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10/25/2012 6:00:00 AM
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.
The Journal of Financial Planning
, July, 2011