Managing the Rising Costs of Higher Education

If you have a child or grandchild in high school quickly approaching college age, the cost of education is likely on your mind. According to the National Center for Education Statistics, college costs have increased by more than 180% since 1980, and half of all bachelor’s degree recipients from public or private colleges graduated with debt (averaging $28,400 in 2019-2020). It may be a priority of yours to help your family avoid student loans, but with the average price to attend a four-year college full-time at $28,775/year (2019-2020), it’s clear why our younger generations are forced to take on debt.

So, What Can We Do?
We can’t control the cost of education or rising inflation rates or how the markets will react. But we can shift our attention to the areas in our control. Three areas we focus on are saving, strategic decision making, and maximizing the financial aid process.

Have You Saved Enough?
It’s always best to begin saving early, but what’s the best vehicle for education savings? 529 plans are ideal savings vehicle for college education if you are confident your child will attend college. These types of accounts allow you to save for education on a Federal tax-free basis and some states offer a deduction or credit for contributions. Additionally, distributions from parent- and student-owned accounts are not counted as income on the FAFSA®. There are downsides to 529 plans as well, including taxes and penalties if you spend their proceeds on anything other than qualified education expenses.

The best way to ensure success is to have your financial advisor help you create a separate savings strategy for your funding goal.

What’s Your Strategy?
We often ask children what their top choice or dream school is. But we rarely follow-up with the strategic questions like what the rate of return on a degree may be.

• What careers are you interested in?
• Have you researched what different professions earn?
• Is there a less expensive, higher ranked program than what is available at your number one pick?

It’s about finding the perfect school to help you achieve your goals that’s also in your budget.

What are Your Opportunities for Financial Aid?
Completing the FAFSA® (Free Application for Federal Student Aid) provides you with the opportunity to qualify for aid through the government or school you are applying to. The application process has become very streamlined over the years, with the average time to complete at 30 minutes. The Federal Student Aid website (studentaid.gov) has detailed instructions and videos on what to gather before starting the process, and you now have the ability to transfer your tax information into your FAFSA® application directly from the IRS’s website.

Note: The application is FREE. Be aware of scams charging you a fee to apply.

Per the Federal Student Aid website, when filling out the FAFSA®, the goal is to qualify for and accept Financial Aid in this order:

1. Free money (e.g., scholarships, grants)
2. Earned money (e.g., work-study)
3. Borrowed money (e.g., federal student loans) – subsidized, unsubsidized, PLUS, private

So how do you qualify? The FAFSA® uses the information you provide including income and assets of both the parents and student (not including the primary residence or retirement accounts). It also accounts for contributions from other family members for education to determine a family’s Expected Family Contribution. Understanding this formula is critical to knowing how your financial situation will impact your qualification for aid. Schools then determine the Cost of Attendance, which is unique to each school, and subtract a family’s Expected Family Contribution. This gives the school an estimate of aid based on financial need.

Cost of Attendance (COA) − Expected Family Contribution (EFC) = Financial Need

It may be that your child will not qualify for need-based financial aid, but you should still complete the form because some schools require it to award merit scholarships. A student may qualify for a merit scholarship regardless of their financial need. Also, some types of aid that you may qualify for are finite and distributed on a first come, first served basis so you should complete the application as soon as possible after it opens on October 1st.

There are many additional factors to consider when planning for college beyond what’s discussed in this article. If you are starting to plan for a loved one’s college education costs and have questions related to college funding, please feel free to reach out to you JMG financial advisor for more information. The contents of this article may or may not be directly applicable to your situation. In either case, we invite you to pass this along to someone who may find it helpful.

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