By FPA member Amy Jo Lauber, CFP®
Last Updated: February 27, 2012
The Pew Research Center report “Is College Worth It?” finds that adults who have graduated from college estimate, on average, they make $20,000 more per year than non-graduates because of their degree.1 “Colleges are big business,” says Ryan James of College Assistance Plus, a firm specializing in the financial aid process. "In life, families are finding they have three major financial decisions: buying a home, planning for retirement and now paying for college education."
According to a study by Fidelity Investments, “Even as they face the difficult reality of paying for college, a growing majority (73 percent) of parents surveyed don’t want to burden their children with hefty student loans, with most (61 percent) who still agree that it is a parent’s obligation to pay for their children’s college completely.” Seventy-seven percent of parents still believe, however, that children won’t appreciate college as much unless they share responsibility for paying for it.2
So it comes as no surprise that most families want to improve the possibility of having some of the economic burden presented by college expenses covered by financial aid. But there are many myths to the financial aid process, so parents need to become more aware of facts. “Many believe that saving too much will decrease their chance of receiving aid, while others believe that not saving at all will ensure all of their financial needs will be met,” says David Juliano in his article “Financial Aid Pie: Getting a Big Slice” in the August 2011 edition of Financial Planning magazine. “With higher-net-worth clients in particular, the conventional thinking is that aid won’t be available at all.”
Financial aid has two categories: needs-based and merit-based. Since this article focuses on financial aid rather than scholarship opportunities (of which many exist, especially in private colleges that maintain foundations and endowments), I will focus on needs-based aid. Among the needs-based, there is both federal and institutional methodology. The Free Application for Federal Student Aid, or FAFSA, is a needs-based federal program used by most colleges and universities. Federal methodology typically factors in the number of family members, children in college, earned income, and assets. Keep in mind that only 5.64 percent of parental assets are included in this formula and typically home equity and retirement funds are exempt. Assets of the student factor in much more significantly into the calculation; some experts say as much as 35 percent.
The FAFSA can be completed as soon as (but no earlier than) January 1st of the year the child plans to enter college and must be sent to every college to which the student plans to apply. Most parents are advised to seek professional guidance regarding their assets and income – and how they may affect their child’s financial aid application – no later than the child’s junior year of high school.
Each college, upon reviewing the FAFSA, will take into consideration the cost of the school, what aid may be available, and determines the “EFC” or “Expected Family Contribution.” This figure is likely to be different from school to school, based on methodology used and aid available. Many parents believe that a public school may be more affordable, but that may not be the case if an aid package to a private school renders the Expected Family Contribution lower than the public school option.
The Institutional Methodology, used by as many as 300 colleges and universities (mainly highly selective private schools), relies on the CSS/Financial Aid profile, which asks for more details about the family’s financial situation, including retirement accounts and home equity.
The most important thing to keep in mind is choosing the right school based on curriculum, location, student life, values etc...not based price alone. Once you have a list of schools that seem most appropriate, Juliano suggests using a software program called Strategee’s Smart Search, which enables a family to compare different schools side-by-side, “including the likelihood of admission, estimated cost, aid formula used by the school, family expected contribution and percentage of need met.” Every application and situation is completely unique; don’t make assumptions, good or bad. Do your own research, get professional guidance, and go accordingly.
Parents and students need to bear in mind that aid comes in the form of grants, scholarships and loans..the latter needing to be repaid. There are many programs to help a student pay down student loan debt in a reasonable manner and, in some cases, have the debt forgiven. Bruce Campbell, who has 20 years of admission and financial aid experience in college settings, says, “Student loans have been getting a lot of attention these days. Uncle Sam, citing potential bank abuses and possible inefficiencies, took over the industry in 2010 through the Direct Lending program.”
There are several repayment options available including extended, graduated, and income-based programs as well as loan forgiveness options for graduates that teach in low-income areas, work in public service and many other categories (read “Education Funding: Before, During and After College”). Campbell also mentioned a special federal loan consolidation program that started January 2012 that offers borrowers a .25 drop in interest rate for consolidating their student loans, plus another .25 for setting up direct payment from a bank account. Campbell references the National Student Loan Data System where students may obtain the terms and status of their loans as well as FinAid and National Association of Student Financial Aid Administrators.
FPA member Amy Jo Lauber, CFP®, is president of Lauber Financial Planning in West Seneca, NY.
1 The Journal of Financial Planning, July, 2011
2 Fidelity Investments 4th Annual College Savings Indicator Executive Summary of Key Findings