I love to talk about college financial aid. I am not a financial advisor or a college advisor! but I often see confused young parents writing on the list serves about saving for college, so here is my personal experience:
When I save money to a savings account, I spend it. When I inquired about saving in a UTMA custodial account, my accountant said, "well, you know it is the kid's money. It isn't earmarked for college and if they decide that they want to take it all to Amsterdam for that teen age backpacking trip, they can." Because it is the kid's asset, 100% of it is factored into the financial aid calculation. Many states have 529 plans. We got a little state tax break for saving money with the NY State 529, so we did it. A little every week, out of the paycheck, painless, grew to modest amount that didn't make us feel like totally bad parents. Also, even though the kid's name is on it, it is actually your (the parents) money. When it comes to financial aid calculations, it plays a minimal role (figured at the parents very low percentage). NY doesn't mind if you use it for colleges in other states.
Fast forward to junior year and the college catalogs start flooding in. We had shopping bags full, times two kids. I did a little reading as I am want to do. Some schools give some financial aid, some schools give merit aid, some schools give 100% "demonstrated need", in-state schools are cost effective, out-of-state schools charge you as much as a private school (I am speaking in generalities of course). My thought was always that we could hack two state tuitions somehow, but that the total cost of private was a deal breaker without a lot of help. There are so many awesome colleges and my kids where paralyzed by the variety. I made it easy on them.
I googled "best value colleges and universities" and I found this list. It also happens that as I read about them, they were mostly schools that give "100% demonstrated need". I said, "okay, daughters, this is the first cut. You can choose from these schools. You must also find at least one in-state school, and a school that might give you a merit scholarship." At that point we started thinking; safety/reach, large/small, city/country, hippy/preppy... They are usually bargain shoppers, but when it came to colleges they wanted the name brand (it was them not me, I swear your honor!). Happily the schools that they wanted were all on this list and many that they hadn't thought of. Many of those schools are very hard to get into, so to take advantage of the large endowment, you also have to be a pretty good catch.
Demonstrated need is kind of determined by the feds, kind of by the school. What they do is figure out with the FAFSA (free application for federal student aid) and if you are applying to private schools, the CSS (the College Boards financial aid profile) your EFC (estimated family contribution). This is a code number that indicates what the feds think that your family can tolerate to pay for college for one year (the number doesn't represent the actual dollars though). The private schools take this info and they stir it up with a bunch of other info; your home equity, the make and age of your car, if you have a vacation home, more in depth info about your investments or your business and come up with your "financial aid package". You will do this every year (it sounds harder than it is- considering that it could save you thousands of dollars, it is well worth the time). The schools that provide the magic "100% demonstrated need" take the total cost of attending their school (including room and board, books, travel) and subtract your EFC and the difference is what they cover. Most of these schools won't factor in any loans, which is AWESOME. What we found in these schools was they were giving the difference almost totally in grants and scholarships (cash money towards your bill that doesn't ever need to be paid back) they will also expect the kids to do a little federal work study and get a little job over the summer to pitch in (essentially a couple K). The thing about the college's calculation of EFC is that they also take into account how many kids you have in college at one time. This is a simplistic explanation: If they determine that your family contribution is $30,000. and you had your kids 4 years apart - you will pay $30,000 for 8 years. Here is where it finally pays off to have twins: if you have 2 kids attending simultaneously for 4 years, you can still only afford to pay $30,000 a year. It is essentially two for one; $15,000. each. Unfair you say? Remember, I paid my dues early. My advice to parents of singletons - get busy, you may still be able to take advantage of this for a couple years of overlap.
Regular nice private schools that give need based aid (but not the magic 100%) gave nice grants for some of the difference (but not even close to the other schools) and the rest of the difference in loans (which do need to be paid back and frankly aren't much help at all!). The in-state school came in at our EFC and gave nothing at all. We really didn't expect it. The girls made a hail Mary pass with a merit scholarship at one very nice school and came back with extraordinary money (in one case, full tuition for 4 years). Let me just say, that my kids are hard workers. They have been very good and diligent students. They did not have perfect SAT's, they did not start a non-profit or write a best seller at 16. They were very active in a couple activities that they were passionate about and they wrote beautiful essays that expressed themselves to a 't'.
So to set yourselves up for a happy, fiscally prudent life:
- save generously for retirement (you can borrow for college but not for old age). Your accumulated retirement funds won't be a big factor in the aid calculation because the schools do not expect you to mortgage your retirement for school. But, don't be a wise guy and put a huge percentage of your salary into a 401k in the years right before college. They aren't stupid. They can totally see that you are trying to 'shelter' the money and make your amended tax total look way lower that it ordinarily would be.
- save moderately in a 529, or whatever, so that you have some money to draw on. The schools and the feds don't want to penalize you for saving for this. There is a rumor out there that you will be screwed for being a responsible saver. We have absolutely found that wasn't true.
- pay off your credit cards. The aid calculation doesn't care whether you have debt or not. You are only hurting yourself.
- owning a home doesn't necessarily hurt your aid. We found that the super generous schools 'capped' our home equity - something like 2.5 times our yearly income. Even though our modest home is now worth gobs more than we paid for it nearly a quarter century ago, the schools in question all knew that we could never afford to buy at current market value. This is not always the case. We heard of a less than generous college that sent a home appraiser to make sure the family was giving the full value of their home on the reports. It goes without saying, we would never have applied to that school.
The bottom line is that you need to have a clear eyed conversation about boundaries before you fall in love and buy the t-shirt. If you, the parents, are paying for college and you let your child pick the schools first and close your eyes and cross your fingers hoping that they will get nice aid, you will get the aid that you deserve. If cost is a factor, it is your job to talk to your child about what you can afford and what they should expect, and letting them fall in love with a school that you can't afford is just cruel. If your child is paying, letting them mortgage their whole future as a 17 year old for some crazy impulse buy that they don't understand the true implications of is just bad parenting.
For more info about financial aid and financial literacy check out Frugaldad.com