College funding is one of the key areas where families are DIY-ing their financial planning – and failing to do it correctly. Year after year, students and their parents are falling into the trap of taking on too many loans. They don’t set a tuition budget. Overlooking these key steps hurts their short and long-term financial wellness. As advisors, it’s our job to jump in and help them steer clear of these roadblocks to set both parents and students up for a successful financial future.
Let’s talk about what a few of the biggest college funding mistakes are that we see happening often – and how you can solve them for your clients.
#1: Not Talking About A College Budget
This is the #1 mistake that the team at College Aid Pro™ sees families make. It doesn’t seem like that big of a mistake at first glance. However, when families start to shop for college, they go about the process backwards.
First, they start exploring different school options. The parents take their college-bound students to a few campus visits, and encourage their kid to start thinking about a major or the benefits of different programs. Then, after applications are in, and financial aid has been awarded, the family sits down together to determine how much they can spend on college.
When families let colleges dictate their college budget, they’re setting themselves up for failure. This is the equivalent of letting a 17 year old test drive Ferraris and Lamborghinis and then telling them you can only afford a Honda Civic. Breaking the news to a student that a college they were accepted too isn’t in the budget is tough. The problem with college is that they can get student loans to pay for it, where as that 17 year old would get laughed out of the dealership if they tried to buy a $250,000 car.
Talk to your clients about a college budget before they even start seriously looking at schools. This helps them to predetermine what schools they can afford, and what type of aid they need to look for. Talking about a college budget as a family empowers your clients to make well informed college buying decisions.
#2: Misunderstanding Expected Family Contribution
An EFC is the starting point number for trying to determine what your client will owe when it comes to the cost of college. This is essentially what the college thinks you can afford each year for school based on a formula. Most people find this number out when it is too late and simply take whatever the formula spits out. For those families that are need based aid candidates the sad truth is that most schools don’t meet 100% of a family’s need so your clients could be on the hook for more than their projected EFC. Where as many of our most expensive and prestigious universities are extremely generous and meet at or near 100% of need. Many families who are DIY-ing their college planning take their EFC at face value, and are surprised when they receive their actual financial aid package.
As an advisor, you can help avoid this misunderstanding by drilling deeper to find out the exact cost of different colleges your clients may be looking at and how to potentially reduce their EFC. Tools like College Aid Pro™ make it easy to calculate the real-world costs that your clients can expect.
#3: Discounting Student Earnings
Many parents encourage their kids to start working part-time during high school to save toward college. Additionally, grandparents or family members often give large amounts of cash as a gift to boost a high schooler’s savings. While these efforts can have a positive impact on the total amount of cash saved for tuition, it can also negatively impact your clients’ total EFC.
Did you know that student assets and parent assets are viewed differently when calculating your clients’ EFC? 20% of a child’s assets are expected to go toward the cost of college. Compare that to the highest rate for parents’ assets to be assessed is 5.64%.
Make sure you’re starting conversations with your clients early in their child’s high school journey about student assets. As long as a student’s earnings are planned for, you should be able to help them avoid any unpleasant surprises when they start filling out their FAFSA.
Additionally, you can encourage them to request that any large cash gifts toward the cost of college be made directly toward a student’s 529 Plan. Anyone can contribute to a 529 including the student. This helps to ensure the funds go straight toward the cost of college.
Help Change the Conversation
When families don’t talk about their college budget, the amount of money they’re willing to put toward a student’s tuition, or how they want to approach college funding as a family unit, trouble brews. Help your clients improve by tackling these conversations head-on. You are able to act as a third-party who can offer objective opinions during this stressful time of life. More informed college buying decisions and better outcomes for young adults, now that’s a win win!