At SMARTTRACK® College Funding, we’re asked every day by middle- and upper-middle-income parents if there’s anything they can do to make college more affordable. The problem for these families is they don’t expect much in the way of financial aid but will be challenged by the high cost of college. If they have more than one student to educate (oh boy!), their concerns multiply. The short answer is to start thinking strategically about your funding plans while your student is still two to four years away from going to college—ninth grade is optimal, 10th grade is acceptable, and 11th grade is urgent!
Financial questions parents should ask themselves
It’s okay if you don’t have all the answers to your college financial questions just yet, but delaying the conversation could cost you tens of thousands of dollars. Here are the key things families should be asking and deciding now.
- How much can we comfortably afford?
- Have we saved enough for all our children?
- Will our student’s college choices be limited by cost?
- Which of our financial resources can and should we draw upon?
The full retail cost of attendance at a four-year undergraduate institution currently runs between $80,000–$320,000 on average. Most families have not saved that much or don’t have enough cash flow to cover it. Many also believe the financial aid system is only for lower-income families, so they don’t engage in the process at all. The reality is the aid system is much larger and more inclusive than most families realize, even for those in the middle- and upper-middle-income ranges.
A look at your EFC
When you submit your financial information during the FAFSA process, colleges and the government will determine the minimum amount they expect you to pay out of pocket. This calculation is called your Expected Family Contribution (aka EFC, and what’s soon to be known as the Student Aid Index). We’ve rarely met a middle- or upper-middle-income parent who got their EFC estimate and said, “No problem—this is what we can reasonably afford.” It’s usually more like, “Are you kidding me? Why is it so high?!” The reason is simple: For many middle- and upper-middle-income families, how they organize their financial life can artificially inflate their EFCs.
It’s critical for parents to review their financial profiles in the years before their student applies to college and mitigate any red flags inadvertently elevating their EFC calculations. When you give yourself the time to organize your finances—including how your income is derived, how your assets are configured, how your taxes are structured, and more—you’ll put yourself in a position to be more favorably assessed. Your tax return offers the best analogy: You’ll pay more in taxes if you don’t take every legitimate deduction available to you, right?
The taxes factor
For high school seniors filing the FAFSA, the tax year that will be your base year for financial aid consideration is not the year prior to your student applying to college, but the year before that. Referred to as your “prior-prior year,” it means your tax return from the year your student was a sophomore or first-semester junior in high school will become the basis for grants, scholarships, and loan offers the first time you apply for financial aid. You have the power to impact that tax return, but only if you start thinking strategically in advance.
Funding beyond financial aid
How you pay for college will impact how much you pay for college. When you use your resources in the most tax-advantaged, cost-efficient way possible, you can potentially save yourself tens of thousands of dollars. For example, let’s say you withdraw from your retirement account to help cover costs for your student’s freshman year of college. When you submit new financial aid applications the next academic year, they’ll assess those funds as income, which will reduce your aid eligibility. So now you’ve damaged your retirement fund and reduced your financial aid package. But when you learn to leverage your income and assets to maximize what’s available from the government and colleges, it’ll reduce the amount you may have to borrow and save you from financial burden.
Another big factor in maximizing your savings is for your student to consider schools that are likely to be generous to your family—as long as they are still a good fit for your student. A generous school is one that can meet your family’s financial need with more grants and scholarships and has the resources to provide merit aid to incentivize your student to accept their admission offer. A school isn’t considered generous if they fill your aid package with nothing but loan offers. Many families will miss the boat here because they’re deterred by the high price tag of private schools that might actually be very generous, making those institutions more affordable than expected.
For middle- and upper-middle-income families with students heading to college in the next few years, now is the time to get your financial house in order. This will help you maximize your student’s eligibility for grants, scholarships, and other financial aid as well as set you on a path to paying for college in the most affordable way possible given your personal circumstances.
Find even more expert answers to all your financial aid questions with Our Best Advice to Help You Pay for a College Education.