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College Planning
College planning is a complex process. It can be challenging, time-consuming, and extremely expensive. Understanding all the strategies and determining which ones apply to your family’s situation can be quite confusing. With costs skyrocketing year after year, your college funding will most likely have an impact on your retirement planning goals - the two are closely intertwined.
Planning for college and retirement is extensive and must be approached proactively with a long-term perspective, using a multitude of financial management strategies.
Our planning focused approach considers five key components:
- Paying for college – Best strategies for saving and paying
- Financial aid – Two types: merit aid and need-based aid
- College selection – Only 15% of students are happy with their college choice
- Responsibilities – Outlining the responsibilities of both parents students
- What to avoid – Common mistakes and inappropriate advice
College planning is about integrating each one of these areas, below, into a comprehensive coordinated plan.
Paying for College
According to the College Board Advocacy & Policy Center, the average cost of attending a four-year in-state public college including tuition and fees, room and board is $20,900 for the 2016-2017 school year. The cost for attending a four-year in-state private college is now approximately $45,370. The tuition and fees increase was 3.4% this past year, a slower increase than in previous years. College is a big investment, but fortunately there are strategies to both reduce the cost of college and save appropriately.College funding involves many areas of your personal finance such as income, cash flow, taxes, and investing. It may also include merit aid and financial aid, grants and scholarships, as well as financing available through both private and government loans. More importantly, as a parent you must know how each areas affects the other for education funding purposes. Additionally, you must determine your financial commitment, set realistic savings expectations, and stick to a savings program.Depending on your student’s age, the strategy and vehicle used for saving may vary. Currently, one of the best vehicles for college savings is the 529 college savings account. Depending on the state, there could be a tax deduction for contributions. Earnings are tax free when withdrawals are used for most college-related expenses, including tuition and fees, along with room and board. Anyone can make contributions to the account, adding the flexibility of others such as grandparents to contribute. Another advantage is that it can be used at any accredited school in the U.S. A great place to find information on the Ohio 529 Plan is www.collegeadvantage.com.
Financial Aid
Merit aid is offered through grants and scholarships as a way for colleges to attract certain students to their campuses. The availability of merit aid from year to year tends to fluctuate, It is based on how much of their endowment a college earmarks, enrollment goals, and what specific programs they intend to target.Needs-based financial aid is money, primarily distributed by the federal government and colleges in loans, grants, scholarships and work-study jobs. To determine needs, there are two different aid applications. Most colleges require the FASFA (Free Application for Federal Student Aid), while some require the PROFILE, or a college’s own formula. The result is the Expected Family Contribution, or EFC. The EFC is the amount of money you will be expected to contribute to college costs. The difference between the cost of attendance and the EFC is the child’s financial need.When a child is accepted at a particular college, he or she will receive a financial aid award letter. The letter will detail the specific amount and type of financial aid each college is offering. This is usually done through a mix of loans, grants, work-study, and scholarships. It is possible to negotiate a more favorable aid package. College financial aid administrators can exercise professional judgment to reduce the loan part of an aid award package.
College Selection
According to the Department of Education, fewer than 40% of students who enter college each year graduate within four years. Almost 60% of students graduate in six years. At public schools, less than a third of students graduate on time. In addition according to a report by the National Association for College Admission Counseling, one in three students who enroll in either two or four year college will probably transfer at some point. With the current cost of a college education continuing to escalate, the idea of one or two extra years of college expenses is quite daunting. This greatly increases the importance of choosing the right college from day one.
There are many factors that go into the college selection process:
- Cost, campus life, academics, activities, enrollment size, and location are just a few
- Consider those schools where the student profiles are in the top 20% of the application pool
- Choose 8 to 12 schools, including an in-state school and a fall back school
- Determine the admissibility indicator for each school, the cost, the expected family contribution, and the estimate of both financial and merit aid
Responsibilities
At Total Wealth Planning, we have developed a four-year college planning checklist, which begins with each child’s freshman year of high school, to help manage the planning process. As each year of high school progresses, so do activities of both parent and student. It specifically outlines the responsibilities of both parents and students each year.It starts with simple things like establishing good study habits, striving for a high GPA and enhancing vocabulary and writing skills. For parents, step one is beginning to understand the Expected Family Contribution (EFC)—and whether repositioning of income and assets to increase eligibility for financial aid—is warranted. In addition, parents must decide their own financial commitment. This is not an easy decision, but one that must be planned out by establishing specific goals and objectives.
What to Avoid
In our “what to avoid step”, we help parents avoid certain mistakes that can actually harm a student’s ability to receive needs based or merit based financial aid. Additionally, certain investment vehicles are not suited for long-term accumulation purposes. For example, avoid life insurance products and annuities as a savings vehicle. These types of investments have high fees and other hidden expenses, and traditionally pay a high commission to the selling agent or broker.Saving money directly in the child’s name in a UTMA or UGMA account can also negatively impact a child’s ability for aid. That is because 100% of this account is counted toward the Expected Family Contribution (EFC) by the University.Be aware of the numerous scholarship search scams and college consultants promising a whole host of awards and other aid packages that typically do not come through. |
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