Most people understand the importance of seeking help with their retirement planning or appreciate the value of investment management, but college planning is an often neglected piece of the financial puzzle. The average graduate leaves college with huge student loans (1) and parents also take on debt to cover the cost of higher education. According to a Sallie Mae report, 35% of parents with children in college take out loans, (2) and that doesn’t account for those who dip into their retirement savings to fill in the gap. Education is an investment, so why not get guidance, just as you would for other financial goals? Here are ten questions to ask as you start thinking about college planning:
1. What Will College Cost?
College is ridiculously expensive. Most of us dream of our kids going to a great school and getting a solid foundation for their future career, but have you considered how much of an investment it will take to get them to that point? The reality is that it will be different for every family and will depend on a number of factors such as your category, your finances, your choice of school, the calculation methodology of the school, number of students in college at the same time and a few others.
For the 2015-16 academic year, an average full-time student was looking at a bill of at least $22,750 (for a public college) and as much as $45,760 for a private institution. (3) The costs will vary depending on room and board and other educational expenses and could be much higher, but either way, it’s a significant amount of money. And since college costs have risen an average of 2.4% a year for private schools and 3.5% for public colleges over the past ten years, we can expect to shell out more as the years go on, certainly for the near future but could change dramatically in the future with technology changes.
2. When Should I Start Planning?
Just as with any other investment, the earlier you save the better. Regardless of which financial vehicle you use (and you should consult an experienced advisor on the best ones for your family), you want to take advantage of compound interest. Every little bit will help when it’s time to write that first tuition check. Many families don’t start thinking about college until senior year, which often leaves them scrambling. If you feel like you are behind, start making a plan now to take advantage of the time you do have. The year your child is born is not too early to start saving for college.
3. How Is Financial Aid Determined?
Since you want to cut down on how much you pay out of pocket, you’ll need to know what goes into the financial aid application process. Here are the nine factors that the federal student aid board takes into consideration:
- Parental income
- Parental assets
- What type of asset
- Ages of the parents
- Number of children in college simultaneously
- Marital status of parents
- Assets in your child’s name
- Child’s income
- Schools on your child’s list
Keep in mind that these factors are not all weighted equally. For example, income has a much greater impact than assets and it would be advisable to consult a Financial Professional that specializes in College Planning BEFORE choosing which financial vehicle to start using.
4. What Is Expected Family Contribution?
The FAFSA, or Free Application for Federal Student Aid, is the method used to potentially qualify for financial aid at your child’s college of choice. When you fill out this application, you will be asked to provide your financial information, which will then be calculated as your Expected Family Contribution, or ‘EFC’.
There are three types of aid available:
- Need-Based Aid: Colleges will offer need-based aid depending on the family’s financial formula and choice of school.
- Merit-Based Aid: To qualify for merit aid, students must show academic achievement, high test scores, and/or above average talents or accomplishments.
- Negotiated Aid: To qualify for potential negotiated aid there needs to be advanced planning in Sophomore and Junior years of high school.
Note: Your Financial professional should be able to fairly accurately estimate your EFC many years before college so as to maximize your family’s specific situation.
5. How Can I Maximize The Financial Aid My Child Receives
The FAFSA is complicated, but if you plan ahead you can change your outcome by making adjustments. For example, your cash reserves affect your eligibility and the type of account they are in, but your debt doesn’t. Consider using your excess cash to pay off your high interest debt, therefore reducing the amount of savings you have to declare on your FAFSA. Be careful though because it could be costly to not have a decent emergency fund.
In most circumstances, don’t put assets in your child’s name. There are a number of reasons for this, including an increased EFC. Your child’s individual assets will count for 20% for aid purposes, but yours will only count for 5.64%. (4)
Don’t leave this planning to your child’s junior or senior year in high school. This planning should be done when STARTING to save
6. What Difference Does College Choice Make For EFC?
One of the main determinants of financial aid is the college choices on your child’s financial aid application. As an example, state universities rarely give nonresidents need-based financial aid, and many high-end colleges don’t offer merit scholarships to high-income families. For private institutions, much of the aid is in the form of loans, which only leads to a heavy debt load after graduation. It is vital to know which methodology each school uses when estimating financial aid. A college planning specialist should be able to tell you which methodology is used.
7. How Do I Choose The Right College?
College choice should not be taken lightly. It’s not about the most popular school or the location of the institution; it’s a matter of determining the most appropriate FIT for your child based on a number of factors. What are the student’s natural giftings, how does that fit in with career choices, what majors will I need, and only THEN do I look at possible schools that will match. Other things we should look at are: what % of students does the school graduate in 4 years, what is their financial aid mix, are there other students in college at the same time, expected starting salary and then how does that fit into the parents’ financial plan. That’s a lot of pressure to put on a teenager, but you don’t want your child to graduate with unmanageable debt.
When doing your research, compare colleges on an equal basis. Comparing apples to apples will give you a good evaluation of each institution’s strengths and weaknesses. Use a scoring system and gather as much information as you can.
8. How Much of My Retirement Am I Ready To Commit To College Expenses?
According to a Fidelity study, parents might plan to take care of 66 percent of college costs for their kids, but most of them are only set up to cover 27 percent by the time they send their children off into the great big world. (5) How will you make up for that difference? It can be tempting to dip into your retirement savings to help your child out, but that simple action could set you back years and make you miss out on the magic of compound interest. While a college education for your children is also a priority, there are many other ways to finance the cost without skipping your annual retirement contributions.
Remember – we can always borrow for college, but we cannot borrow for retirement.
9. What Are Some Other Ways To Finance College?
There are some overlooked strategies to ease the financial burden of college, including work-study programs, grants, and scholarships. If you are proactive, you can even save money by having a financial award negotiation strategy in place. This is why it pays to plan ahead!
10. Do I Have To Do This Alone?
College planning is arguably one of the most significant financial and parenting milestones you will face. There are more details than you know what to do with and it might feel like you are learning a new language. But because of its importance, you don’t want to make a mistake that could cost you down the road. It’s a wonderful teaching opportunity for us to teach our kids how to go through a decision-making process on important issues.
In a perfect world, you would love to write a check and send your child wherever they would like to go. But that’s not the reality for most parents. Today’s rising college costs make it critical for you to understand and utilize as many strategies as possible to reduce your out-of-pocket expenses.
At College Planning America, we specialize in every aspect of college preparation, starting as early as 9th grade or even the day the child is born. We walk you through the FAFSA, college choice, test prep, scholarships, and, of course, financial planning. Our team is committed to making college more affordable for parents and students. If you are ready to start planning for college, take our strategy quiz and schedule a no-obligation get acquainted meeting by emailing me at dcoen@sageviewadvisory.com or calling 800-814-8742.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his financial industry experience, he is a College Planning Specialist and has served on the advisory board of a national College Planning training organization. He works closely with individuals and families to provide them comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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(2) https://news.salliemae.com/files/doc_library/file/HowAmericaPaysforCollege2016FNL.pdf
(3) G. Kent et al., “The Condition of Education – Postsecondary Education – Finance and Resources – Price of Attending an Undergraduate Institution – Indicator May (2016),” The Condition of Education – Postsecondary Education – Finance and Resources – Price of Attending an Undergraduate Institution – Indicator May (2016), May 26, 2016, , accessed September 06, 2016, https://nces.ed.gov/programs/coe/indicator_cua.asp.
(4) https://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10089
(5) “9th Annual College Savings Indicator: Executive Summary of Key Findings,” 2015, , accessed September 6, 2016, https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/CSI-Exec-Summary-NATL.pdf.
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