Most of us know the basics when it comes to college financial planning. Save money every year in a low-cost 529 plan, such as Colorado’s CollegeInvest Direct Portfolio. Make use of the American Opportunity Tax Credit, which offers $2,500 toward college costs. But what if you don’t have enough saved for college for your high school aged child? According to college funding expert Lynn O’Shaughnessy, take these steps keep costs down even if your college savings has fallen short.
Answer the Financial Aid Eligibility Question. The first step is the Expected Family Contribution (EFC) calculator on the College Board web site. This calculator considers your assets, income, family size, and other factors and estimated how much you would be expected to pay every year for college. Almost all public universities use the EFC.
If your EFC is higher than a college’s annual cost of attendance, it’s unlikely that you will qualify for need-based financial aid. On the other hand, with a low EFC you could focus on universities that meet the financial need of its students with minimal loans. The College Board site has a college look up feature that shows the percent of demonstrated need met by each college.
Use Net Price Calculators. Every college has a net price calculator on their web site that provides personal estimates of what one year of college will cost. The good ones use detailed financial information, including on assets and income. This is particularly important with private schools that may use customized aid formulas. Not only can the calculator estimate the need-based aid that your student could qualify for, but merit aid can be estimated using your child’s grade and test information. You also can play detective with the calculator to see how a higher ACT or SAT score could affect merit aid. They are so helpful I would not recommend applying for a college without first using its net price calculator. Finally, beware of the bad calculators that collect very basic information with rough income ranges rather than the details.
Understand How Investments Affect Financial Aid. Many self-identified college finance experts try to structure your assets to maximize financial aid. Usually they are commissioned salespeople selling expensive products. In most cases avoid moving funds into non-qualified variable annuities or cash value life insurance in order to maximize merit aid. A good rule of thumb is that 5 to 6 percent of your assets held in college savings and other non-retirement accounts will be used in determining how much your family can spend on college each year. Don’t let this formula prevent you from saving for college.
Know the Main Source of College Money. While there are a few high profile, lucrative scholarships such as the Boettcher for Colorado residents, the more common source is the institution itself. If you have demonstrated need, look for schools that address the funding gap through grants. If college funding formulas do not show a financial need, look for schools that make merit aid a priority. Private school merit aid has reached a historic high with an average tuition discount at more than 58 percent. Keep in mind this discounting phenomenon generally does not extend to the most competitive universities.
Avoid the Trophy University Issue. If money is an issue when it comes to paying for college, be actively involved in your child’s college selection process from the beginning. Most 17 year-olds are not equipped to make a decision that a $300,000 education is better than a less expensive choice. It’s hard to fathom the repercussions of saddling themselves and their family with crippling student loan debt. Too often published college rankings, peer influences, and name recognition can hijack the college selection process.
Studies by Stacy Dale and Alan Krueger establish that there is little lifetime earnings advantage for children of middle class and affluent families in attending elite universities. Through using net price calculators you can formulate a reasonable estimate of how much a college would cost your family. If you want to save a lot of heartbreak, cross schools off your list that you are unwilling or unable to cover before submitting an application.