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Every year families go through the tedious process of filling out financial aid forms in hopes of getting enough money to make college affordable for their student(s). But the truth is unless they understand the financial aid system inside and out, most middle-upper income families will get little or no aid. If they do get aid, most of it is in the form of loans, which today have a high fixed interest rate.
However, that’s not the REAL problem. The real problem is even if the student is awarded some grant money, most families will struggle financially to pay the balance due the college. The ‘balance due the college’ is usually determined by the Expected Family Contribution (EFC) of the family.
The EFC is computed by using family financial data submitted on the FAFSA financial aid application form. Private colleges may use their own Institutional EFC forms. The EFC is then subtracted from the Total Cost of Attendance (tuition, fees, room and board, books and supplies, personal expenses, cost of a computer, and transportation to and from college) to arrive at the student’s “need”, or eligibility for financial aid.
Example
Johnny wants to attend XYZ Private College. The cost is $36,000 per year. XYZ college offers Johnny $10,000 in grant money and $6,000 in student loans.
- Question - Is this an attractive financial aid offer?
- Answer - Maybe.
- Question - Can Johnny get a better deal from this college?
- Answer - With professional help… probably.
- Question - Does this offer make college affordable to the family?
- Answer - Probably not.
You see, the real problem is Johnny’s family must still come up with $20,000 per year to pay the balance due the college. And even if Johnny’s aid package was negotiated by a professional to $13,000 in grant money and $3,000 in student loans, the family still owes the college the $20,000 balance.
What can this family do?
They could go into debt and take out parent (PLUS) loans at an 8.5% fixed interest rate (this could very easily lower the parent’s credit rating). They could take out some loans and pay the balance out of their income and assets. They could also take money out of their retirement to pay college expenses (this is absolutely the wrong thing to do).
As a last resort, Johnny could decide to forego his dream college and attend a public university. However, with a cost of $15,000 and a family EFC of $20,000, Johnny would not receive any need-based aid. Consequently, the student and parents would have to decide how to split the $15,000 cost, which is still unaffordable to some families, especially if they have two or more children to educate.
Is there a solution for Johnny’s family?
Yes there is, but it can’t be found by pouring over voluminous college books in the library, or searching endlessly through Google for answers. Many families have tried to figure out how to pay for college all by themselves… and failed. And remember: even if you do get financial aid… it’s the out-of-pocket EFC that usually comes back to haunt your bank account.
The solution is to educate yourself on the many financial strategies that can help you pay for college without raiding your retirement fund. Strategies such as:
EFC strategies - minimize your EFC and maximize your financial aid eligibility
Loan strategies - reduce your education debt so as not to jeopardize your current budget, your credit rating, or your retirement funding
Tax strategies - increase your potential tax savings that can be converted to funding college costs
Cash Flow strategies - find potential areas of cash flow improvement in your investments, health costs, insurance costs, mortgage costs, and current living expenses – all which can be used to help fund college costs
Investment strategies - uncover “hidden costs” that can be converted to real dollars used to help fund college costs
What will you do if you don’t qualify for financial aid? Will you need to go into debt and potentially lower your credit rating? Do you have the financial capability to educate more than one child? Will you need to raid your retirement fund to pay for college? Do you really have the time to try to figure out all this for yourself?
If you don't have answers to these questions we can help.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
Dominion Financial Group does not render legal, accounting, or tax advice. Please consult your CPA or attorney on such matters.The accuracy and completeness of this material are not guaranteed. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. Provided courtesy of Dominion Financial Group. Securities offered by a Registered Representative of Sammons Securities Company, LLC. Member FINRA/SIPC.
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