Saving for College: Why You Need to Plan beyond Financial Aid

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Saving for College: Why You Need to Plan beyond Financial Aid

By: Kevin Worthley, CFP®

Autumn signals the beginning of college preparation season, where parents and their high school students gather information about potential college choices, prepare essays and applications, and of course, consider how to pay for it all. Mention college-planning to parents and their first thought is usually how to get (more) financial aid.

While financial aid is indeed important to many families, it shouldn’t be the only focus in funding a college education. Parents who are new to the college financing game are often surprised to learn that financial aid awards include both grant/scholarship money and student loans. In fact, for many students there are often a higher percentage of loans versus grant money in the award. Student loans are still considered financial aid (at least by the government and the colleges) due to the low interest rates charged and the deferred repayment provisions.

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Most financial aid is granted based upon the “need” of the family, which is determined by the  Cost of Attendance for the particular school minus the Estimated Family Contribution or “EFC.” The EFC is calculated by an assessment of the parents’ and student’s assessable income and assets via one of two different formulas depending upon the type of school.

Often, a family is surprised to learn that despite qualifying for a certain amount of aid based on a level of need, most schools only award a percentage of that, often in the area of 70 percent t0 80 percent, leaving the remaining “Unmet Need” of 20 percent to 30 percent to be borne by the parents and/or student, in addition to the EFC. Many parents are also shocked to learn that while incomes of $100,000 – $150,000 may be just enough to meet living expenses, these incomes often disqualify the student from most need-based aid other than loans, yet the EFC obligation each college year may be $20,000 or more.

What parents often miss in college planning is how they will find the means to pay this EFC and Unmet Need. Families often don’t have the funds set aside and usually turn to the many loan programs available. While potentially solving the immediate problem, accumulated college loans can disrupt present family budgets (some loan repayments begin immediately) as well as future cash-flows for both the parents and eventually the students. There are many situations where students start their careers buried in loan payments, hampering plans to start families, buy first houses or even make ends meet in basic living expenses with entry-level earnings.

For the parents, the burden of their children’s college expenses can severely disrupt current family finances and jeopardize retirement savings contributions, retirement goals and other financial plans.  For higher income families, the situation is sometimes worse, as these families generally pay the full price, get little to no financial aid (absent any merit scholarship awards), are taxed in a higher bracket and generally don’t qualify for any education tax breaks. So, financial aid planning is a good first step, but certainly not the only one. A comprehensive plan on how to pay the EFC, the Unmet Need, the loans used, and still meet other present and future financial objectives should be part of every family’s college preparation.

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Kevin Worthley is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. He enjoys fly fishing, other outdoor activities and is a dedicated yoga practitioner. Contact Kevin for help on virtually any financial advice need.

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