In my final semester at the University of Georgia I paid $7,000 in tuition as an out-of-state student. Today, UGA tuition is $30,404 per year, an increase of 5.3% annually. The estimated total cost for an out-of-state student to attend the university is $45,762 per year. At this rate, it will cost $110,500 to send my son to my alma mater in his freshman year.
When I calculated this number, my first thought was that a college degree is no longer worth the price. What job could possibly pay him enough to justify this expense?
College planning is more than just a savings strategy.
Here’s a dirty little secret; no one pays the sticker price. Through a combination of grants, scholarships, tuition discounts, and loans, schools are scrapping together packages to attract students. When we look under the hood, planning for college is a complex and discombobulated formula.
EFC (Expected Family Contribution)
It all starts with the expected family contribution (EFC) amount. This amount is calculated based on a family’s income and assets available to pay for college. Even families with high incomes may qualify for financial aid, especially when considering private schools or when there are multiple children in college. There are planning techniques to reduce the EFC by shifting assets, income, and taxes to different family members or to different savings buckets. Since taxable savings are considered fair game on the FAFSA, but home equity is not, sometimes paying down mortgage debt can reduce the EFC. Other strategies include lowering retirement savings contributions to pay more tax during the financial aid calendar period, paying off credit card debt with savings, and avoiding capital gains on investments.
Even if you think you won’t qualify for financial aid, fill out the forms anyway. Colleges want full-pay students because they are potential future endowment donors. But the only way they will know you can pay is if you fill out the financial aid forms. This may entice a school to offer more merit aid or even tuition discounts.
List of Schools
Gone are the days of visiting college campuses and selecting a favorite based on the look and feel of the campus. After the EFC, the list of schools the student is considering is the most important factor. Not all schools make up the difference between the Cost of Attendance (COA) and the Expected Family Contribution (EFC). Over 95% of students limit their list to within 300 miles of home, but schools looking for geographical diversity may offer incentives to attend. It’s important to spend some time researching the best options for each student.
The Baby Boomers have amassed the largest pool of wealth of any generation to date. Luckily many are willing to assist with college expense for their grandchildren. However, gifts to the student or payments directly to the school will reduce financial aid. It’s best for grandparents to gift to the student during their senior year, after the financial aid calendar period, or to use gifts after graduation to pay off loans. Distributions from grandparent funded 529 plans should also be delayed until senior year. Unfortunately, few students finish an undergraduate degree in four years. The silver lining may be more years to use grandparent funded 529 funds to pay for that extra tuition.
I’ve heard horror stories about the high stakes of academic admissions. Schools are inundated with so many applications, they cannot review them all. Some schools set arbitrary GPA limits and will not open applications below a certain level. This can be heartbreaking for students set on a specific school who achieve less than academic perfection. But the competition lessens after freshman year. Many students are attending a different school and transferring in to their first-choice sophomore year. Community college is also a money saving option. No one asks if you attended all four years at your alma mater once you have your diploma.
My cousin is a high school senior this year. She told me last Thanksgiving that she does between 4-6 hours of homework each night. All of her classes are Advanced Placement. She’s driving to the local university for half of her classes this year. I can’t remember doing homework in high school, and I was a solid A minus student. This level of intensity seems unhealthy to me, but that’s the game these days.
Luckily paying for college is not as scary as it seems. With careful planning around the financial aid calendar and a dedication to finding the best schools for each student’s situation, families can scrap by without destroying retirement savings.