Financial Planning for College Bound Families – 3 Questions You Need to Answer

by | Aug 26, 2022

Some colleges now cost over $80,000 a year.  But don’t worry, the government will provide you with student loans to fund most of it with minimal regard to your credit score or future earning potential.  What can go wrong?  

The average student is now graduating with almost $40,000 in student loan debt and parents are taking out equity lines and raiding their retirement assets to pay the difference. 

Your financial plan needs to incorporate the best way to pay for college.  Doing so will not only minimize your child’s student loans but also protect your assets for retirement.  Answering a few questions will get you moving in the right direction.  

What do colleges expect you to contribute towards tuition?

Colleges call this your expected family contribution, or EFC.  You take the cost of tuition less your EFC and you get your financial need.  If you demonstrate a financial need that means your child qualifies for financial aid.  As a result, your child is eligible to receive need-based grants, scholarships, work-study, and student loans as part of their financial aid package. 

How do you calculate your EFC?  Big Future can offer some general guidance but we also recommend going directly to the college’s website.  Most have a “Net Price Calculator” that backs out student loans to give you a true cost.      

How much can your family afford?

Now that you have a general idea of what your annual cost will be, the next question is how much you can afford to pay.  All too often we hear of families taking out home equity loans, liquidating their retirement assets, or taking out loans to pay the cost.  This can often jeopardize your retirement plan and ultimately increase the cost of tuition after paying taxes and interest.

You should take a personal assessment of your assets earmarked for college, cash flow, and available educational tax deductions and credits.  If there remains a balance then determine the best way to pay it.  Starting at community college or taking a Stafford Loan could help defray the cost.  Another solution would be to target colleges that offer the most financial aid. 

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Which schools will offer you the most aid?

Up to this point, we have been focusing on need-based financial aid.  This type of aid is calculated based on the income and assets of the family and reflected in your EFC.  But there is another type of financial aid that can help pay for college, merit aid.

Merit aid is based on your child’s academic, athletic, musical, and other merits and comes in the form of scholarships that don’t need to be repaid, unlike student loans.  You could make over a million dollars a year and still qualify for this type of aid. This is why we always recommend applying to schools that offer merit aid and ones where your child ranks in the top 20% academically.  A great resource that can help with this is Niche.          

The one thing that astounds parents and students, often late in the college admissions process, is finding out that almost all of the elite colleges in the country do not offer academic merit aid.  You get aid at those institutions only if you demonstrate a need for it, which means your EFC has to be less than the sticker price.  Otherwise, you’ll be writing a check for the sticker price.  This is why college selection is so pivotal in the planning process.

A college education is an enormous investment.  One that can pay tremendous dividends if planned for correctly.  Find a financial advisor who can guide you on how to pay for it without jeopardizing your retirement.