What Can Your Family Afford For College?

What can your family afford for college?  Knowing this is the first step in the Upside Down College Search process.  I introduced this concept last week as A Better Way to Search for Colleges.

This Upside Down College Search process is targeted for families caught in the middle – too much money for financial aid, but not enough to pay sticker price for four years of college.

First things first – It is extremely important for you and your student to be on the same page as far as who is paying for college.  Chances are, if you are on my website, you are probably intending to pay for at least part of your kid’s college education. Make sure you talk to your student early about how much you are willing to pay and how much you are expecting her or him to contribute.

In assessing what your family can afford for college, there are four main things to look at. At this point in the process, we are not going to consider merit aid.  Before you even begin to explore merit aid, you need to understand where your family stands in relation to college tuition. These are basic principles, but are at least worth reviewing.

#1 – Assess Your Savings

Maybe you started a college savings plan when your kids were little.  Maybe grandparents put money away.  Whether money is held in parent’s name, student’s name or someone else’s name, if your student has a college savings account of some kind, this is the place to start.

The next place to look would be any other kind of non-retirement savings account you have.  If you have money set aside, are you able to put some of it towards your kid’s college education? (Note: I would always recommend not to dip into retirement savings to pay for college, but some parents do consider this an option.)

The last type of savings to look at is what your student can save between now and his or her last year of college.  For example, we set a goal for our two oldest girls that they would earn and save $3,000 per summer each year from the summer after Junior year of high school through the summer after Junior year of college.

Add all this savings together to get a total savings amount you can use to pay for college.  I recommend taking the total savings number and dividing it by 4 to get an expected amount to put towards each year of college for your student. (Of course this assumes your student will finish college in 4 years. With some good planning, this is an achievable goal for most students.)

#2 – Assess Your Cash Flow

Since most families don’t have enough savings to pay the full cost of college for 4 years, there is usually a need to supplement with cash flow. A good place to start assessing is by looking at your monthly income to determine if there is an amount you can kick in to pay for college on a monthly basis.  Luckily, most colleges will set up monthly payment plans for this purpose.

Consider any other expected income during the year.  An example would be a yearly bonus.  Are you willing to contribute part of an annual bonus towards college?  Just make sure you aren’t counting on something that isn’t a guaranteed amount.

In addition to parent cash flow, your student’s cash flow should be considered.  Do you expect your student to have a job during college? Do you only expect your student to pay for incidental expenses or does he or she need to earn enough to pay part of the cost of college?

Add any cash flow amount you and your student can contribute each year together with the savings amount to get the total amount you estimate that you can contribute towards the cost of college each year.

#3 – FAFSA4Caster

For many parents, this will be “wake up” time.  You have already calculated what you think you can contribute towards the cost of college each year. Now find out what the government expects you to pay towards the cost of college.

October of your student’s Senior year of high school is when you can first file the Free Application for Federal Student Aid (FAFSA).

As soon as you start considering the college search process for your student, you can use the FAFSA4Caster to get an early estimate of your financial aid eligibility. Since you are a few years away from sending your student to college, you will want to estimate your financial situation at the point when your student starts college.

The important number in the FAFSA4Caster is the Expected Family Contribution (EFC). This is what the government expects your family to contribute towards the cost of college each year. You probably already know how this works.  The Federal government will offer aid to try to make up the difference between the cost of attendance and your EFC, but this aid will take into account Federal Student Loans, the Federal Work Study Program, and Federal grants.

If you fall into my category of The College Search Family Caught in the Middle, your chance of being offered anything other than Federal Student Loans (everyone who files FAFSA is eligible for unsubsidized Federal Student Loans) and possibly the Work Study Program is slim to none.

It isn’t enough to know your EFC from the FAFSA4Caster because colleges also have other ways of determining financial aid eligibility, including their own institutional aid formulas and the CSS Profile.

#4 – Net Price Calculators

In order to get a realistic idea of what a particular college calculates as your Expected Family Contribution, you will need to use the college’s Net Price Calculator.  If you are just starting out with the college search process, I recommend picking a few different types of schools to run Net Price Calculators on.  Pick a really expensive school like an Ivy League or other extremely competitive school, pick one of your in-state public universities, and pick a fairly local private school that you don’t think is super expensive.

You can usually find the Net Price Calculator under the Admissions or Financial Aid section of a college’s website. If there is a search field at the top of the college’s website, you can search for “net price calculator”. The Net Price Calculator will ask you for the same basic financial information as the FAFSA4Caster.  If it asks for GPA and ACT/SAT score, it is also assessing your student’s eligibility for institutional merit scholarships. (We’ll cover that more next week.)

After completing these steps, you should have a good idea of what you think you can afford and what colleges think you can afford.  In most cases, colleges will expect you to pay a lot more than what you are prepared to pay.  That’s why we are building an Upside Down College Search Process. I know you want to pay less than what your EFC shows. I want to help you find colleges that will allow you to do that.

Next week, we will look at how your student’s performance in high school can help you pay less for college.  We will explore why Institutional Merit Scholarships are the best way to lower the price of college and we will look at examples that show that your student doesn’t have to be #1 in his or her class with a near-perfect ACT or SAT score and GPA to get offered merit aid.