The school year has started and with it many families with high schoolers will either begin looking at schools or try to narrow down their final selection. One of the services I offer as a financial planner specific to college planning is helping families understand what they can expect to pay at a given school factoring in their financial situation and the student’s academics and how that will result in financial and merit aid to get to their net cost. The goal of this service is to help families identify schools that won’t result in a mountain of student loan debt.
As a rule of thumb, when it comes to taking on student loan debt, if families can limit student loan debt to the amount of direct loans they can receive through the federal government that is considered a success. There is a limit though of $31,000 on the total amount of these loans you can get as an undergrad. This amount may not be enough to meet the total cost of college for some families. If this is the case, then shoot for no more student loan debt than what the student can expect to make as a first year salary. This allows those in higher paying professions to take on a bit more debt and still be able to afford the payments upon graduation. If you find yourself going beyond these debt totals, then you may be in for a rude awakening when you start paying back the loans. The now graduated student might find loans taking up too much of their paycheck to start making progress on building their own future financial stability by being able to establish emergency savings or investing in a 401k. If the parents are paying back the loans, they may find themselves now facing a new debt payment at the same time as the thought of retiring is becoming attractive.
For parents going through this now or will be soon in the coming years this can be a daunting process. Let’s face it, this space has changed so much from when I, or many of you, went to school. In the early 90’s, I went to an in state school where tuition was $1000 per semester. All-in the cost for an entire year of school was in the area of maybe $6000. This was still in the age where you could work, save a couple of thousand dollars, and go to school with a reasonable amount of student loans. If you want to look at a public four year institution those days are long gone. School is just too expensive now to be able to take that same approach the previous generation did. With many state schools costing at least $30,000 per year, there is no way a student can earn enough to pay their way. There are still circumstances where a gifted student might get a full ride or a family of lesser economic means gets the vast majority of school covered with grants but that applies to a very, very small group of people. Most people now have to cover the cost with a combination of savings, scholarships/grants, and loans.
Each year I work with families looking for assistance in this area and I see the same issues over and over. In this article, I will cover some of these common items I see and what you can do instead to be in a better position.
1. Not knowing your EFC/SAI
The first step in knowing if you are going to receive any financial aid is knowing how much the government thinks you can contribute to your child’s education. This is done by filling out the FAFSA form. This is a form that is available each year in the fall, although a new form will be unveiled this year and won’t be available until December 1. This form can be accessed here and is used to gather financial information about your family. Using this information, the government comes up with what used to be called your EFC (Expected Family Contribution) and now will be called the SAI (Student Aid Index). This is essentially the amount the government thinks you can put towards college.
Now let’s be very clear about this number. Just because the government thinks you have the resources to pay that much, it may not line up at all with what you can actually put towards the cost of college. It is just a formula. But, like it or not, this number is used to determine if you will receive any need based financial aid. In the most simplistic explanation, if your EFC/SAI is more than the stated cost of attendance you will likely not be receiving financial aid at that school. If it is less, then you might, but no guarantees. It will depend on the school and the amount of demonstrated need.
It is important to note that a given EFC/SAI number does not guarantee you will receive need based aid at every school you apply to. Say your EFC/SAI number is $15,000 and you apply to a smaller public in-state school with a cost of attendance of $18,000. In this case, there is only a demonstrated need of $3000 and you may not get offered any aid. On the other hand, if you apply to an Ivy League school with an $80,000 cost of attendance you are likely a very strong candidate for need based aid.
The key is to compare your EFC/SAI to each school’s stated cost of attendance to get a feel if need based aid is a realistic expectation. If need based aid looks like a possibility, then you need to understand how the school addresses that need. Each school will have different numbers on what percentage of need they meet and if that need is met through grants, scholarships, work study or loans. There are databases like collgeboard.org and collegedata.com that have information for each school but those numbers are averages so be careful about relying on them too much for your situation.
2. Not establishing a budget before looking at schools.
Think about all the major purchases you make in your life. You establish a budget or know how much you can spend before you go shopping for things like a new car or house. If you are comfortable with the monthly payment on a car costing $40,000 you don’t even bother looking at a Tesla Model S with a base price of $75,000, right? If you can afford a $2500 monthly mortgage, you likely aren’t going to the new housing development with million dollar plus homes and thinking they are a legitimate option. Of course you don’t, because you know you can’t afford options that don’t fit within your budget.
A four year college education will likely cost anywhere from 80k up to over 300k making it one of the largest expenditures you will make in your life. And yet, I see many families come to me with a list of schools that do not factor in their financial situation at all.
The budget you set should be based on the combination of dedicated college savings plus any other resources to be used for college plus reasonable student loans. For example, let’s say you were able to save $50,000 for college in a 529 plan, can contribute an additional $5000 per year and feel okay with up to $30,000 in student loans. That leaves you with $12,500 per year from your 529 plan, $5000 in additional resources and $7500 per year in loans for a total of $25,000 per year. This doesn’t mean the stated cost of attendance at the school needs to be $25,000 or less but that your projected cost should be no more than $25,000. This means you can target schools with a net cost of $25,000 or less after any financial and/or merit aid are applied.
3. Touring schools without knowing your cost ahead of time.
This is a very common mistake I see from families. It tends to play out like this. Usually in the student’s junior year, the list of schools gets compiled, and families find time over long weekends or longer breaks to go visit some of these schools. The student will decide they don’t like a couple of the schools while others rise to the top of the list. It is at this time parents will check in and say here are the schools we have a high interest in. Now, what will they cost? And, usually, it somehow works out that their child has a knack for choosing the ones that will have the highest net cost. I get to deliver the news to parents that the school is $20,000 per year above their budget and ask if they want a list of other schools that might be a better financial fit. The problem is the student is set on the expensive school and there is only so much time and money left to go do more tours. The parents feel stuck.
But this is easily avoided. Every school has a listed Cost of Attendance (COA) that you can find on their website. This is intended to be the all-in cost for the school including tuition, room & board, books, fees and some even include transportation and personal expenses in the COA. This establishes the starting point to determine if a school fits within your budget or not. It is important to note that just because the COA is higher than your budget does not mean the school should automatically be removed from consideration. These numbers are before any merit or need based aid is applied. Each school will also have a net price calculator feature which is intended to give you your estimated net cost at that school, including any expected merit and/or need based aid. These calculators vary in accuracy from school to school, but they should at least give you a ballpark idea of what you can expect a given school to cost.
Going through this exercise before making your travel plans will let you know which schools should fall within your budget and are worth taking time to visit. Let’s run through a few scenarios for a family with a budget of $30,000 per year and an EFC/SAI of $50,000.
School A is a state public school with a COA of $45,000 and $17,000 in projected merit aid bringing the net cost to $28,000. This school should be a safe financial choice.
School B is a small private school with a COA of $60,000 but has $28,000 of projected merit aid resulting in a net cost of $32,000. While not within the $30,000 budget, it is very close and if it is high on the list can still be worth checking out.
School C is a state public school with a COA of $48,000 with no projected merit and/or needs based aid leaving the projected net cost at $48,000.
In this scenario, schools A and B are worth keeping on the list while school C has a net cost well above the family budget and can likely be removed. This allows the family to focus their time on schools they can afford and just worry about the fit of the school for the student since the financial piece will likely be okay.
4. Not understanding how different schools handle aid
Just because your student has good grades and test scores does not mean they will get big scholarship dollars at every school. The same student can apply to 10 different schools and receive 10 different offers. There are a couple of things to understand related to this; what are the different types of aid and what type of aid a given school tends to give out.
Schools that have very rigorous admission standards may not offer much in the way of merit aid. This does not just apply to Ivy League schools either. Many public state schools fall into this camp as well as a large number of smaller private schools. Since the admissions standards are tough, by default every student there has a very strong academic track record so very few get awarded with a scholarship. On the flip side, these schools tend to be very generous with need based aid if you can get in.
Other schools offer very nice merit aid packages. Some public state schools will have thresholds that if the student meets, they will automatically receive the scholarship. These are usually based on GPA and/or ACT/SAT test scores and can be found on the school’s website. There may be multiple tiers of the scholarship offered by the school as well with larger awards for higher grades/test scores. This can bring an out of state school in line or even below in state costs. Many private colleges also offer generous merit aid packages. While these numbers aren’t usually published like the public schools are, they can typically be worth in the range of $20,000 - $30,000 which is a big help as many of these types of schools have a much higher starting COA and can bring the net cost in line with public schools.
Other schools may not offer up much in the way of either merit or needs based aid but might have a lower starting COA instead. Many smaller in-state public schools may only offer a few thousand dollars of merit aid but might have a COA of just $20,000.
This is not to say a very strong student won’t get more merit aid from any of these types of schools. What I am trying to point out is what you can plan on receiving. If you apply to one of the elite schools you won’t be in line for an automatic university scholarship, but you may end up receiving a departmental, leadership, or some other type of scholarship. These awards could be significant in terms of dollars and maybe even a full ride.
All schools will have a scholarship section on their website. You can see there if they offer automatic scholarships or if scholarships are limited in number or have to be applied for separately from admission. When forecasting the cost of college though it is difficult to assume a student will receive one of these scholarships that are handed out on a very limited basis. These types of scholarships can be trickier to navigate as a university may offer hundreds of these types of scholarships and it can take a lot of effort to sort through them to see which ones the student may qualify for.
5. Assuming your cost will be the same as someone else’s at the same school.
If you know others who have gone through the college selection process before, you likely have heard stories about what other people have received in terms of scholarships, grants, or maybe even full rides. One mistake I have seen is people taking this information and assuming it will apply to them. Just because your neighbor’s kid received a $30,000 scholarship at a given school doesn’t mean your student will, even if they have similar academic records.
The reality is that every family has their own unique combination of factors, be it academic, financial, family size, types of assets, heritage, you name it. Schools can use all these factors to determine who they give money to and how much. You don’t know every detail about another family whose story you’ve heard or how the school uses that information, so it is almost impossible to compare apples to apples.
And, the criteria can change from year to year. My daughter graduated high school in 2021 and schools treated aid very differently during those peak covid times than they did previously or will moving forward. Kids didn’t have to report test scores and schools were worried about declining numbers so may have been more willing to go higher with aid to keep their attendance numbers in place. With the new FAFSA process starting this year and student loan overhaul with the SAVE program, I would expect more changes in the handling of aid in the future.
Even the websites I mentioned earlier with the numbers for how aid is handled at a school need to be taken with a grain of salt. These published numbers are averages so you can’t assume that you will receive the published amount of grants or scholarships. Your situation is unique, and your numbers and financial award will be unique to you. If the average need based aid award is $15,000 but your EFC/SAI is within $5,000 of the COA, you will get less than the average, if anything, and not the average.
In summary, the process of shopping for college can be overwhelming. We all want to do the best for our kids and we want them to have a great college experience. It can be difficult to have a conversation with them where finances might eliminate an option they are interested in. But there are so many great schools out there and at the end of the day, I am a big believer that it is up to the students to make the most of their time at the school. Like most things in life, they will get out of it what they put in. Going to a very expensive school doesn’t guarantee a great experience. Heck, I wouldn’t trade my $6,000 per year University of North Dakota experience for anything. I got involved in campus activities, had a great time, and have many lifelong friends and terrific memories from there.
As a financial planner, I don’t have a dog in the fight as to where your kid goes to school. I truly want every child to go have a great experience and come out ready to take on the world. I just don’t want the student or the parents to have the downside of taking on an amount of student loan debt that can have a negative impact on your life. This can be avoided by taking some time upfront and doing some homework so you don’t make some the mistakes we just discussed here.
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