5 Things You Need to Know About Paying for College

Patrick Cote |

By: Patrick Cote

Student loans are a hot topic these days, with the recent announcement that the US government is forgiving $10K - $20K of federal student loans for borrowers with incomes below $125K (single) or $250K (married).

If you have children at or below college age, there is a good chance that the entire topic of college is a source of stress in your family. The application process is much tougher now than in the past.  It is a running joke amongst many parents now that they would not be admitted into their own alma mater if they were to apply today.

Because it has become so much harder to get into the leading colleges, many families now worry more about having their kids get accepted first and then just figure out how to pay for it.  However, it is much better for families to start considering funding college at the same time that they are applying for admission. These are the five things you need to know about college funding:

1 – College is more expensive today

No surprise here - everyone knows that college is more expensive than even ten years ago.  The actual out of pocket cost is a lot more than just tuition – at many of the top private colleges the full cost is ~$80K/year.  That means that the total bill runs to $640K for a family with two kids who go to 4 year private colleges, which is a lot higher than the median price of a home in the US ($429K).

2 – At the extremes, college funding is straightforward

Needs-based financial aid will not be available for wealthier families, however, they may still be able to receive merit scholarships at some schools.  At the other extreme, families with low income and little to no assets are now in a position to receive significant financial help for college.  Some of the colleges with the largest endowments are now beginning to provide more help – for example, Princeton has a $38 billion endowment and has recently announced that it will cover all college costs for students whose families make <$100K per year.  Kids with strong grades and SAT scores who come from historically disadvantaged groups may get everything fully covered at some of the other top schools as well.

3 – For everyone else, college funding is now much more complicated

With costs continuing to increase, even many millionaire families find it challenging to cover college expenses.  Fortunately, many of these families will still qualify for financial aid, depending on their exact situation. The key is the EFC (Expected Family Contribution), which is what colleges think you can afford.  The EFC is calculated based on income, typically 22% to 47% of parents’ AGI (adjusted gross income) and parents’ assets, typically 5.64% of assets, excluding retirement accounts and home equity for the primary residence.

There is a lot of misleading information floating around regarding financial aid eligibility.   For example, you might hear that families making >$200K will not qualify for financial aid.  This is not necessarily true – with the cost of college being so high now, even higher income families can qualify, particularly if they have several kids in college at the same time.

It is critical for every family to fill out the FAFSA (Free Application for Federal Student Aid) form, since it is required even for merit scholarships.  In addition, many private colleges will require the more detailed CSS (College Scholarship Service) profile to be completed as well.  It is really important to complete these applications early.  For the school year starting in the fall of 2023, parents should complete the FAFSA form in October 2022 because financial awards start being handed out as of 11/1/2022 and are often given until available funds are depleted. 

4 – Be careful about “financial aid”

One would think that all financial aid would be good, particularly since many families need all the help they can get to cover the cost of college.  However, colleges will generally lump all types of financial support into the aid category.  Some forms of financial aid are clearly very good, such as grants or scholarships, which do not need to be repaid.  Direct subsidized loans are generally good as well, because interest is being paid by the government while the student is enrolled – however, these are often only available to lower income applicants.

Unsubsidized student loans are where families and students can run into trouble.  They fall into the category of financial aid and are presented to families as a means of helping to cover the college costs.  However, there are no requirements that colleges show how likely the student is to be able to repay the loan (e.g., showing what the average income is for graduates in a given program).  Unfortunately, this can lead to situations in which the students have a large amount of student loans but are unlikely to generate enough income to be able to repay them.

5 – Shop around for the best solution for your child

From a financial perspective, the best choice of college for your child will depend on your family’s specific situation.  The very top schools will generally not give out merit scholarships, however, they are more likely to give out large grants/scholarships based on need.  Some good schools may give out automatic merit scholarships to encourage top applicants to attend.  For example, the University of Alabama gives out-of-state freshman automatic merit scholarships from $6K (for SAT scores of 1260-1290 and GPAs of 3-3.49) to $28K (for SAT scores >1420 and GPAs of 3.5+).

If your child is in the fortunate position of being accepted at multiple schools that might be a good fit, it is worth calculating what the 4 year net cost to attend would be for each school.

The key take-away is that while the college application and financing process can seem daunting, it is important not to rule out any schools based on the potential high costs.  By completing the FAFSA forms and calculating your 4 year net cost for each school, you will be well-positioned to understand the financial impact of college and make the best choice for your family.  A good financial advisor can help with the process, so please feel free to contact us if you have any questions about college funding.