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Finance 101: A Lesson in Helping Your Student Pay for College

You think back fondly on college days--studying in the quad, late-night pizza, tailgating for the big football game, dorm living, tossing your graduation cap in the air...beyond the lifelong friends and the parties and fun, college helped you get to where you are today. Looking ahead, your child may be planning on following in your footsteps and will be receiving that admissions letter of acceptance sooner than you think.

Unfortunately, it’s getting increasingly more difficult to afford college. Formal higher education is the institutional stamp of approval that will grant your child the entrance into the workforce, but that stamp comes at a steep cost that has increased more than 500 percent since 1985. Student loans end up being the solution for most college-bound students which come tied to their own set of issues; 43 million Americans hold student loan debt at a collective total of $1.26 trillion as of Q1 2016. Plus, approximately 43% of Americans who took out federal student loans are not making any payments.

There are scholarships and grants that lower the price tag of higher education, but they also make navigating the complicated world of financing college even more challenging.

Take these tips into consideration as you help your student apply and prepare to pay for college:

Know your budget.

Like purchasing many large, expensive items like a car or a house, it’s wise to know your budget going into the search for the right fit. If you don’t, you run the risk of test driving luxury cars out of your budget or touring houses outside of your price range and then what you can actually afford seems not good enough. The same goes for schools. If your family cannot realistically afford XYZ College then don’t tour the campus. And sure, a full ride scholarship would be great...but isn’t likely. Narrow down choices within a reasonable range (and with 4,726 degree-granting institutions in the U.S. there are indeed plenty of choices), and then help your student decipher what’s important to them in relation to what’s offered at the options from there.

Start acknowledging affordability by running the numbers through the Expected Family Contribution (EFC) calculator to learn what colleges are likely going to say your contribution should be. If you calculate a high EFC number (meaning you are wealthier), you still won’t want to pay full price for school. In that case look for schools that are generous with merit scholarships for students (regardless of financial need). If you calculate a low EFC rate, look for schools that have substantial financial aid.

Understand the financial breakdown.

Your student likely won’t be paying the total sticker price for a year’s tuition at college. That means you’re looking at the total net price (sticker price minus total aid). When your child receives the acceptance letter with the financial aid award breakdown (scholarships, grants, etc.), it can be difficult to decipher what means what. For example, the line item “financial aid” can be used in the place of what are actually loans. Then there’s often a question around how much Expected Family Contribution there is and how it can be applied to what--is it just tuition or does that include room and board? Avoid confusion preemptively with a secure online tool like College Abacuswhich allows for the comparison of net price estimates, given your personal situation, before financial aid is actually determined.

Expand the search.

Don’t be afraid to expand the search parameters for colleges. Some colleges are so popular they see such high applicant numbers they can afford to be selective in who they accept and who they offer money to, resulting in less generous overall financial aid. Schools with lower application rates are usually small, lesser-known, private colleges who may have higher reserves of financial aid to grant.

Learn from an expert.

Make an appointment with the financial aid offices at the colleges your student is considering to gain a better understanding of how they will calculate financial contribution. They’ll be able to tell you if elements like home equity will be factored in. (This is not information required for the FAFSA, but is required information at some private colleges.) They will also be able to answer any specific questions that apply to your situation that a general college financial FAQs webpage cannot answer. Additionally, a meeting with your financial advisor well before your student pays that first semester bill is wise to ensure you won’t be met with any surprises when taxes comes due.

Resources

https://trends.collegeboard.org/college-pricing/figures-tables/tuition-and-fees-and-room-and-board-over-time-1

http://www.bloomberg.com/news/articles/2013-08-26/college-costs-surge-500-in-u-s-since-1985-chart-of-the-day

http://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10064

https://www.newyorkfed.org/microeconomics/hhdc.html

http://www.marketwatch.com/story/every-second-americans-get-buried-under-another-3055-in-student-loan-debt-2015-06-10.

http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.