The Pew Research Center report "Is College Worth It?" finds
that adultswho have graduated from college estimate, on average,
they make $20,000 more peryear than non-graduates because of
their degree.
1
"Colleges arebig business," says Ryan James of College Assistance
Plus, a firm specializingin the financial aid process. "In life,
families are finding they have three majorfinancial decisions:
buying a home, planning for retirement and now paying for
collegeeducation."
According to a study by Fidelity Investments, "Even as they
face the difficultreality of paying for college, a growing
majority (73 percent) of parents surveyeddon't want to burden
their children with hefty student loans, with most (61percent)
who still agree that it is a parent's obligation to pay for
theirchildren's college completely." Seventy-seven percent
of parentsstill believe, however, that children won't appreciate
college as much unlessthey share responsibility for paying for
it.
2
So it comes as no surprise that most families want to improve
the possibility ofhaving some of the economic burden presented by
college expenses covered by financialaid. But there are many
myths to the financial aid process, so parents need to becomemore
aware of facts. "Many believe that saving too much will decrease
theirchance of receiving aid, while others believe that not
saving at all will ensureall of their financial needs will be
met," says David Juliano in his article"Financial Aid Pie:
Getting a Big Slice" in the August 2011 editionof 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 articlefocuses on financial aid rather than
scholarship opportunities (of which many exist,especially in
private colleges that maintain foundations and endowments), I
willfocus on needs-based aid. Among the needs-based, there is
both federal and institutionalmethodology. The Free Application
for Federal Student Aid, or FAFSA, is a needs-basedfederal
program used by most colleges and universities. Federal
methodology typicallyfactors in the number of family members,
children in college, earned income, andassets. Keep in mind that
only 5.64 percent of parental assets are included in thisformula
and typically home equity and retirement funds are exempt. Assets
of thestudent factor in much more significantly into the
calculation; some experts sayas much as 35 percent.
The FAFSA can be completed as soon as (but no earlier than)
January 1st of the yearthe child plans to enter college and must
be sent to every college to which thestudent plans to apply. Most
parents are advised to seek professional guidance regardingtheir
assets and income - and how they may affect their child's
financialaid application - no later than the child's junior year
of high school.
Each college, upon reviewing the FAFSA, will take into
consideration the cost ofthe school, what aid may be available,
and determines the "EFC" or "ExpectedFamily Contribution." This
figure is likely to be different from school toschool, based on
methodology used and aid available. Many parents believe that
apublic school may be more affordable, but that may not be the
case if an aid packageto a private school renders the Expected
Family Contribution lower than the publicschool option.
The Institutional Methodology, used by as many as 300 colleges
and universities (mainlyhighly selective private schools), relies
on the CSS/Financial Aid profile, whichasks for more details
about the family's financial situation, including
retirementaccounts 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 listof schools that
seem most appropriate, Juliano suggests using a software
programcalled Strategee's Smart Search, which enables a family to
compare differentschools side-by-side, "including the likelihood
of admission, estimated cost,aid formula used by the school,
family expected contribution and percentage of needmet." Every
application and situation is completely unique; don't
makeassumptions, good or bad. Do your own research, get
professional guidance, and goaccordingly.
Parents and students need to bear in mind that aid comes in
the form of grants, scholarshipsand loans..the latter needing to
be repaid. There are many programs to help a studentpay down
student loan debt in a reasonable manner and, in some cases, have
the debtforgiven. Bruce Campbell, who has 20 years of admission
and financial aid experiencein college settings, says, "Student
loans have been getting a lot of attentionthese 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, andincome-based programs as well as loan forgiveness
options for graduates that teachin 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
startedJanuary 2012 that offers borrowers a .25 drop in interest
rate for consolidatingtheir student loans, plus another .25 for
setting up direct payment from a bankaccount. Campbell references
the National Student Loan Data System where students
mayobtain the terms and status of their loans as well as FinAid
and National Association of Student FinancialAid Administrators .
FPA member Amy Jo Lauber, CFP
®
, is president of Lauber FinancialPlanning in West Seneca,
NY.
1
The Journal of Financial Planning
, July, 2011
2
Fidelity Investments 4th Annual College Savings Indicator
ExecutiveSummary of Key Findings