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February 18, 2020

When the Waiting Is Not the Hardest Part: A Financial Aid Primer

Please read important disclosures HERE.

When a new year begins, most high school seniors are both relieved and anxious. While college standardized tests are behind them and applications have been submitted, the waiting seems endless as universities slow roll their admission decisions. Soon families’ focus will shift from the exhilaration of college acceptance to the reality of paying for it. College expenses can be the second largest cost incurred by most families, after the purchase of a home. Paying for college may even delay or derail parents’ retirement plans. Since the financial crisis of 2008, states have reduced funding for public universities, requiring students and families to shoulder more of the costs. According to the Center on Budget and Policy Priorities (CBPP), tuition has increased 37% on average at four-year public colleges over this period of time. In a handful of states, including California, published tuition is up more than 60%. Net costs including room and board have increased a more modest 24% nationwide in the 10 years following the Great Recession.1

Competition is fierce for admission into the highly ranked University of California system, even for in-state applicants. As a result, many California students broaden their search to include out-of-state universities, but attendance to those schools comes at an even greater price. For instance, my daughter is graduating from high school in May and like so many high school students, she submitted applications to an array of universities across the country. As a planner by nature and profession, I, along with my spouse, saved for this since she arrived 17 years ago, feeling joyfully in control as we mapped out projected increases in tuition against savings and appreciation. Once comforted by our advance planning, we were dumbfounded when we learned that the annual tuition cost of college ranges from $45-$65K at competitive out-of-state public universities in states like Wisconsin (Go Badgers!) and Michigan. Private school costs can easily run $20K higher.

It’s Free? Why Not!

Even with these bills looming, we dismissed the idea of applying for financial aid. We have some money set aside in a tax-advantaged college savings fund, known as a 529 plan, and regular earned income so we knew that we would not qualify for financial aid based on need. We researched the financial aid process, however, and found that there are some benefits to filing the Free Application for Federal Student Aid (FAFSA), even for families with savings earmarked for college. We completed the FAFSA form available online through the Federal Student Aid office of the U.S. Department of Education. When a family submits the FAFSA, the information is provided to the schools chosen by the student on the application.

We learned that many merit-based aid programs offered by schools require the submission of a FAFSA for consideration. The reality is that even schools with enormous endowments want to admit mostly students with a demonstrated ability to pay. These schools may offer merit awards to attract the top echelon of students and to fulfill the mission of admitting promising first-generation entrants, but the vast majority of applicants will be asked to pay full tuition. Having a view into the applicant’s ability to pay can also help the university predict who will drop out because of financial hardship. Competitive universities need to maintain exemplary graduation rates, a very important metric for ranking purposes. Could our daughter be given priority by a competitive university because our family demonstrates the ability to pay? Filling out the free application suddenly seemed like a no-brainer.

The Not-So-Secret FAFSA Sauce

The key determinants of financial need are an alphabet soup of acronyms:

Cost of attendance (COA) includes tuition, room and board, books, and other expenses such as the cost of a personal computer. This number is calculated by the university and provided to the family on the otherwise glorious day the student is accepted.

Expected family contribution (EFC) is a formula established by law that includes the family’s taxed and untaxed income, assets, and Social Security and unemployment benefits. This calculation also takes into account the number of family members who will attend college during the year. Interestingly, it does not include home equity or retirement plan balances, but annual contributions to retirement plans are included as income.

The difference between COA and EFC is determined to be the family’s financial need. The FAFSA form is available for filing between October 1 and June 30 prior to the start of the new school year so this calculation is refreshed annually.

The students most in need of aid will qualify for federal grants. The award maximum is $5,135 for the 2020–2021 school year. Universities also have discretion to award additional grant money under the Federal Supplemental Educational Opportunity Grant program. Need-based aid encompasses more than grant money, it also includes work study (a job) and loans. Borrowing is limited to $57,500 per year for undergraduates, but only half of this amount can be offered as subsidized loans. Subsidized loans are beneficial because the federal government pays the interest expense on these loans for students who are enrolled at least half-time. Any amount borrowed as an unsubsidized loan accrues interest expense from the first day the money is borrowed. If accrued interest isn’t paid, it’s added to the balance of the loan, snowballing the repayment burden. Certain programs also allow parents to take on loans to finance secondary education. Borrowing rates for the federal loan programs ranged from 4.5% to 7.0% for the 2019–2020 school year, but student loans arranged by private lenders can be even more expensive. With increasing costs of attendance, it’s no wonder the Federal Reserve Board reports a crushing $1.6 trillion of outstanding federal student and parent debt as of the first quarter of 2019.

Plan Early, Contribute Often

Unfortunately, there is no clandestine strategy for getting a free or subsidized ride at the student’s college of choice. The available federal grant money is just not enough to cover a big tuition bill and colleges are selective when handing out their own endowment money. With this in mind, the team at B|O|S encourages our clients to fund a 529 plan when children or grandchildren are young. The 529 plan can be used for a broad range of college expenses and balances can be withdrawn with no taxes due on the earnings. While the 529 structure is beneficial from a tax perspective, 529 plan balances will detract from a family’s demonstrated need for financial aid. If parents are the owners of a 529 plan for their child, the plan balance is included in the parent’s assets to determine financial need. If the 529 plan is owned by a grandparent or other family member, the amount used to pay college expenses each year is included as untaxed income to the student in subsequent FAFSA filings.

Value Strategies Emerging

Fortunately, strategies for keeping college costs manageable exist. In California, for example, students attending low-cost community colleges have guaranteed admission to a number of University of California schools after successfully completing roughly two years of a full load of classes. While it may not be the right experience for every high school graduate, it does offer an alternative to mitigate rising costs. And, narrowly speaking, the Introduction to Calculus textbook at Diablo Valley College, a community college located in the San Francisco Bay Area, is the same as the Introduction to Calculus textbook at Harvard. Some public universities are also creating honors colleges. These programs offer smaller class sizes and more engaged cohorts at a bargain price. This is an attractive option for those students who are looking for, but unable to afford, a private school experience. With more collaboration and imagination devoted to reducing the high cost of college attendance, someday we may return to a time when the waiting for the acceptance letter was the hardest part.

The author is a 1987 graduate of the University of Wisconsin-Madison. As an in-state resident, she paid $387 for tuition and $1,100 for room and board during her first semester as a freshman.


1. Center on Budget and Policy Priorities (CBPP), “State Higher Education Funding Cuts Have Pushed Costs to Students, Worsened Inequality”, October 24, 2019.

Filed under: Financial Planning

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