A lot of noise and disinformation swirls routinely around the college admission process, and that’s even truer today because of the pandemic.
Here are three evergreen pieces of advice that your clients should follow if they want to reduce the cost of college.
1. Use an Expected Family Contribution Calculator.
This calculator will allow a family to know what the aid formula says a household should be expected to pay, at a minimum, for one year of college. The bigger the family’s income, the higher the EFC will be.
The EFC is expressed as a dollar figure. Let’s say a family’s EFC is $15,000 and the cost of a college is $60,000. The family would be hoping for $45,000 in aid.
In this case, the family would have considerable need if aiming for a private college and would want to aim for colleges that provide generous need-based aid.
Let’s look at an affluent family that has a high EFC of $65,000. If these clients didn’t want to pay full price, they should look for schools that provide merit scholarships. The vast majority of schools fall into this category with the major exceptions being the elite schools at the top of the U.S. News & World Report Rankings.
I recommend using the College Board’s EFC Calculator.
2. Don’t apply without using a school’s net price calculator.
Here is a dangerous trap for your clients: Parents tell their teenagers to apply to whatever colleges that they wish, and then the parents sit back to let things play out. Too often, what happens when the award letters arrive is a financial disaster. A teenager gets into colleges that end up being way too expensive
Here is an example: A relative of mine allowed his son to apply to whatever colleges he wanted. Most on the teen’s list were doable financially, including state schools, but his son also wanted to apply to New York University. I told my relative that NYU is fairly unique because it gives terrible need-based aid and it is equally miserly with merit scholarships. The majority of students at this school pay the full cost of attendance, which is $79,000!
The teenager got into NYU, and, just as I warned, NYU did not offer the child a scholarship or need-based aid. The dad ended up caving to his son’s appeals and let the child attend NYU. He acknowledged it was an expensive mistake.
It is hard to say no to a child when he or she gets into a dream school even when it will require parents to make horrendous financial decisions.
You can ward off this disaster by using the net price calculator for each school. A good net price calculator will ask for the same type of financial information as an EFC calculator, and, if the school offers merit scholarships, it should ask about grade point average, test scores and possibly class rank.
The calculator takes the financial and academic figures and calculates whether a student would receive aid from the federal and/or state government and from the institution itself.
While net price calculators are invaluable, about half of the nation’s net price calculators are mediocre. These calculators use the federal template, which doesn’t ask about assets, only uses an income range that tops out at a ridiculous $99,999 and can’t calculate merit aid. For many people, using one of these calculators will be a pointless exercise.
Public universities are heavy users of these worthless calculators. Luckily, hardly any selective colleges use the federal template, but NYU is inexplicably one of them.
3. Save as much as possible.
Parents worry that their savings will hurt their chances for financial aid. Most of the time, savings will have little to no impact. Here are some reasons for that:
Retirement assets are not counted in financial aid formulas. Income is a much bigger factor in whether need-based aid is a possibility. In addition, parents’ assets are assessed at a low rate—no more than 5.64%. As an example, a couple who saves $100,000 for a child’s education would reduce their chances for need-based aid by only $5,640. That figure represents how much the EFC would rise.
It’s vastly better to have $100,000 set aside for college rather than lose out on potential aid of $5,640. As a practical matter, the aid is likely to be in the form of loans anyway.
Parents should not be listening to anyone who suggests that purchasing expensive annuities or life insurance is the answer to cutting college costs. It’s not.
What matters is getting a discount. Whether it’s need-based financial aid or institutional merit aid is irrelevant. What you want is a price break, regardless of what it’s called.
Lynn O’Shaughnessy, a nationally recognized college expert, offers an online course–Savvy College Planning–exclusively for financial advisors. Click here to get Lynn’s guide, Finding the Most Generous Colleges.
