High school seniors are now in the process of getting acceptance letters to colleges.
When the thick envelope comes, there will be well-deserved joy, possibly followed by the dismaying thought on how to actually pay for those four expensive years.
Hopefully, parents will have done some advanced planning and saving for this major event. There are various strategies which can substantially ease the financial burden of higher education, some of which should be started many years before high school.
Before we discuss strategies, let’s review some key terms, as they say in school.
There are two major financial aid forms which could be completed. The first is FAFSA, the Free Application for Federal Student Aid. This has to be submitted to be considered for any federal financial aid. It can be completed as early as January of the child’s senior year in high school. FAFSA assumes that 5.64% of parental assets can be used to fund annual college expenses, while the assessed rate on the children’s assets is a much higher 20%.
A second form, called the CSS Profile, is required by an increasing number of private colleges and some public schools as well. Both FAFSA and CSS use family income and assets to determine how much the family can spend on college, and how much aid they might receive. CSS counts some family resources which are excluded by FAFSA, and assesses some assets at a higher rate, leading to a higher expected family contribution and less aid.
The Expected Family Contribution, or EFC, is the total amount the family is expected to contribute for college education in any given year.
Federal aid includes grants and loans. Grants do not have to be repaid. Loans either start accruing interest after college or during college, and do have to be repaid. Institutional aid includes the separate funds the college may give, including grants, scholarships, and work/study programs.
Each school may have its own Net Price Calculator, which will give an estimate of federal and institutional aid, and the total EFC, depending on your circumstances.
There are various options to save for college, including 529 Plans, Coverdell Education Savings Accounts and custodial accounts. These are described in College Savings Options by Lowell Lombardini Parker.
Based on how various items are classified on the financial aid forms, families can do some advance planning to maximize the potential aid. The following five strategies, in order of how early you can start them, could really help.
Consider having twins!
Having more than one kid in college at the same time can increase financial aid. The expected family contribution is the total for the family, regardless of the number of children in college at the same time. This means that, if you have two kids in school at the same time, the EFC per child will be cut in half. For example, if you were expected to pay $30,000 if you had one kid in college, you would be expected to pay $15,000 per kid, or $30,000 total, if two of your children were in college at the same time. The lower EFC per kid could lead to more financial aid.
Max out parental retirement savings
Neither FAFSA nor CSS includes parental retirement assets when calculating financial aid. This means that one very important way to increase financial aid is to put as much as possible into the parents’ retirement accounts as early and consistently as possible.
Pay down your primary mortgage
FAFSA excludes primary home equity from its calculations. A perfectly acceptable technique to decrease the amount FAFSA expects you to contribute to college is to use some of your liquid assets to pay down the mortgage on your primary residence. CSS does include home equity – the more home equity the more they expect you to spend. Various schools which use the CSS form may place limits on the amount of home equity they include in their own calculations.
Have money in parent’s name
Because FAFSA assesses parental assets at a much lower rate than the child’s assets, it makes sense to keep assets in the parents’ name. Custodial accounts are considered the child’s assets, and will be assessed at 20% each year for the EFC. It could be more beneficial to fund 529 Plans, which are considered parental assets, and are assessed at a much lower rate.
Avoid capital gains when kids are in college
Capital gains increase your adjusted gross income, which will mean a higher expected family contribution. If you have appreciated securities which you will use to fund college, consider selling them by December of the child’s junior year in high school.
These five strategies can each have a beneficial impact on the amount of aid your child may get. When combined, these strategies can really help finance your child’s bachelor’s degree.