We have put together a series of 9 Basic Truths that you need to know about how to get college funding as early in the process as possible. If you do nothing else before sending your child off to college: Take the time to read these!
Basic Truth #1: Smart families maximize the financial aid process
When most parents hear the term “financial aid” they assume that they make too much money to qualify for anything. So, how do you get college funding?
The truth is that financial aid is based on a number of factors besides income. Number of children in college, age of parents, divorced or separation agreements and the cost of the college are just a few of the additional factors that go into the financial aid formula.
Choose to ignore the financial aid system at your own risk.
Families with combined incomes as high as $200,000 or more per year have qualified for aid. Don’t rule yourself out until you truly understand how this system works.
This is a system that is responsible for over $198 billion dollars in college aid each and every year.
Look for that $198 billion dollar figure to continue to rise, perhaps at an even higher rate going forward. Our government continues to pledge to push for significant increases in federal spending on college financial aid.
Whether your family qualifies for aid or not ultimately depends upon one number, which brings us to…
Basic Truth #2: Know thy college number
All successful college plans start with determining what your families Expected Family Contribution (EFC) number is.
This is the number that the department of Education determines that your family can afford to pay for college each year. A figure that is based on a number of things including: income, assets, age of parents, number of kids in college, etc.
Once your family knows its EFC number, it can quickly determine whether need based financial aid will be a factor or not.
Here’s the basic formula for determining need.
COA – EFC = Family Need
In this case, COA stands for Cost of Attendance at the college and EFC stands for Expected Family Contribution. If your EFC is less than the COA, then there is a chance for need based financial aid.
If there’s a chance for need-based aid, your family needs to do everything it possibly can to legally lower the EFC number in order to obtain as much aid as possible.
Which leads us to…
Basic Truth #3: How to lower your EFC and get the maximum amount of money from each school
Just like proper tax planning can minimize your tax liability; it is possible to set up your financial situation in the most favorable terms legally allowable in order to lower your family’s EFC.
Certain assets are counted much more heavily in the financial aid formula than others. Where you keep your money could mean the difference between getting $30,000 in financial aid and getting nothing. If you don’t know how to legally and ethically position your money properly for purposes of financial aid, you could end up losing thousands in financial aid.
Here’s an example:
Let’s say you have $20,000 in a joint investment account for one of your children.
The Department of Education is going to take 20% of that account, or $4,000 and add it to your family’s EFC. Essentially causing your family to lose $4,000 of aid.
This doesn’t have to be the case. There are certain accounts that the EFC formula does not take into consideration. Moving a child’s college fund into one of these sheltered accounts is perfectly legal and a great planning strategy.
A few of these “sheltered” accounts include IRA’s, annuities, cash value life insurance and others. All of which, if set up properly, can be accessed for college expenses penalty and tax free.
Basic Truth #4: Where to get the absolute best rate on A college loan
There are currently over 250 different types of college loans available in the US marketplace. Which is the best one for your family? And how do you know if you are getting the best rate and terms?
This used to be a tricky question for families. But not anymore.
There are several companies that compile all the information regarding rates and terms of every type of college loan on the marketplace and put them into one easy research tool.
But there’s a catch. Every one of these “college loan comparison” websites gives preferential treatment to the loan companies who pay them for placement. In other words, they make it seem as if certain loan companies are the best deal even if that is not truly the case.
However, there is one non-profit organization who doesn’t accept paid placement money to list available private loans. That company can be found on the web here:
Go there whenever you are ready to get the absolute best deal on a private college loan for your child.
Basic Truth #5: Private colleges versus state universities: Getting the best deal on both
Some schools are well-endowed and have the ability to award a lot of money to students. Other schools have very little money to give away.
It’s important for you to know this information before you ever apply to a school.
By knowing, in advance, which schools give the best financial aid packages; you can have your child pick schools that they have the best shot of getting money from.
This way, you don’t waste time and money applying to and visiting schools you will never be able to afford.
When researching a schools ability to award money, you want to look for 3 key figures:
- Percentage of need met
- Percentage of gift aid
- Percentage of self help
A school that is high in percentage of need met, has the ability to award maximum dollars for your child’s education. Even better still is a school that awards a high percentage of aid as gifts. Simply put, this is free money. In comparison, some schools will provide a high percentage of self-help money which are essentially favorable loans and work study programs.
Basic Truth #6: FAFSA Forms: The key to unlocking billions
There is no doubt that filling out government forms can be a challenge. The Free Application for Federal Student Aid or FAFSA is no exception.
But why fill out the FAFSA form in the first place?
Simply put, last year there was $198 billion dollars of financial aid given out to college students. More than 50% of that money was given out because of information supplied on the FAFSA form. This form is the gatekeeper for all that money. If you don’t fill it out or you fill it out incorrectly, you have lost your opportunity for your family’s share of the $198 billion dollar financial aid pie.
Now that we know why we are filling out the FAFSA form, here are 3 costly mistakes to avoid when completing it:
#1: Missing priority filing dates. Financial aid is given out on a first come first serve basis. Those who submit the FAFSA form on time and correctly are placed in the front of the line for any eligible aid. Priority filing dates vary by school but typically fall around February 15th of the year your student will be filing for aid.
#2: Overstating assets. The FAFSA form will ask for a number of things that your family owns. But not everything. In fact, you are able to legally exclude any qualified retirement assets. This includes your 401k and any IRA’s you own. On top of this, you are also able to leave off equity you have in your primary residence. Those are typically the two biggest assets that families own. Don’t include them on your FAFSA. They are not required.
(Note: This is NOT true for private colleges that require the CSS Profile form. If you child is applying to one of these schools, be prepared to provide information on our home value and other assets that are not required on the FAFSA form.)
#3: Waiting to get your taxes done. The FAFSA form and website clearly state that you can estimate your income and tax information from the previous year. But for whatever reason, a lot of parents wait until their taxes are done to fill out the FAFSA form. This can cause you to miss priority filing deadlines. Our advice, provide estimated tax and income information in the base year and then update that information later on your SAR once your taxes are done. If you wait to get your taxes done and miss a priority filing date, you will lose aid.
Basic Truth #7: The truth about private scholarships
I regularly speak in front of families with college bound kids and one of the questions I ask at the beginning of the talk is, “By a show of hands, how many in here are interested in private scholarships?”
Nearly 100% of the people in attendance raise their hand.
And they should be interested. Who doesn’t want free money?
But the truth is private scholarships are a tiny percentage of the $198 billion dollars in aid given away each year. In fact, less than 2% of this enormous figure is from these types of scholarships.
It is not in your best interest to spend tons of time chasing and applying for these types of scholarships.
But, don’t ignore them either.
In fact, here is a great and free resource you can use to search for and apply to private scholarships.
It can be found at www.fastweb.com.
This is a free resource. It only takes a few minutes to plug in your child’s information and submit. Once in the system, they will alert you to any private scholarships available for application.
My advice is to pick 5 of the scholarships that you have the most promise of getting accepted and to apply to those. This should only take a few hours total.
Remember, this is a small percentage of the available $198 billion dollars. Focus your attention elsewhere.
Basic Truth #8: “College Cash Flow” What is it and how to make it work for your family?
A major mistake that families make is assuming there are no extra dollars that can be allocated for college costs coming from their household income. While every family’s situation is different, there are an overwhelming number of families who can free up $100, $200, $500, or even $1,000 or more per month to put towards their kids’ college education without changing their lifestyle whatsoever.
A good cash flow analysis will uncover what strategies can be used by each family. Strategies that could include debt management or consolidation, budgeting, and tax reduction.
Here are three great cash flow strategies to get you started:
- Consider switching from a 15 year mortgage to a 30 year mortgage. On a $250,000 mortgage, this is a difference of $662 per month (assuming a 3.65% rate mortgage).
- Consider switching to a high deductible car insurance policy. By switching one car, a family can save as much as $60 per month. Switch two cars and save up to $120 per month. Three cars would equal $180 per month.
- Consider paying off high interest credit card debt with equity in the house. The average family in the U.S. carries $8,000 in credit card debt at an average of 13% interest, which comes out to a payment of $182 per month. By rolling this into a new mortgage, an additional $145 per month is freed up for college expenses. (Assuming 3.65% over 30 years)
Combine all three of these strategies for an additional $927 per month of college savings. That monthly savings can pay for a lot of college bills. Plus, once college is paid for it can go towards supplementing your retirement fund.
Make sure and give yourself a solid cash flow analysis. It will not only ease the burden of funding college but will make a major impact on your family’s long term financial health.
Basic Truth #9: Smart families seek after and know where to get help
At this point you should have the makings for a solid plan on how your family will fund college for all of your children. But, the job of paying for college is far from over.
In fact, College Funding 101 and it’s 9 Basic Truth’s is just a starting point.
The next step is to put this knowledge to use. A step that can be frustrating.
If you are like most families, this is your first time going through the college process.
There is a lot to learn and act upon to make this process work. More than likely you are going to have questions. There are a couple of things families in this situation can do. Let’s take a look at each, along with the pros and cons.
#1 – Continue researching and learning how to maximize this process. Otherwise known as the “do it yourself” method.
Pros: There is little to no cost to search the internet endlessly, attend seminars, or check out books from your local library on the topic.
Cons: Time consuming and possibly second guessing each decision you make.
#2 – Hire a company or college consultant to help your family with the college funding process.
Pros: You get to draw upon the expert experience and track record of helping families pay as little out of pocket as possible for college. Saves time.
Cons: Requires an upfront investment of money in order to save many times more in the future.
If you enjoy doing things on your own and have the time, the option 1 is a good option. You probably still go down to the library and pick up the paper tax forms every March and hand write your taxes. I get it; I used to be that way too.
If you’re not in that boat, than option #2 may be right for you.
Bye for now,
By Charlie Donaldson