It’s college planning season for millions of families. In this series of three articles, I’m going to share with you three keys to ensuring that you don’t overpay for college. In this first installment, let’s talk about the three payors of the cost of college:
• You (the family)
• The College (grants/discounts from the ‘sticker’ price)
• The Government (student and/or parent loans)
The determinant of who pays what – and in what order – is the FAFSA process – the Free Application for Student Aid. That process is designed to put Mom, Dad, and Junior at a huge disadvantage. Think of it like playing a game of cards. Each of the three entities in the pay arrangement wants to hold their cards close to the vest and get the other to show theirs first. But FAFSA forces you to show yours first.
The outcome of FAFSA is your Expected Family Contribution – or EFC. The EFC is the base amount you’ll pay regardless of what school Junior decides to attend. But it’s just the baseline amount. If the cost of the school exceeds your EFC, you’ll also pay at least some portion of the difference. So:
College Sticker Price
– Expected Family Contribution
= Remaining Need
Once the Remaining Need is determined, now the other two play their cards and decide how they’ll help. Most traditional financial advisors are oblivious to the landmines lying in wait in the FAFSA, meaning you’ll walk unwittingly into the trap – driving up your EFC – perhaps substantially and unnecessarily.
For example, each of the following increase your EFC:
• Home Equity over a certain threshold
• Liquid assets over a certain threshold
• All money in 529 College Savings Plans
• Money in your kids’ names over a certain threshold
• 401k Contributions over a certain threshold
If you don’t know what the threshold is, or what the EFC penalty is for exceeding that threshold, you’ll automatically overpay.
Imagine your EFC is $8,000 greater than it could be with a little savvy planning. You have 3 kids – that’s 12 years of college – which means regardless of what schools they attend, you’ll pay almost $100,000 more than you need to ($8,000 X 3 kids X 4 years each = $96,000).
What’s worse, that $100,000 mistake comes at a critical time in Mom and Dad’s lives. That period from age 40 – 55 (when most kids will be in college) is the most critical determinant of your retirement outcome. If that $100,000 stayed in your personal economy, it would grow to about $250,000 by retirement, which would make a huge difference in your retirement lifestyle.
How many Quarter Million Dollar mistakes can you make in a lifetime without it seriously affecting you?
The good news is that whether the Junior at your house is 8 or 18, it’s not too late. Some relatively simple adjustments in your personal financial structure could make a huge difference. But to optimize your EFC (make it as low as possible), you need to talk with a college planning expert – not a traditional financial advisor. I’m happy to refer you to one in your area – just ping me back.