Paying for College: 5 Key Concepts to Strengthen Your College Financial Planning

Maximize your college financial readiness

There is no question that earning a college degree is an expensive endeavor. Tuition coupled with other costs have skyrocketed more than 100% for private institutions and more than 200% for public schools over the past 30 years. The Cost of Attendance (COA) – the sticker price – for a private university is nearly $50,000 for the 2019-2020 school year. Public institutions aren’t far behind at a staggering $38,000 for an out-of-state student for 2019-2020.

However, don’t let the numbers scare you into thinking that taking on a huge pile of student loan debt or raiding retirement accounts or your home equity are the only ways to tackle paying for college.

It’s time for a reality check.

Lowering your college costs, avoiding excessive student loan debt and saving more to pay for college, are achievable goals for you right now.

Here are 5 key concepts to help you maximize your college financial readiness.

1) Understand College Pricing Dynamics

Not every family pays the published sticker price for college and there is a high degree of price variability per student and per school.

As you might expect, college costs can vary based on school type (public vs. private) and location (urban vs. rural) and residency (in-state/out-of-state). Also, the choice of major and how schools calculate the cost of credit hours, along with a handful of other significant variables will impact your costs.

However, one of the most influential pricing factors today is tuition discounting.

Tuition Discounting

While college costs have been on the upward trajectory, so has the practice of tuition discounting, or offering institutional price breaks. Since the 1990s, schools have been increasingly using institutional financial aid to attract a greater number of students across the family income spectrum.

According to the 2019 Tuition Discounting Study, 89% of freshmen at private colleges and universities received institutional aid, as well as nearly 82% of all undergraduates, with average discounts of approximately 55% to 60% off the sticker price. While the majority of college students in the U.S. attend public colleges with typically lower costs than private institutions, more than 50% of freshmen receive discounted tuition.  

Tuition discounting has been a theme in higher education for many years. The 1992 re-authorization of the Higher Education Act brought about a change in Federal policy. The federal government began expanding the focus of financial aid beyond need-based aid. It broadened the focus to encompass more merit-based aid in order to improve college affordability for more middle income and higher income families.

Once this shift occurred at the federal level, the doors swung open and states and higher education institutions followed suit. In subsequent years the high tuition/high discount pricing model took hold and remains in place today for many schools.  

Schools offer more tuition discounts, as a counter to rising costs, in order to attract more students. The terminology used in financial aid offers may differ, but merit aid, scholarships, institutional grant aid, and tuition waivers, all refer to the practice of tuition discounting.

The good news for families is that college costs can be reduced significantly and schools are leading the way by providing more institutional aid. However, the challenge to lower your costs remains a work-in-progress as there are no stringent formulas or guarantees that any school will easily provide you with generous amounts of institutional aid.

Don’t let the cost of attendance scare you away too soon or reject schools based on sticker price alone. Taking a moment to understand that college prices are not static, and for the majority of families, are responsive to different variables including heavy tuition discounting, is the beginning stage in your college financial readiness journey.

2) Defining Net Price

Net price is the real starting point in better understanding what college may cost for one year.

Net price = Cost of Attendance (COA) – Gift Aid

Gift aid represents any financial aid that does not have to be repaid including, grants, scholarships, tuition waivers, and the like. Student loans or work study programs are not included in gift aid, and are not shown in the net price calculation.

Online calculators can help you determine net price, and all schools are required to include a net price calculator on their website. Unfortunately, many of the calculators vary in terms of accuracy and ability to help you compare schools more easily from a cost perspective. More detailed inputs, including academic and family financial data, help provide a more accurate picture compared to calculators that do not require this information. Both the College Navigator tool and The College Board offer net price calculators.

For families who are early in the college search process, developing a more personalized net price can help you find and compare schools that may be a better financial fit.

An important caveat; do not confuse net price with net cost.  

Net Cost = COA – gift aid – student loans

Student loans do not lower your college costs; they are a mechanism by which you can pay for college.

Be on the lookout when comparing schools and financial aid offers as sometimes these terms are used interchangeably, but they represent a significant difference to you in determining your out-of-pocket costs.

3) Focus on Value and Financial Fit

Broaden your college search beyond just a popular name or college ranking list. Factors such as popularity and location can cost more without necessarily providing greater value or return on your investment. Additional search criteria should include;

Academics

Learn more about the department for the student’s anticipated major. No school is a top-tier choice in all departments or majors. Look for what kind of student support systems are in place, like mentors and professors who are highly engaged with students, and other staff that have gone above and beyond in helping students find their way.

Campus Life

Learn more about what life on campus is like both inside and outside of the classroom. Find out about the type of work experiences and internships that may be available, as well as student involvement in extracurricular activities or clubs and the overall campus community. These attributes are key drivers to student engagement and success.

Financial Fit

Consider lower priced schools. Also, look more closely at how generous a school may be with need-based or merit-based aid, and for schools that do not rely on student loans as a significant component in their financial aid packages.

Additionally, consider four-year graduation rates and first year student retention rates. Taking longer to graduate or transferring schools increases your college costs.

Value of Attendance

How well a school does in preparing students for post-college life should not be a mystery. Consider job placement rates and salary, and graduate school placement rates as metrics of success for school value.

4) Learn More About Financial Aid            

The world of financial aid is confusing and many families may shy away from talking about it or even applying for it. Don’t be one of those families!

With the exception of the Ivy League and a few elite schools, the majority of schools face intense competition to attract new students, with many schools not able to fill their freshman classes. Schools are using financial aid as a tool in their enrollment management process to help attract and retain more students. College is a buyer’s market for most families.

Remember however, that schools are also businesses; their institutional goals include attracting more students but also attracting more families that are willing to pay full price.

Financial aid offers therefore can be viewed as levers in the admissions process; you may be offered more or less based on several factors, including but not limited to, your expressed interest, student academic achievements or special talents, residency status, and perhaps most importantly your willingness to pay more or less.

And, schools are using algorithms and other data points in order to know more about prospective students to help inform their admissions decisions and financial aid offers. 

Families need to do just as much information gathering on their prospective schools to ensure they maximize financial aid and reduce their out-of-pocket college costs.

Maximizing Financial Aid Opportunities

Your family’s ability to maximize financial aid starts long before the college application season.

Student preparation through academic achievements and other skills and talents can help them to stand out in the admissions process and potentially attract more financial aid. Don’t wait until senior year of high school to focus on this.

Additionally, parents getting their household finances in order can play a crucial role as well.

Familiarize yourself with the Expected Family Contribution (EFC) and the income and assets that do or do not impact it. Your EFC is the starting point to personalizing the financial aid process.

Financial aid is not a one-size fits all. And since the majority of students are receiving some form of aid, don’t be deterred from learning more or applying for aid because you think your income is too high, or because you think merit awards are only for the smartest students.

Although financial aid can seem like a huge hurdle to jump, it is more important now than ever before to be well informed and prepared to take action. 

5) Save More

Tackling college funding requires the corralling of many resources. Even with merit based or need based financial aid, you may still face a significant shortfall in covering your costs.

To help combat this challenge, give yourself the gift of saving money for college. There are several reasons to do so, early and often, including:

• It’s cheaper to save than to borrow; student/parent loans incur interest charges which increase your total borrowing costs
• The longer you save, the more potential for account growth through compound interest and investment growth
• Tax benefits are available when using certain college savings plans and can help your money go further
• Enjoy greater peace of mind by avoiding excessive debt

The best time to start saving is now, regardless of how much you start with. Once you start down the path of saving, continue setting money aside for as long as you can and make adjustments as you go. Need help figuring out how much to save- check out this.

Fortunately, there are vehicles that can help ease the burden of saving for college.  One such vehicle is the 529 college savings plan. 529 plans are sponsored by states, and authorized by Section 529 of the Internal Revenue Code. By saving for college (or kindergarten through 12^th grade) with the help of a 529 plan, earnings within the plan can grow tax-deferred, and when it’s time to use the funds they are tax free if used to pay for qualified education expenses. The plans also offer flexibility in terms of contribution amounts, who’s eligible to contribute, and there is minimal impact to financial aid eligibility as a parental asset.

The Bottom Line

College costs have soared over the past few decades. These astounding increases combined with a lack of transparency in the college planning landscape, have led many families to overpay for college and incur burdensome debt. However, following this framework for college financial readiness can help you avoid the same fate.

Understanding college pricing, seeking value and financial fit, learning about financial aid, and saving early and often, can all lead to greater success on your college financial planning journey.