Maximizing College Savings
As students gear up to receive admissions letters, we thought we’d share some thoughts on planning for and paying for your student’s college tuition.
With the cost of attendance at some of the most elite schools topping $75,000 per year, on average, students today face a difficult decision when determining their path to higher education. At that cost, students in our country face staggering amounts of debt for undergraduate and graduate degrees that often follow them decades into adulthood.
Clients and friends often ask if they are “missing” something in the process of planning for their children’s education. They hear stories about their friends qualifying for financial aid or read about shifting assets around to boost their chances of qualifying for assistance.
I sat down recently with Betsy Greaney, Director of College Placement Consulting LLC, to catch up on some frequently asked questions. Her advice has been incorporated into the Questions and Answers below.
When is the right time to begin planning and saving for college?
Save early, and save often. The 529 College Savings Plan is a terrific way to start savings for a child’s future. The earlier you contribute to a 529 account, the longer it will be able to grow. If you have the disposable income to start saving when a child is born, that is the right time to contribute to a plan. Remember the limitations on the use of funds held within a 529 account; funds used for non-qualified education expenses will be subject to ordinary income tax and penalties.
When should my student engage a college counselor?
Betsy recommends engaging with a college placement consultant no later than your student’s sophomore year in high school. The first step in her discovery process typically begins with completion of the Free Application for Federal Student Aid (aka, the “FAFSA”) and the College Scholarship Service profile (aka the “CSS” or the “institutional” profile).
Once you have an idea of your eligibility for need, a college placement advisor should be able to guide you and your student through the process of building a list of schools that will be able to “fit” your student’s desired academic offerings (and budget!). This is a great starting point to begin shaping expectations for your student (and anxious parents).
How do 529 plans work?
Assets within a 529 plan grow tax free when used for qualified education expenses, and some states offer tax deductions for contributions made by residents of their own state plan. Each state works with a custodian to sponsor its own plan, so be sure to do your research if you hope to benefit from your own state’s tax deduction.
Parents should also remember that not every child will go on to pursue higher education. However, 529 accounts may also now be used for vocational and trade school tuition, as well as higher education, elementary or secondary school tuition, and related qualifying expenses.
Assets held within a 529 Plan may reduce a student’s eligibility for financial aid by up to 5.64%. At one point in time, 529 Plan assets held in grandparent-owned accounts were more punitive to students applying for financial aid. However, this is no longer relevant with the updated FAFSA, which only considers taxable income.
Speak with a Certified Financial Planner™ practitioner to understand how grandparents might “superfund” a 529 plan for their grandchildren up to $80,000 per year, per beneficiary using a 5-year gift tax averaging exclusion.
How Much Do I Need to Save?
It depends! Betsy encourages parents to find the “right school” for their students and to consider the total financial “investment” that you (and your student) will make in order to graduate, along with the likely earnings that a student will have in his or her chosen career path. That will help you determine what level of income will be available to assist with the repayment of student loans (if that is part of your financing package).
There are a number of online calculators that might assist you in determining the amount you will need to save for college. The Maryland 529 Plan offers one here and the Virginia Plan has one here.
Still, we recommend reaching out to a Certified Financial Planner™ practitioner to discuss your student’s specific objectives and to customize your savings plan.
What if we don’t qualify for financial aid?
There are a number of strong colleges with selective admissions and strong endowments. Working with a college counselor will help your student determine an appropriate list of schools to fit his or her needs.
Depending upon your student’s interests, he or she may also qualify for loan forgiveness or financial assistance programs at the state level. Many states offer assistance for students who pursue careers in areas of healthcare, public service, computer science, and other industries if they are working in under-served areas.
What are the FAFSA and CSS applications?
The FAFSA is used to determine federal aid, while the CSS is used to determine private assistance. The CSS is currently used by approximately 200 “high-profile” schools to help determine a student’s need and eligibility for financial aid provided by the school’s endowment or scholarship fund.
A number of variables will determine a student’s ability to qualify for financial aid – including the student and the parents’ age, income, asset level, marital status, and even how many siblings a student has. If you do not know whether you will qualify for need-based aid, you might consider trying the College Board’s online Expected Family Contribution (or “EFC”) calculator prior to completing the online application. Note that the EFC is slated to be replaced with a new term that will be known as the “student aid index.”
Although the calculations on both the FAFSA and the CSS are typically similar, the actual calculation of the EFC on the CSS (the non-federal application) is unique to each of the participating 200 schools. These schools also consider the amount of equity in your home, retirement savings, and grandparent-owned 529 plans in their need calculations.
What is the Net Price Calculator?
Each of the 200 colleges using the CSS has its own proprietary net price calculator. Many of these proprietary financial aid calculators tend to yield similar results when estimating a family’s expected cost of attendance. Some schools take into account merit, while some ignore merit
Betsy explained that the most elite schools are less likely to give merit aid: “Villanova doesn’t ask for grades or SAT scores on their net price calculator; they don’t need to attract academic students. But a less competitive school may provide both financial aid grants and merit grants. Location may also contribute to the popularity of the school, which means that may factor into whether the school needs to attract a top student to attend.”
By law, every college and university must publish a net price calculator on the front end of their website. If there is a particular school of interest, run that net price calculator now to understand what that school might cost. The results will differ by school.
How do the FAFSA and CSS applications score or weight assets versus income when determining a student’s eligibility for financial aid?
Do not be afraid to save either into your own retirement account or your student’s 529 plan. When determining need on both the FAFSA and the CSS, income is a more significant factor than assets. On the FAFSA, Adjusted Gross Income is weighted about 20%, while assets are weighted at approximately 5.64%.
The FAFSA does not include retirement assets, while the CSS includes retirement assets and income diverted toward retirement accounts. Applicants will need to provide tax returns, W-2s, and other supporting documentation to show their income and retirement contributions for prior years.
Keep in mind that saving more in a retirement account may lower a student’s EFC. However, saving in a 529 will not have the same effect (since those assets are earmarked for education). Even so, assets are “penalized” or weighted less than income.
What about assets and income in my child’s name?
Assets held in your student’s name are weighted significantly higher than assets in a parent’s name. When determining a family’s contribution, parental assets are credited approximately 5.64%, while student assets are credited up to 20% of the account value.
Income attributable to a student is weighted by approximately 50%, including income from investments.
If making a choice between saving into a 529 account and a custodial account, it would be better to save into a 529 account for purposes of qualifying for financial aid.
Should I take on more debt to improve my student’s application for aid?
Taking on additional debt will not improve the outcome of your EFC on the FAFSA.
The CSS profile considers home equity, so taking out a loan to reduce equity would need to be spent (or else it may appear as an asset available toward the Expected Family Contribution). Note that some CSS calculators may exclude retirement accounts.
If you believe your student is academically competitive and would like him or her to consider one of the 200+ schools that use the CSS to award financial assistance, the best course of action will be to begin your savings plan as soon as possible. Do not expect to “hide” assets in an attempt to improve your EFC calculation.
Is emancipation a possibility for my child in order to qualify for financial aid?
Yes, but this is a bit extreme!
Private colleges will tend to be the most expensive option for students with tuition of approximately $43,000 per year, while public schools will run about $28,000 for out-of-state students, and about $12,000 for in-state residents. Depending upon a student’s strengths, he or she may qualify for financial aid that significantly reduces the cost of attendance at even the most expensive schools. Still, not every student will be able to get into an Ivy League institution, nor is that the best path for every student.
We recommend framing early discussions around college admissions and financing with a determination of 1) the caliber of school your student is likely to be admitted; 2) the total cost of the attendance; and 3) the likely “return” on investment. If student loans are a part of your financial package, we recommend taking a loan out in your student’s name rather than the parent’s names.
When saving for college, parents will be better off saving as early as possible rather than trying to circumvent or game the system. Although you may hear about tricks or actions you could take to transfer your assets or divert income to someone outside your family, your best course of action will be to save, save, save. Albert Einstein is said to have described compound interest as the “eighth wonder of the world.” He said, “he who understands it, earns it; he who doesn’t, pays for it.”
We highly recommend working with a Certified Financial Planner™ practitioner to help you weigh your own financial goals, along with your children’s academic pursuits. Engage your student in the discussion to understand the investment that you and your student will be making to pay for college. Understanding this first big investment as your student launches into adulthood will be an invaluable lesson and help him or her on a path toward financial independence.
About the Author
Jane DeLashmutt O’Mara, CFP®, is a Senior Portfolio Manager at FBB Capital Partners. She works with high-net-worth clients, incorporating education and compassion in the financial planning process. She enjoys working with endowments, trusts and families with unique or complex estate planning needs. Jane is a Certified Financial Planner™ practitioner and a member of the National Association of Personal Financial Advisors.
College Placement Consulting, LLC is a college planning firm providing students nationwide with college planning advice. Betsy Greaney is passionate about helping students use college planning as a learning opportunity to mature and develop skills and traits that will make them successful in college.
College Board: College Board – SAT, AP, College Search and Admission Tools
Expected Family Contribution Calculator: https://bigfuture.collegeboard.org/pay-for-college/calculate-your-cost/expected-family-contribution
CSS Profile: CSS Profile Overview Training Course – ProProfs
Federal Student Aid: https://studentaid.gov
State of Maryland Financial Aid Programs: https://mhec.maryland.gov/preparing/Pages/FinancialAid/descriptions.aspx
Maryland 529 Online Calculator: MCIP College Savings Planner (wealthmsi.com)
State of Virginia Financial Services for Students: Virginia State Grant Programs | Student Financial Services
Virginia 529 Online Calculator: 529 Calculators | Resources | Virginia529
Edmit Blog focused on Paying for College: https://www.edmit.me/blog
Nitro Blog focused on Paying for College: https://www.nitrocollege.com/
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