Learn more about Brett on NerdWallet’s Ask an Advisor
When you live in North Carolina, as I do, you get to experience some great college basketball. After watching this year’s NCAA tournament, my son switched his allegiance from the local team, North Carolina-Wilmington, to Duke. I guess winning the tournament will have that effect on a child.
After the championship game, he asked me how much Duke would cost to attend. That’s when I started asking myself the same three questions I help my clients answer about college planning.
1. Where is my child likely to get accepted?
The first step is determining which colleges your child will want to attend and where he or she will be accepted. With thousands of colleges in the United States, this can be a daunting task. A website such as College Navigator from the U.S. Department of Education can help you get started. If your child needs further guidance on selecting schools based on a certain culture, major or program, consider working with a college guidance consultant.
The goal is to narrow your search to a select number of schools where your child will get accepted and will fit in, and then determine your eligibility for financial aid at those schools. Being flexible in the college selection process should open the door to greater opportunities to save money.
2. What aid can we expect to receive?
There are two types of college financial aid: need-based and merit-based.
Need-based aid is calculated using this formula:
Cost of Attendance – Expected Family Contribution (EFC) = Need.
EFC is the minimum amount your family will be expected to contribute toward your child’s education. It’s based on the income and assets of the student and his or her parents. There are three different methods of calculating EFC, so you will need to know which method each school uses to determine your eligibility for need-based aid.
Merit-based aid is distributed according to your child’s achievements and skills. That can include musical or athletic ability, but the primary focus is on grades and test scores. Most colleges publish the requirements for academic-based merit aid on their websites. Knowing your child’s eligibility for aid at your schools of choice will be of tremendous value in developing your college planning strategy.
3. What’s the best strategy to pay our share of the cost and still save for retirement?
Your out-of-pocket cost will be the price of attendance minus the total aid you receive. Now you have to figure out how to pay that cost, and that means deciding how much you want to rely on:
- Family income, from parents and the student.
- Family assets, including savings and investments.
- Loans, in either the student’s name, the parents’ or both.
Since there are so many variables in the college planning process, your strategy will be unique to your family’s situation. If your family does not qualify for need-based aid, then you might focus on tax-minimizing strategies such as shifting income and appreciated assets to children and claiming the American Opportunity Tax Credit. Families trying to optimize aid can look into strategies to decrease reportable assets or refrain from realizing capital gains or income until the child’s senior year, thereby reducing reportable income. Parents need to find a balance between helping their children pay for college and funding their own retirement.
College planning is retirement planning. Treat college as an investment. This means helping your children get into the best school at the best price and protecting your assets and income for retirement. Every dollar you save on college can go toward your retirement and help lessen the burden of loans for your children. The best way to go about doing this is to be proactive, determine your best strategy and figure out your answers to the above questions before randomly applying to schools.
Image via iStock.