Other than retirement, college tuition is the biggest investment goal that your clients will likely face. What’s more, this investment is in their most precious asset—their children.
Many parents worry about planning for college, and for valid reasons. According to the College Board, the average cost of tuition and fees for full-time in-state students at public four-year universities is $9,970 for the 2017-2018 school year. Keep in mind that the cost is for in-state schools and does not include room and board or books. The average private school tuition and fees for the 2017-2018 school year jumps to $34,740. When you multiply those numbers by four years and throw in the average annual rate of 3.2 percent college inflation, this certainly is cause for stress.
Ease Their Worries
There are a few myths when it comes to college planning. First, many parents worry that it is too late to plan for college because they believe they are late to the game. The truth is that it is never too late to plan college as long as they take action.
Another common myth is that many parents believe that they do not qualify for financial aid. The reality is that you can’t get aid unless you apply for it. There are many forms of aid—need-based aid, merit-based aid, scholarships, grants and low-interest loans. It is important to educate your clients on the different types of aid and the significant dates they need to know to apply for it.
Yet another myth that many parents believe is that the sticker price of college is what you pay. In actuality, due to financial aid, scholarships, tax credits and living expenses that are already incorporated into their family’s budget, many families will pay less than the sticker price for college.
As a matter of fact, only 12 percent of incoming freshmen at private colleges paid full sticker price for tuition during the 2016-2017 school year.
As mentioned, all clients should be encouraged to apply for federal financial aid regardless of their financial situation. Research shows that up to 85 percent of four-year students who apply receive some sort of aid.
Even more important, for wealthy clients who don’t believe that they will qualify for aid at all, families can never predict if unforeseen financial circumstances will occur during the academic school year. Filling out the FAFSA (Free Application for Federal Student Aid) is required for federal parent loans, as well as non-need-based federal PLUS student loans for graduate students.
October 1 of every year is the start of the FAFSA filing season and families should file as early as possible. This is good news, as the FAFSA filing season used to start January 1. This means that families should fill out the FAFSA in October of their child’s senior year of college, regardless of whether they know what colleges they are applying to or whether they will be accepted. Families will be required to fill out the FAFSA every year that their children are in college.
The FAFSA is the basis for need-based aid that is given by the federal government, as well as the states and individual college campuses. Filling out the FAFSA determines a family’s Expected Family Contribution (EFC). Every family’s EFC is different and the goal is to establish the lowest EFC possible to qualify for the most amount of aid. It should be noted that the number of children a family has in college at once also lowers a family’s EFC.
Parents’ and students’ assets and income affect every family’s financial aid eligibility. However, these sources are not equally treated. Income matters more than assets and student income matters more than parental income. Assets held in the student’s name are assessed at a higher level, as well as income in the student’s name. A student’s assets are assessed at 20 percent and a student’s income can be assessed at up to 50 percent.
EFC Critical Factors
Coach your clients in helping them to evaluate where their assets are and whether their name or their children’s names are on the assets. This will help them significantly when determining EFC. All families have a certain amount of money that is not part of the EFC; however, that depends on marital status and the age of the older parent (how close they are to retirement).
Home equity is an exempt asset on the FAFSA, as well as all types of retirement plans and the cash value of life insurance plans. The equity in a small business or farm might also be exempt.
Due to all of these factors, your clients might want to avoid selling any investments on or after January 1 of their child’s sophomore year in high school to avoid any impact to financial aid eligibility. That tax year will be the base year for the FAFSA filing of their child’s freshman year.
While your clients will not know their actual EFC until they fill out the FAFSA for the first time, they can determine their estimated EFC using the EFC calculator on the collegeboard.org website.
Getting on the Same Page
The financial part of planning for college is certainly crucial, so it is also imperative that parents and their children are on the same page when it comes to where the child will apply to and attend school.
Do the parents and the children see eye to eye on what they are looking for in a school? Does the child want to go to an in-state or out-of-state, private or public school? Do they want to learn about a chosen field or continue athletic achievement? Will the child be expected to contribute to his or her college funding? All of these things factor into planning for college, as well as what the true cost of college will be.
Encourage your clients to have these important conversations with their children early.
The Bottom Line
Most parents want to be good stewards of their hard-earned money. Provide them with hope rather than worry when it comes to this significant investment in their most precious asset. Educate them on navigating the nuances of paying for college even if they are late to the game. Be sure that they know how financial aid works and help them to work within those rules to successfully plan for college accordingly.