Did you know that …
· Saving for college is the #1 worry of families with children?
Yet only 17% of families are saving for college expenses.
· Your financial aid package may vary depending on the type of college chosen?
Public universities typically follow FAFSA guidelines, while private schools may use the CSS Profile or consensus groups for financial aid awards.
· Colleges want $0.47 for every dollar earned over $100,000 for married couples filing jointly?
For families with above average income, that is a real concern.
Within this article, I hope to alleviate some of the concerns you have about funding your child’s or children’s college expenses. Specifically, I’m tailoring the article to parents of high school students who are college-bound. For general college saving strategies, sign up for my free email series with valuable college savings tips.
I recently had the privilege of attending an in-depth training on college planning, taught by Joe Messinger of Capstone College Partners. Below are five take-a-ways from the session that should be considered as your child prepares for college.
1. Honor the deadlines
Many universities have November 1st or November 15th early action deadlines. Early action usually refers to nonbinding application programs, so your child may apply to multiple schools by the early action deadline. Early decision is more stringent and binding, which means you only apply to one college and go to that college if admitted.
The Free Application for Federal Student Aid (FAFSA) just became available on October 1st. It’s imperative to complete the FAFSA and any other financial aid applications by the same early action deadline. Many colleges – except elites such as Harvard and Yale -- are vying for top students. If your son or daughter is admitted early, financial aid officers can make your aid package more attractive if you submit the FAFSA in conjunction with the admissions application.
2. Seek a pre-approval amount
Mortgage pre-approvals are common. Loan officers can quickly gauge how much home you can afford. When you are sending your child to college, you are making an average investment of $100,000 to $300,000 per child. Shouldn’t you have a similar pre-approval process for college costs so you and your child don’t get in over your heads?
Selecting a college is akin to shopping. Set a budget before your child decides on a particular university; sticker price isn’t a valuable measure. Instead, figure out the net cost after financial aid, which includes scholarships, grants, and need-based aid. Furthermore, as a general rule, your student should not take out more in undergraduate student loans than she or he expects to earn in the first year after college.
3. Understand loan nuances
Seven in ten college graduates have student loan debt. Our national student loan debt is crippling -- over $1.5 trillion. In fact, parents over the age of 60 are the fastest growing group of people paying off student loan debt.
The maximum Federal Direct Stafford loan principal amount is $31,000 over 4 years (consult this article for loan limits by year). These loans establish instant credit and offer a reasonable fixed interest rate -- currently 5.05% for undergraduates. They also allow your child to have financial “skin in the game.” Subsidized Stafford loans are need-based, and no interest is accrued until loan repayment begins. No more than $23,000 of the $31,000 maximum can be subsidized loans. On the other hand, any student can qualify for unsubsidized loans, and therefore, interest accrues immediately.
Parent PLUS loans are expensive. The fixed interest rate for the 2018-2019 school year is 7.6%, plus there is a loan origination fee exceeding 4%. Instead, consider tapping into a Home Equity Line of Credit (HELOC) if you have substantial home equity, have a strong credit score, and are insistent on borrowing at a lower cost.
Private student loans are not need-based and can be borrowed by the student. Nonetheless, a co-signor is typically required and lenders have strict qualifications. This LendEDU article examines the differences between Parent PLUS and private student loans in more detail.
4. Know how aid is awarded
Income is the most heavily weighted item within the FAFSA to calculate your Expected Family Contribution. When you are submitting the FAFSA in your child’s senior year of college, consider income from the prior tax year. If you’re submitting the FAFSA now, your point of reference will be the 2017 tax year. For fall 2019 applications, use the 2018 tax year data. All families should complete the FAFSA, regardless of whether you think you will qualify for need-based aid. Many scholarships require it, and financial circumstances may change.
Deferring income to the following tax year or increasing expenses in the current tax year is a great strategy for small business owners or self-employed individuals who have control over these items. Your Expected Family Contribution should hold relatively constant throughout the undergraduate years unless your situation changes drastically due to change in income, job loss, death, or divorce.
Merit-based awards consider your child’s test scores, GPA, and extra-curricular activities from freshman, sophomore, and junior years of high school. Your child should put her best foot forward in the application process. And remember to discuss the importance of finishing undergraduate college quickly, since many renewable scholarships only last four years.
5. Have a back-up school in mind.
I applied to six colleges. One of my “reach” schools admitted me but wanted full sticker price, while another “reach” school waitlisted me. Four were easy admittance, but only one offered the whole package: Saint Louis University. I instantly felt comfortable during the campus tour and knew I could thrive academically and socially. The half-tuition scholarship sealed the deal for me and my family.
If your son or daughter is begging to go to a particular school that is out-of-reach financially or academically, insist that he or she apply to more than one college. Consider these resources to explore other colleges that may be a good fit:
Except for elite schools like Princeton, Stanford, or MIT, colleges typically incentivize the top 25% of an incoming class. For example, University of Alabama offers a grid system for merit-based scholarships applicable to out-of-state students. They award scholarships to students with a 3.5 GPA or higher who have scored at well on the ACT.
Affluent families who send their children to elite universities may have no financial aid whatsoever, with only 3% of students receiving merit scholarships. All admitted students are academically ahead at these universities, and the schools have substantial endowments available to help economically disadvantaged students. Actively research graduation rates and starting salaries for your child’s chosen career to uncover if the “premium” associated with an elite school is really worth it financially.
I’ve only skimmed the surface. There are several intricacies to college funding, and most financial advisors are simply not discussing them.
Within the next few months, my firm WorthyNest® will be introducing a new service offering specifically tailored to parents of college-bound high school students. I’ll show you how to pay for all four years of undergraduate college with a combination of assets, cash flow, student loans and tax strategies. Your child can graduate with manageable student loan debt without robbing your retirement. Sign up for my free College Savings Checklist and you’ll be the first to know when our new service offering is launched.
If instead you would rather receive holistic advice on a variety of financial issues affecting your family, I’d love to work with you. Schedule a complimentary, initial consultation now.
Deborah L. Meyer, CPA/PFS, CFP®is a fee-only financial planner and investment advisor based in St. Charles, Missouri who works with clients nationally. As the owner of WorthyNest, Deb helps Christian parents build wealth in a way that aligns with their values and is a 2018 recipient of the AICPA’s Standing Ovation award. Find Deb discussing finance on LinkedIn, Facebook, or Twitter.