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Paying for the Skyrocketing Cost of College

| December 04, 2016
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College Planning

I get a number of questions from clients about how to save for college, sources of financial aid, and parents wondering if they should apply for financial aid using the FAFSA form.  The Free Application for Federal Student Aid (FAFSA) form is open early this year and is available now.  So here are a few thoughts about helping pay for your children’s skyrocketing college costs. 

 

  1. There are several sources of aid when it comes to help paying for college
    • US Federal Aid – this takes the form of Pell Grants that do not have to be repaid, as well as Direct Stafford and PLUS Loans which do have to be repaid, and Work Study
    • State Aid – here is a link for additional information about the state of Washington: US Department of Education
    • Aid from the college or institution – these are grants or scholarships offered by the school. Some schools have a special form or application to apply.
    • Aid from non-profits or private organizations. Here is a link to a scholarship finder: US Dept of Education Scholarship Finder
    • Private loans – higher loan limits, higher interest rates, not eligible for public service loan forgiveness
  2. There are two primary types of aid
    • Need based aid that depends on the finances of the student and parents
    • Merit based aid that is given to students based on athletics, music, or grades
  3. To calculate if a student will qualify for aid, the cost of attending the school minus the Expected Family Contribution results in the financial need. The higher the cost of the school or the lower the family’s Expected Family Contribution, the more likely the student will qualify for financial aid.
    • The Expected Family Contribution is calculated using a formula based on the parents’ income and assets divided by the number of children in college. Also included are the student’s income and assets.
  4. To qualify for need based financial aid, the student and parents must complete the Free Application for Federal Student Aid (FAFSA) each year the student attends college. The FAFSA is now available starting on October 1, 2016 for the 2017-2018 school year.  The deadline is June 30, 2017.  Plan to fill out the FAFSA as soon as possible after October 1st of the student’s senior year of high school and each year thereafter because money is distributed on a first come, first served basis and a large portion of the money is distributed in the first 3 months.  Try to complete your FAFSA by the end of December.  It should take less than one hour to complete the FAFSA form if you have your tax returns and statements handy.  Try to use the IRS Data Retrieval Tool within the FAFSA form to upload your tax information.  This will reduce the likelihood that your FAFSA is selected for verification which saves the family time and hassle.
  5. Parents with college bound children often underestimate their chances of qualifying for need based financial aid. They think, erroneously in some cases, that their income or assets are too high and this will make them ineligible.  Unless the parents earn more than $350,000 a year, have more than $1 million in reportable assets, have only one child in college and that child is enrolled at a public college, they should still file the FAFSA.
    • Keep in mind, eligible/reportable assets do not include your primary residence, nor do they include retirement accounts such as 401k and IRAs. Eligible/reportable asset do include, cash, savings, value of a business or farm, rental properties and secondary residences, non-retirement investment accounts, 529 plans. (the 529 is considered an asset of the parent, not the student, which carries a lighter burden in the calculation)
    • Students from wealthier families may qualify for aid at higher cost colleges or when they have siblings also enrolled in college
    • Consider using the FAFSA4caster to see if you might qualify for need based financial aid before completing the FAFSA: FAFSA4caster
  6. Take time to make sure you are filling out the FAFSA form correctly. This means using the student’s FSA ID number (not the parent’s), making sure the student’s information is entered in the student’s section, and the parent’s information is entered in the parent’s section.  I know that sounds simple but it’s easy to mess up.  Also, make sure that when you are reporting assets, that you are only reporting eligible assets.  This means you do not have to include your primary residence and retirement accounts as mentioned earlier.  Try to avoid errors and omissions on the form which can lead to delay.
  7. The Direct Stafford Loan is a low interest Federal loan for both undergraduate and graduate students who are enrolled in college at least half time. This is a loan in the student’s name.  The maximum amount of a Direct Stafford Loan is:
    • Freshman $5,500
    • Sophomores $6,500
    • Juniors $7,500
    • Seniors $8,500
    • If a student takes more than four years to obtain a bachelor’s degree, and the majority do, the most that an undergrad can borrow is $31,000.
  8. Direct Stafford Loans are either subsidized, which means the government pays the interest while the student is still in school, or unsubsidized which means the student is responsible for paying all the interest that accrues from the date of the first disbursement until the loan is paid in full
  9. Parents can borrow additional federal dollars through a Direct PLUS loan. The PLUS loan is an unsubsidized loan that allows the parents to borrow the difference between the cost of the university and the student’s financial aid package which includes any merit based aid (grants and scholarships) and need based aid (Direct Stafford Loans)
  10. Students should avoid borrowing more than one year of estimated annual income post-graduation. For example, if the student’s expected annual income upon graduation is $40,000 per year, try to avoid borrowing more than $40,000 for college. Parents should avoid borrowing more than they can afford to repay in 10 years or by retirement whichever comes first. When a student borrows two times annual income, they put themselves at high risk of default.
  11. Students who transfer or change majors will take one to two additional semesters to graduate which can mean more debt. The parents and students should sit down and calculate how much the student loan debt will cost to repay (there are plenty of free on line loan calculators).  If the student can estimate first year annual income, and then formulate a budget for rent, utilities, transportation, and student loan payment, it can be a major eye opener.  This can help promote part time employment while going to college, or even outside programs like Military Aid or public service loan forgiveness for certain occupations such as education and medical.
  12. There are a number of strategies for maximizing need based aid. These include minimizing or deferring income (such as using a deferred comp plan or avoiding capital gains); reducing reportable assets such as cash, secondary residence, and investments in non-retirement accounts; saving in the parent’s name not the child’s name or using a 529 plan; and spending student assets before parent assets.
  13. Here are a few tips for winning scholarships:
    • Start searching for scholarships sooner, such as summer between junior and senior year
    • Apply for all scholarships for which you are eligible which gives you more chances to win
    • Pursue smaller scholarships such as small awards and essays – seek help from a teacher if you have trouble writing essays
    • Clean up your on line presence – if you don’t want your grandmother to see it, don’t post it
    • Beware of scholarship scams

Source: Mark Kantrowitz, Cappex.com

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Past performance is not an indication or guarantee of future results.

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