In this article, we discuss maximizing financial aid for college.
A child’s college education can be a big family expense
A college education is often the largest major expense outside of retirement for many families. According to the Federal Reserve (link opens in new tab), student loans represent the second-highest consumer debt category behind mortgages, but higher than both credit cards and car loans.
72% of US college students receive some form of need-based financial aid according to the National Center for Education Statistics (link opens in new tab). This is good news, because according to Trends in College Pricing (link opens in new tab) research by the College Board, in about 10 years college is expected to cost over $142,000 for 4 years at a public university, and over $324,000 for 4 years at a private university, including tuition, fees, and room and board. These figures assume an average college cost inflation rate of 5%.
Planning for college expenses should typically start when children are young, so any savings have longer to potentially accumulate compound interest. I wrote another article (link opens in new tab) about some fun ways to contribute to a child’s education savings account.
FAFSA & CSS calculate a family’s expected contribution to college expenses
But what about all the other assets a family has when it comes time to apply for financial aid? Typically, the first step in seeing if a student qualifies for financial aid is to complete the FAFSA, Free Application for Federal Student Aid. Some schools require the CSS, College Scholarship Service Profile. These forms calculate the family’s expected contribution to college.
To complete either form, the family and student must provide many details about their financial situation, such as income, savings, debt, other children also in college, net worth, and more. Each application looks at the previous year’s financial information. So for example, if a student was beginning school in the fall of 2022, the family would fill out the aid form in 2021 based on the 2020 tax return.
Ways to potentially maximize financial aid
Here’s an article (link opens in new tab) which looks at some ways a family and student may be able to maximize financial aid for college by doing things like paying off car loans and credit card balances, moving funds into retirement accounts, and using earned student income over a set limit to pay for things a student would need in college like a laptop, rather than keeping it in a bank account. Typically, assets in a student’s name count towards the amount they will be expected to pay, so it can be beneficial to spend down these assets, like an UTMA account or checking account, prior to applying for aid. For parents, retirement assets and principal in a primary home are typically not counted as assets available for college.
Read the full article here (link opens in new tab). And talk to your financial advisor about your specific situation.