When my son graduated from UVA about 20 years ago, I shook the President’s hand and I said, “this handshake cost me $40,000.” Today the cost is closer $120,000 to $160,000. And I can get into the debate on loan forgiveness but rather would like to discuss options available to make college more affordable.
If you’re the parent of a senior in high school, you’re about to embark on the first step of paying for college. First step is submitting the “Free Application for Federal Student Aid” or FAFSA. It’s an application that all families should apply for, regardless of income because most colleges use the application to offer additional financial support, or scholarships, regardless of need. And now is the time to start this process.
The FAFSA application
The application process begins right now after Labor Day, when students and parents each create their own FAFSA account. While you can’t file the forms until October 1, you can set up your account now at StudentAid.gov under the “Apply for Aid” tab. Since parents must upload the most personal financial information, these separate accounts with passwords allow for privacy from your teen children.
After opening your account, you’ll receive a FAFSA ID. That number, along with your password, allows you to upload the required information securely, once the forms become available on October 1. Your most recent tax returns are gathered automatically with a secure link to the IRS.
Your tax forms provide your income and you’ll have to list the value of all your assets and investments including parent owned 529 plans because 5.64% of the value is considered accessible for college in any one year — not included are such assets as your family residence, your retirement accounts and smaller family-owned businesses nor your children’s UTMA accounts (UTMAs are reported as an asset of the child).
Yes, FAFSA is intrusive. It requires reporting of both income and your assets — so the government can decide how much in federal student loans your child/children can receive for the coming year. You’ll have to file an updated one every year in which you re-apply for aid.
Contrary to what you may hear, the “formula” for calculating the expected family contribution (EFC) may seem confusing until you run some examples as I had. While it’s oversimplistic to say, it’s been my experience that basically your EFC is going to be based on your adjusted gross income and the number of your children going to college. Nevertheless, the idea is to let the family know how much federal financial aid their student can receive – and how much parents should be prepared to provide.
Is federal financial aid enough?
Lest you mistakenly think that federal aid will cover all the costs of college, consider these numbers. For 2022-23, the maximum Pell Grant amount is $6,895. These grants are made based on need.
As for federally subsidized (interest is not calculated until you quit or graduate) and unsubsidized (interest is calculated from day one even though it’s not due until you quit or graduate) loans, freshmen may only borrow $5,500 per year; sophomores may only borrow $6,500; and juniors, seniors and those who study beyond their fourth year are limited to $7,500 per year. Don’t be surprised if there is a huge gap between what federal financial aid offers and the full cost of college — every year, for four years!
As parents, you’ll be on the hook for the difference between the federal aid granted and the cost of attending college (which includes room, board, books, and transportation). Some schools will offer additional aid in the form of work-study programs, grants or “merit aid.” At Scholarships.com you can search immediately for more free money. But don’t count on that filling the gap.
You can make up the difference yourself by using Parent Plus loans, which do not require financial need. However, Plus loans are the most expensive way to borrow, based on rates and fees. An alternative is refinancing your home (although the interest on borrowings used to pay for college is not deductible).
Many families turn to private lenders for student loans, at high rates and with no income-based protections. The only way out of private loans is bankruptcy.
The real challenge
When this eye-opening revelation hits you, it’s time to have “the conversation.” That’s the moment you tell your high-school senior that you simply can’t afford to send her or him to that dream school. Yes. Parents are allowed to say no. Your determined kids will find ways to pay for college themselves as there are a myriad of programs and student financial aid available.
The following outline a few ways to make college more affordable such as:
- Scholarships nonprofits, and other private organizations with December 31 filing deadlines.
- College credit which are advanced placement courses in high school which can save thousands.
- Community colleges for the first two years with much lower tuition and ability to stay home and save room and board.
- No-loan schools there are more than 50 colleges that provide no long financial aid packages that feature scholarships, grants, and work-study opportunities. Yes, most of them are small colleges.
- Just say “no” big expensive colleges (if you’re going to pay for it). Good education is also available at smaller more affordable colleges.
- 529 plans are one of the most effective ways to save. Plan to start early.
- Money smarts, that’s a personal financial class the student can take in high school to learn the basics, especially on how to avoid racking up debt of any kind.
- Other sources such as checking out college websites which can be found at CollegeCalc.org for fees.
- Trade Schools: Four-year college isn’t for everyone, and trade schools offer a great alternative for a kid that isn’t suited for college or wants to go. Electricians, plumbers, carpenters etc. are in great demand. These professions pay very well in fact better than some jobs requiring a college diploma.