Six Factors for Paying for CollegeSubmitted by Castlebar Asset Management on March 9th, 2017
All families have questions about how they should go about paying for college. High income earners may have additional ability or capacity to save for their children’s college, but there are key items to consider when paying for college education.
First Steps: High income families may choose a slightly different route than an average family in figuring out their college costs, but all roads start with the Free Application for Federal Student Aid (FAFSA) or the CSS Profile (CSS). These forms will calculate your expected family contribution or EFC. Even if you feel like you won’t be eligible for financial aid or loans you should fill these forms out. Many colleges require you to complete them to be considered for merit based scholarships.
If you have more than one child in college you may be surprised that you qualify for some type of aid. Additional children in college can drastically reduce your EFC. Work situations can change as you enter your mid career. Downsizing, recessions and career changes can all impact your earnings. If you don’t complete the FAFSA a school can’t review your file to see if the college can help. If you complete the FAFSA they will be able to do a professional judgment review and adjust based on your future earnings and not your past.
Colleges and universities are a business. The FASFA can help position you to the school showing you can pay more of the cost to attend than the average family. Schools have budgets to hit and parents who can afford to pay with less discounts are attractive to colleges.
School Selection: Parents and children will have to weigh the costs of going to their preferred college against the value received from the education. When I went to college 20 years ago, the rule of thumb was go to the best college you could get into. College was like buying a car then, now it is like buying a house. College was affordable back then and with the cost of going to school skyrocketing it is not as straightforward. Making a pragmatic choice in school that balances value and costs will make paying for school easier.
Your Child’s Contributions: Your child has two ways they can reduce the overall cost of college. The one that usually has the biggest impact is merit based scholarships or grants. This is where families will see the biggest reduction in sticker price. The more competitive the school your kid wants to go to, the less likely there will be as much merit money available. At elite schools, all students have a merit being there so it comes down to a family’s financial situation. The other way your kid can contribute is by working part time during school, full time during the summer and savings accrued before school.
Your Savings: Higher income families have more of an ability to save for college than an average family. If you have been proactive is another story! A 529 plan is usually the most used savings vehicle for college. Your after-tax savings can also be tapped as a way to pay for school. The EFC number will take into consideration your non retirement net worth and expect you to contribute about 5% to 6% towards the costs of college. Having a higher net worth is usually more beneficial than a high income in the current formula for family expected contributions.
Your Current Income: You will find that your income is the driving force behind how much you are expected to pay. The FAFSA and CSS calculates your EFC and is usually around 1/3 of your income plus 6% of your non retirement accounts. This number will be different if you have multiple children in college at the same time. Most higher income families expect to pay for a large percentage of college out of cash flow.
Family Contributions: Grandparents love to spoil their grandchildren. If your parents or in-laws have the means and want to contribute it can be another avenue to explore. We recommend having the conversation sooner with family to help you better plan.
Debt: There are two routes to explore with debt. Hopefully as a high-income family you will be able to pay for college through a combination of the items above and avoid taking out loans. If you can't parents can access some of their home’s equity through a HELOC or consider Parent PLUS loans. Your child can also take on some student loans to pay for school. Some parents don’t want their kids to have debt leaving college while others want there kids to have skin in the game. You know what motivates your children better than anyone. If you want them to be invested in their education by leaving school with some student debt, you can always help them pay their loans later on.
College is expensive, there is no way around it. More and more it is about selecting the right school! If you overpay for college the other five things we discussed are a moot point.
Additional Articles On College Savings.
Saving For Your Kids Beyond a 529 Plan
How Much Should Parents Contribute to College?
Why Wealthy Families Should Apply for College Financial Aid
Financial Aid Opportunities for Higher-Income Families
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