A good college plan for most families has to not end at just saving for college but also saving on the cost of college

by Dan Kaibel, CFP®

Paying for college is one of the greatest financial challenges facing middle-income America today. As a result, our national student loan debt has grown from $240 billion in 2003 to $1.3 trillion as of March 2016—that’s an increase of more than 510 percent in just the last decade, according to a 2016 study by the Global Financial Literacy Excellence Center at George Washington University. The Federal Reserve estimates we are adding $2,726 per second to our student loan debt.

While the majority of families will have some amount of student loan debt in their college-funding solution, graduates leaving college with too much debt may be forced to delay their lives. They may not be able to save for a house or for retirement, and they may delay getting married and starting families of their own. As a rule of thumb, for every $10,000 borrowed, they will owe $100 per month over 10 years.

The four-year sticker price of college today ranges from $100,000 (in-state) to $250,000 (elite/private)—that’s a $400,000 to $1 million investment in education for a family with four kids.

While this is a lot of money, parents also know that getting a good education at a reputable university is often an investment worth making in their children. In 2014, the median earnings of young adults ages 25 to 34 with a bachelor's degree ($49,900) were 66 percent higher than the median earnings of young adults who only completed high school ($30,000), according to the National Center for Education Statistics. There is of course other good benefits that come from the college experience. Those with a bachelor’s degree also reported higher job satisfaction and quality of life; so, college remains a good investment—as long as you don’t overpay for it.

Because most families cannot simply save enough or earn enough to write a check for college, being smarter consumers of education is imperative. Unfortunately, the combination of guilt on the parents side for not saving enough money, the lack of understanding on how financial aid works and some of the emotion involved that lead to a poor financial decision.

When you understand how financial aid works, you will have the strategies to cut the cost of college, reduce the stress and anxiety surrounding college funding, and ease any guilt that you have not done enough to prepare. It starts with understanding all the moving parts.

How can families look at their current situation and put together an executable plan? Families need to understand not only what it costs to send their kids to college, but also how they will pay for it. How will college be paid for over all four years. Parents though, can’t just look at paying for college in a vacuum. For many, retirement is just around the corner. If they can save a bit today on college they can increase the likelihood of a good retirement as well.

Making good decisions by using a step by step process when paying for college.

by Dan Kaibel, CFP®

There is a lot at stake when it comes to making decisions for the parent and child when it comes to choosing a college and how to best pay for it. There is a lot of information out there on the subject but it can be difficult to determine what applies to your particular situation. A good way to make sure you're evaluating the information correctly and in a timely manner is to walk through a step by step process.

Before beginning the process it would be best if parents and child (perhaps other family members who may be contributing) commit to good communication. Parents will of course need to work together on many decisions but it is also important not to forget the child's input and needs in the process. While the parents may be investing a significant amount of money and have more experience making big decisions they may inadvertently miss out on a great opportunity. The opportunity to work with their child and potentially model what it takes to make a good decision could be one that affects the family for years. After all, the child plays a crucial part on how well the college experience works out, not just for the next four years but also beyond. It is important for the communication to go well. The earlier and better the communication is, the less time and opportunity there is for expectation gaps to arise for the family. (see 'College Talk' under the Financial Planning Today dropdown).

Having good communication on this subject is important but you also need the right information at the right time to help you make the decisions you will need to make. Rather than beginning with a college choice and perhaps rushing to do everything you can to make that happen, it is important to ask a very important question. What is the most cost effective way to pay for it. It is fine to do some research on what type of or specific college the student would like to attend but having a good strategy on how you are going to pay for it will reduce stress and potentially also save on the cost of college itself. A step by step process that can help you with your decision making will make sure you are looking at all options rationally rather than being overly influenced by emotion. Having a step by step process won't of course guarantee that you make all the right decisions but it should improve the chances of that and you can also have more peace along the way. Please feel free to use the drop downs under Financial Planning Today to help take you through a simplified step by step process. It is important to stress that this is a simplified version. Each family has different things to consider and it would be impossible to cover all the specific circumstances of every family in this way. Please know that Purpose Financial Planning, LLC (Purpose) would love the opportunity to walk alongside you through this process for your specific situation, just reach out to Dan Kaibel at (847) 370-5017 so that he can tell you about the services Purpose provides.

The first step toward good college choice and funding decisions is to first get a good understanding of the financial position of both the parent and the student. One of the reasons to first look at the financial situation is to also consider that the family has more goals than college. For instance, how might using assets or borrowing money impact retirement for the parents and the child's goals after school. This allows you to better see how much you and/or your student can really afford for college. Another reason to get a good handle on the financial situation is that you will need this information in which to apply for financial aid. Please see an example of a worksheet under the drop down 'College pre-qualification' for help in beginning the process.

A good next step is that once that you have a good idea of what you can afford is to take a look at how much financial aid may be available to you. Some assume that because they have a larger than average income or good equity in their home they won't qualify for much in financial aid. While income and assets for both the parents and child are the main drivers of whether you receive federal financial aid, these drivers are not created equal. Some are more important than others so it is possible that you can re-allocate income and/or assets to improve your chances of receiving this kind of aid. You'll also discover that there are different kinds of aid.  Most of the aid (at least the kind that you don't have to pay back) comes from the government or the institutions themselves. Knowing this, it is important you know what they are looking at before offering an aid package. You can go to the web-site fafsa.ed.gov but we suggest you don't file an application right away. Instead, scroll down to the fafsa4caster and use that initially. You can get quite a bit of information from that, but it is best to see if there are ways you can change your application 'picture' before applying. There may be an opportunity to appropriately re-position your assets and/or income that could increase the amount of aid that you receive. As part of our service to our clients Purpose has access to software that gives a good idea of what financial aid from the government and the particular colleges that you may be interested in. We can also run some 'what if scenarios' with your financial information and with different colleges to come up with possible alternatives that may save you on the cost on college. For now, Please see the drop down menu College Aid Formulas  for additional insight.

As you and your child research which colleges to apply to, we encourage that you apply to 8-12 colleges. The reason for this is that the more acceptance letters you receive the more options you have. Also, the award letters from competing colleges may assist you in an appeal process with your first or second choice college.

It is important that you have a good understanding of what type of aid that you may see on the award letter. You may initially see the letter and be pleased that a lot of the financial need was addressed by your first or second choice college. However, what the school may have done in meeting that need is to do so with a lot of student loans. This is important because many students are now leaving with so much debt that they can’t see a time when the debt will not be with them. Some students, carrying a large amount of student loans decide to pursue a higher paying position even though they have little passion for it just so they can attempt to reduce the amount of debt that they owe. Please see more information on the drop down College Award Package

Something else to consider is scholarships that your child may be eligible for outside the government and institutions. Please know though that sometimes getting outside scholarships may result in reducing your other aid. More on this and additional insight coming to our web-site.

In closing, while it is of course never too early to begin saving for college it is best to increase the focus on college planning the student's freshman or sophomore year in high school. However, even if your student is less than a year away from entering college planning is still important since you have total of four years that you will need to look at a number of factors and find the best way to pay for college. Purpose hopes that this information is helpful as you begin to go through this important process. Please fee free to review our resources and do not hesitate to give Dan Kaibel a call at (847)370-5017.