Let’s face it, with the exception of (maybe) your home, funding college for your child(ren) will be one of the greatest investments you will have made to date. And while changes may soon be around the corner, currently the cost of college continues to rise, far outpacing inflation. One of the most popular questions we receive from parents whose children are preparing for college, is “How much should I expect to pay?”
And the answer, which is the answer for pretty much any question in financial planning, is it depends. Below are some common myths about college that we hear:
- Private school is too expensive
- I won’t qualify for financial aid
- Every school offers the same financial aid reward
- I should fully fund my child’s education so they aren’t hindered by student loan debt
- Using retirement savings to fund college is advised because I still have time to replenish my savings
And some of these, when taken at face value, can ring true. For example, based on sticker price, private schools are often more expensive. However, many times private schools are able to provide more scholarships/grants/financial aid than public schools which can reduce the overall cost of education to an amount lower than an in-state public school.
College vs. Retirement
Before we go any further into how to ‘shop’ for college, let me address the last two bullet points. For the vast majority of folks, tapping into assets which are designated for and needed for retirement is not recommended. Students can always borrow money for college. And while we certainly want to avoid large student loan debt (using student loans in a methodical and reasonable manner can be quite beneficial), if you outlive your money in retirement and subsequently need to rely on your children, have you really benefited them? Remember, you can borrow money for college, but you can’t borrow money for retirement.
Expected Family Contribution
Anyway, back to the original question of “How Much Should I Be Expected to Pay”. The first step is determining your Expected Family Contribution (EFC), which you can do for free using this FAFSA Tool. How much financial aid you can expect to be eligible for is based on the below calculation:
Total Cost of College- Expected Family Contribution (EFC)= Financial Aid Eligibility
Your EFC does not correlate to what you should expect to pay. It’s a number which calculates how much financial aid you are eligible for, and you may be expected to pay more than your EFC. In fact, you may be shocked at what the government expects you to pay. You can see from this equation that your EFC can play a huge role in determining the amount of financial aid you are eligible to receive.
So how is EFC calculated?
There is a lot to digest in this graphic, but essentially what this is saying is when saving for college having assets NOT in the students name is preferable as assets in the students names are accounted for at 20% vs just 5.64% for non-retirement assets in parents name (Retirement assets are not included in this equation). Also, many people try to be unnecessarily fancy and start redirecting/retitling assets or buying expensive life insurance policies to shelter assets which is typically detrimental over the long-term just to avoid this 5.64% accountability. Income is the biggest factor in determining EFC and thus proper tax planning to reduce Adjusted Gross Income usually is more beneficial. The FAFSA also looks at tax returns from 2 years prior so it is advised to begin planning for college and pricing out options around this time as waiting even a year can limit your planning options.
Grants/ Federal Loan Options
I have also included below some charts which show samples of available grants (which do not need to be repaid) and also different federal loan programs offered. There are also a myriad of other state and/or institution specific scholarships and grants available which students should apply for, and these are typically listed on the financial aid page of the schools website.
As referenced below, there are also many tax breaks available for parents of students in college, including the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit. There are numerous factors to determine which benefits you may be eligible for, so be sure to speak with your tax professional. These credits can provide a dollar for dollar reduction in tax liability (AOTC also provides for up to $1000 in refundable credits). Keep in mind, however, that in order for 529 plan withdrawals to be federally tax-free, the distributions must be used for expenses that were not counted toward either of these credits. For example, in order to receive the full $2500 tax credit per student for AOTC, one must incur $4,000 in qualified education expenses. If you use 529 plan distributions for these $4,000 in qualified expenses and are eligible for and claim the credit, your distributions are no longer tax-free and will taxed at the federal level. This is also known as ‘double-dipping’ which of course is not allowed. This is why it is important to document your educational expenses.
So to answer the question “How Much Should I Be Expected to Pay” you would need to conduct research for each school you are considering and what options are available. Each school awards financial aid differently, and you may be surprised at which schools are truly more affordable. And in going through this process, do your best to make sure you are taking full advantage of the grants/scholarships/loans/tax credits available to you. College is already expensive enough.
If you have children who are beginning the process of preparing for college and have questions about how college planning fits into your overall financial plan, we would love the opportunity to see how we might be able to help. Please feel free to reach out to us via our website.
Andrew Langdon is a fee-only financial planner based in Peachtree City, GA serving clients in the Greater Atlanta area. FivePoints Financial Planning provides financial planning and investment management services to young families and pre-retirees who are looking to achieve financial freedom. Services are offered on a project or ongoing basis.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.