses eligible for financial aid. You will receive a report with your calculated EFC, as will the colleges your child applied to. Each college also has its own system that will calculate possible aid. They will combine their results and the FAFSA results and will then send you a “student aid package” itemizing the sources of aid – both from the government and from the college itself – that the family is eligible for.
So far, so good. Having visited the DOE’s website, you’re ready for the process of applying for financial aid and have a solid understanding of the kinds of aid available. But inevitably you will have some “spillover” questions. You may want further information that speaks directly to your own financial circumstances, and the unique needs of your student.
So here are the most frequent “financial planning” questions that generally come to me, as a CFP® professional, once my clients have completed their intro course on college financial aid:
Don’t we make too much money to be eligible for financial aid?
This is a frequent misconception among families whose household income is above $100,000. Even at these levels, your student has a good chance of qualifying for the kinds of federal loans not based on financial need. If you have multiple children or are near retirement age, your eligibility increases. Furthermore, there is nothing to be lost by filling out the FAFSA, except possibly your patience and time.
Is there anything we can do to reduce our EFC?
It is possible to reduce your EFC. Because the EFC calculation does not consider the availability of home equity, insurance or retirement plans, you could use savings to pay down your mortgage or buy an annuity before applying for aid. You can also move your child’s UTMA (Uniform Transfer to Minors Act) custodial account to a 529 plan, since the amount considered available for family contribution is less for 529s than a UTMA. But don’t let the EFC tail wag the financial dog. These kinds of transfers have the effect of making your money less accessible to you should other needs arise. Generally, if the only reason you are taking these measures is to lower what your expected contribution toward college costs, it simply isn’t worth it.
The EFC that the government reports is much higher than we can actually provide! What should we do?
Don’t panic: most families are surprised at the amount they are “expected” to pay. Here’s where your college funding plan needs to get creative. Start looking for scholarships. Consider (cautiously) the possibility of private student loans or a home equity line of credit. See if you have insurance policies that allow you to borrow against the cash value. Check with your workplace benefits counselor to see if you can borrow against your retirement plans. But don’t draw money from any of these sources until you have talked with a financial professional.
How do we find scholarships? What about a scholarship search service?
Consider all your affiliations: professional, ethnic, racial, religious and organizational. Any of these may be sources of scholarship aid for your student. Search, too, for funds that are available for students pursuing a given course of study. A great website for searching for scholarships is http://scholarships.savingforcollege.com/. Be careful, however, of online search services that “guarantee” a scholarship for a fee or advertise that they have exclusive information on scholarship money. Many are fraudulent.
My parents put me through college and I graduated debt-free. Shouldn’t we do the same for our child, even more so in today’s economy with jobs so scarce and college costs so high?
This is the hardest question of all and depends on your financial situation, as well as your hopes for and sense of obligation to your children. I do, however, remind parents that their generosity does not always come without a “cost” to their child. If paying for college means retiring with inadequate reserves for basic expenses or long-term care, parents can end up being a financial burden to their kids.
There’s no doubt that venturing into the financial aid arena is not for the faint of heart. There’s a lot of information to absorb and a lot of decisions to be made. Don’t go it alone: get competent advice. Yes, the price you pay for this advice adds to the overall costs of college, but like the college degree itself, it is an investment worth making.