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Five facts on planning for the cost of college

It is no secret that the cost of college has skyrocketed in recent years. In fact, college tuition has

increased faster than inflation for four decades, even doubling and tripling the inflation rate in

some years. With no end in sight to the increasing cost of college, planning for how to pay for

this higher education is becoming an increasingly crucial part of the financial planning process.

Moreover, the college application process is complex and often intimidating. This can cause

families to miss out on opportunities that could have ended up decreasing this huge price tag.

With that, here are five facts that many families are unaware of when beginning to pay for

college.


1. There is no income amount that disqualifies a family from receiving need based

aid. One of the largest mistaken assumptions families make each year is claiming that “I

make too much, I will never qualify for need based aid.” Each family’s need is calculated

using the Student Aid Index (SAI) on the Free Application for Student Aid (FAFSA). This

will take into account the parents’ income, assets, and the student’s income and assets.

This will generate a number that will determine how much aid, if any, a student will

qualify for. However, some assets must be reported with FAFSA, while others do not. For

some families, simple asset repositioning strategies can help them qualify for aid that

they otherwise would not have received.


2. College planning does not begin when the student is nearing graduation. The most

important contribution to college is a prepared student. GPA is cumulative and begins

the day the student walks into high school their freshman year. When it comes to

qualifying for need based aid, the income is determined by the parents’ base year. This

is the year from January of the student’s sophomore year to December of their junior

year. In other words, the full calendar year before their senior year. Any decisions you

make during your student’s base year will directly affect your qualification for need based

aid. When it comes to saving and planning for college, it is never too early to plan.


3. If a family does not qualify for need based aid, there are still strategies to

indirectly minimize the cost of college. There are several vehicles that can utilize tax

advantaged and asset advantaged strategies to save for college. Determining how to

save for college with the maximum asset growth and minimum tax liability can still save

families money. Commonly known funding vehicles such as section 529 plans work

effectively for some. However, there are limitations to what the funds can be used for.

What if the student does not wish to continue their education? There are other tools that

are more flexible and can be useful for certain families.


4. There is a difference between sticker price and net price. The sticker price is the

posted Cost of Attendance (COA) at each school. However, need and merit based aid

must be factored in before determining the net price, or what a family actually pays to

attend that school. Often schools with a high sticker price will be more willing to give aid

to a qualified student, which could result in the net price being lower than a school with a

low sticker price, but reluctant to give out aid.


5. The loan crisis is not all with the students, much of it is with the parents. Once

again, college is expensive. Some families may need to utilize loans to help pay for the

cost of college. There are several various public and private loans that families can use.

However, some are very open to pitfalls because of financial mistakes. There are a lot of

headlines today discussing the student loan crisis, but it is a bit misconceived. While

there are certainly outlying students who are stuck with six figures of debt, the real crisis

is with the parents. In many cases, parents are capable of borrowing the entire cost of

college. This has led to parents borrowing back way more than they could afford to pay

back before retirement. This has caused families to have to push back their retirement in

order to generate adequate income to pay off these loans. The important takeaway here

is that covering the cost of college should never come at the expense of a successful

retirement.

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