30 Sep Understand College Financial Aid
The decision to attend college is one of the largest that most families encounter. Unfortunately for many not enough consideration is given to issues such as financial aid, familial cash flow and the return on investment of attending each particular school.
Financial Aid – Federal Student Aid (FAFSA)
The financial aid process is unique and for often seems complex. Any student that is planning on being in college next fall should complete and submit the 2020-2021 Free Application for Federal Student Aid (FAFSA) as soon as possible. This document becomes available on October 1st each year.
The FAFSA takes into consideration a wide range of factors and should be completed even if a student has not been eligible for past need-based assistance. This is true because as costs of schooling rise and families potentially have more than one student in school the calculations can differ dramatically. Because there is no punishment for completing the form students and families leave themselves options.
However, understanding how the system works is important. For those seeking aid the form takes into consideration two primary factors: a family’s assets at the time of submission AND taxable income for the two years prior. The key understanding here is that debt (i.e. mortgages, credit cards, personal loans, etc.) are not included in any of the calculations. The read through on this is that for many paying down debt, which is a good financial planning strategy, has the added benefit of increasing your eligibility on FAFSA because you are simultaneously lowering your asset base.
Financial Aid – Understanding Grants & Other Benefits
Families should also take the time to fully understand the nuances of how schools handle the calculation of the expected family contribution (EFC). This figure outlines how much a school expects the family to contribute to the overall cost of schooling.
What many families don’t realize is that universities often use language and grant offerings to make the school in question appear more affordable than they really are. For example, most schools front-load grants to incoming Freshman in order to help “get them in the door.” Additionally, some schools reduce the level of any grant by any outside scholarships that the student has earned. This practice effectively makes your net-cost unchanged despite the hard work that a student has done to earn the award!
Plugging Holes with Other Assets
Families should also be particularly aware of how to fund any gaps in tuition that are not covered by grants or other benefits. This can be as simple as understanding the tax ramifications of using funds in a taxable account (brokerage, trust, checking, savings, etc.) versus those in a dedicated education account. Generally speaking, using up the assets in a dedicated education account such as a 529 account should be a family’s first bucket to pull from.
While it is an uncomfortable topic family also need to look in the mirror to see what is truly affordable. We see too many families that are trying to put multiple children through school in an effort to keep their children out of debt. While this is noble, and perhaps what their parents did for them, the ramifications for their retirement are often significant. It is a wonderful blessing for parents to pay for school but doing so should only be done after confirming that it will not negatively impact their future. After all, your children have longer to recoup/save than you do.
Fit is Important
When looking for colleges most families and prospective students look for a good “fit.” Unfortunately, for many young adults this means what school looks the most fun and/or were recommended to them by a guidance counselor. While counselors are a great resource for generating a list of school’s further “fit” consideration needs to be given.
Parents of prospective students should help educate their children about the cost of attending the schools on their list as well as their employment prospects upon graduation. There is no right way to do this step but making sure students are aware of how school is being paid for and the trade offs for them in the future (i.e. delaying a home purchase because of debt, etc.) is important for their future development.
While these are not the only items to consider the sooner, families begin thinking about school the sooner they are able to help develop a plan.