This time of year, students and families are pondering the loan question.  The fact of the matter is, most students will have to finance some or all of their education.  The College Board provides the following tips when considering student loans. 

1. Look at your child’s award letter and figure out which need-based loans your family has been given and for what amounts.
2. After you look at your family’s full financial picture—education cost, awarded aid, and family share—settle on the amount you or your child actually need to borrow.
3. Never borrow more than you need. Remember, you are not required to borrow the full amount of loan aid your child has been offered or to borrow the maximum loan amount.
4. Don’t forget about student employment as an alternative for borrowing. Although working at a job can seem like an extra burden for your child, so is struggling with high loan repayments after college.
5. Apply for your loans right away. You want to make sure that the loan is approved and the money paid to the college before your family has to make your child’s first student account payment.
6. Follow the loan application instructions carefully. Any mistakes you or your child make will delay receipt of the funds.
7. For a Stafford Loan, be prepared for the amount that is paid to the college to be less than the amount for which your child signed. An origination fee, guaranty fee, or both, may be subtracted from the loan before the check is sent to your child’s college.
8. If you will be taking out parent loans, start to keep track of your “loan tab”—the amount your monthly repayment will be—once you know the amount that you are borrowing.
9. If you feel your family needs to borrow more than the amount that’s been offered in your child’s award letter, talk with a financial aid counselor before taking on an additional loan.
10. If you or your child does take on an additional, unsubsidized loan, consider making interest payments while your child is in school. They won’t be much and will save you money—you’ll end up having to pay back significantly less than if you delay (and capitalize) the interest payments.

In these uncertain times, when family assets are devalued, yet the cost of education has not followed suite, it may be that we have to reorder our priorities and ask more of our college-bound children. It should also be apparent that spending four or five years to receive a degree in some soft major will not hold the graduate in good stead when looking for that first job.  Practicality is the current watch word.        

Our founding fathers eloquently stated in the Declaration of Independence, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.” 

That one sentence displays such keen wisdom, yet most overlook its subtle intent.  The statement so precise, it’s very interesting to note that the authors framed our last right to be the pursuit of happiness, not happiness itself.  As the well-known adage states, “no one promised you a rose a garden,” yet today we, as a culture, have come to expect happiness.  Simply the right to pursue our dreams is no longer adequate.  We must have our dreams, our happiness, served up on a silver platter.  Anything less and we feel slighted, or at least unfulfilled.  As well, we’ve past this attitude on to the younger generations.  Somewhere along the line we decided as a society that we are owed happiness, whatever size shape or color we believe it to be.           

After many years of providing college and financial aid planning services for families and students, certain trends have become evident and troublesome.  The majority of parents believe that they owe their children a college education and their children aren’t about argue the contrary.  Without blinking an eye, parents are prepared to give up their life savings to serve up a college education on a silver platter.  Whether or not their child is prepared to effectively attend an institution of higher learning has no bearing on their rush

to sacrifice their retirement.  Suggested options of attending a community college, pursuing technical training, or even working for a year or two before going on to college are treated as heresy. 

The fact of the matter is, in many cases, both parents and students would be better served to look at the alternatives.  How many unhappy freshman have returned home to seek another school or decide a different path.  Had options been entertained initially, how much time, energy and money might have been saved?  The emotionality that surrounds the college selection process cripples most families.  Whether it’s due to the unrealistic expectations of the parents or the less than practical desires of the student, poor decisions are made.  In our blind haste to serve up happiness, we end up dropping the plate. 

It has been said that the sportsman finds exhilaration in the hunt.  The kill is ante climatic.  So it is with happiness.  It is the pursuit of it that brings joy, the attainment is often times disappointing, at a minimum fleeting.  Do not deprive your child of the pursuit.  Ownership in the process makes the result that much sweeter. 

That being said, you should consider the student taking on some or a majority of the financial responsibility for their own education.  That responsibility doesn’t necessarily need to be cold hard cash, but a financial commitment on the part of the student.  If the student can’t excel academically or participate in extracurricular pursuits, which may result in scholarship assistance, then they need to step up and be willing to compromise on the college or university they attend or the path they take to get there.  A focused commitment to the application process with all its administrative requirements can have positive financial results. Taking on the responsibility for educational loans, holding down a part-time job, or even living at home and attending a local college for a year or two are other ways students can help financially, yet achieve their educational goals.                   

Hopefully, around April of the senior year of high school, your student will have been accepted to three or four colleges and received financial aid award letters from each stipulating what assistance is being offered. It is important to compare these offers as each will surely be different, and those that provide the most dollar assistance may, in fact, cost the family more in the long run.

It is important to remember that this letter only constitutes an “offering.”  The student does not have to accept it.  He or she can accept only certain parts of the aid being offered or even request a review and negotiate for a better package (more on that later).

Let’s work with an example.  Our EFC is $9,000, for a private college and determined through Institutional Methodology. Assuming that the total cost of attendance at this private college is $25,000 a year, our student has established $16,000 in need. Since most private colleges cover 100% of the established need, the resulting aid package should be $16,000. About 60-70% of this amount should be in grants and scholarships  (money the student doesn’t have to pay back), 21% will be in the form of a subsidized Stafford Loan (the student doesn’t make payments until after graduation), and the remainder will be covered by work/study (the student holds down a part time job and uses the pay to cover books and miscellaneous expense).  Be aware that some schools may back off on the amount of grant and scholarship money and pad the award offering with a federal parent loan (PLUS Loan) . 

At a public institution, because there is less private endowment and scholarship money to assist the student, less than 100% of the established need is normally met. In our example the Federal Methodology said the student’s EFC was $7,500. Let’s assume now that the student applies to a less expensive public university, which uses the federally determined EFC. The cost of this university is assumed to be $13,500 a year. The established need is now only $6,000. But the college can only cover 75% of the need, or $4,500. This now creates an out-of-pocket expense for the family of $2,500 ($6,000-$4,500), making the total cost $10,000 ($7,500+$2,500).

There’s another difference. For the same reason that less of the established need is covered, the percentage of loans and work/study received in the aid package is noticeably higher than the amount of grants and scholarships. So in our example, the $4,500 would be covered by a loan first ($3,500 is the maximum for a Stafford loan for Freshman). The majority of the remainder would be provided in the form of a work/study program.

In this situation then, the student could go to a more prestigious private college for less than what it would cost the Family at a less expensive public institution.  Keep in mind each circumstance is different, and each college and university has different policies on financial aid distribution and eligibility.  But it is critical that this type of information is evaluated along with the scholastic benefits of the institutions the student is interested in attending. In that way the family can be assured of the best dollar value.

If the college is making full disclosure of out-of-pocket expenses, their letter will reflect the total cost of attendance.  Then they will deduct the student’s EFC from the cost and show the difference as “financial aid eligibility,” or “demonstrated financial need.”  A breakdown will then be given of the aid offered—grants, scholarships, loans, and college work/study.

On the other hand, colleges that want to keep financial aid a bit more mysterious will simply send a very upbeat letter with a listing of aid awards.  The student has no clue as to the true cost to their family.  A call to the college to get a copy of the “on-campus budget for 2007-2008” will provide the missing information with which to determine the real out-of-pocket expense.

A fair comparison of award letters can then be made.  Check the EFC used by the school against the EFC reflected on the Student Aid Report.  If the school is using Institutional Methodology to determine the EFC, then add about 5.6% of the family’s home equity to the federally calculated EFC.  The two figures should be fairly close.  Next look at how close the schools come to meeting your established need (the difference between what it costs and the student’s EFC).  Also, compare the amount of loans necessary to complete the package.  Remember, additional loans such as the PLUS for parents may be necessary to handle all or a portion of the family’s out-of-pocket expense. 

Do a thorough analysis of the debt circumstance.  How much debt can the family tolerate on the other end of four or five years of college?  Is there a second student in the picture in the near future?  

Another easy trap to fall into is college work/study.  This money is not a gift.  The student must earn it.  If the student does not work, the family pays that amount as well.

Here is a list of tips to use in comparing packages:

1  Compare the debt first by adding up all the loans being offered.

2  Compare unmet need and the family contribution–the more need met may mean more family debt, the more gift aid may mean a larger family contribution.

3  Make sure books and miscellaneous are expenses are included in the cost the college used to figure the family’s need.

4  Consider travel costs if institutions are some distance away.

5  Determine if any outside scholarships are renewable and if the college will allow self-help portions of the package to be reduced by them.

6  Compare the terms of any loans included–what the payments will be and the real cost to the family once they’re paid off.

7  Check what aid is provided to upperclassmen—Freshmen award packages are often better.

8  Write it all down and look at the numbers–don’t just guess which package will be less expensive.

9  Last, compare the economic benefit of your future career with the need to incur substantial debt.  It may well be worth it.  After all, that’s what it’s really all about—what are you willing to pay and what level of debt are you willing to endure to achieve a college education?

This Wall Street Journal Article addresses the dire straights that 529 Plans are in and how it is affecting families’ abilities to cope with college costs.

EDUCATION

• OCTOBER 16, 2008

College Savers Stuck in Stocks as Market Falls

IRS Rule on 529 Plans Allows Just One Portfolio Shift a Year; Weighing a Cheaper School

By JANE J. KIM

A rule designed to protect investors in 529 college-savings plans is having the unintended side effect of preventing them from shifting to more-conservative investments as the stock market swoons.

When Charles Strawbridge of Ashtabula, Ohio, got nervous about the markets this past spring, he wanted to boost the bond allocations in the 529 plans he had set up for his 16- and 19-year-old sons. But because he and his adviser, Matt Olver of Cleveland, had already changed his investment mix in January, he had to keep his current allocation of 20% and 25% in equities for his older and younger sons, respectively.

Now, after watching the accounts drop in recent weeks, he’s telling his older son — who is in the process of transferring colleges — to consider less-expensive schools. “We do have to keep in mind the downturn that the market has had on his available funds,” says Mr. Strawbridge, a 55-year-old accountant. “It was unfortunate that we couldn’t have made the move. It takes a little bit off the table.”

With 529 plans, investors put after-tax dollars into an account that typically offers a range of mutual funds and other investments. Distributions and earnings are tax-free, as long as they’re used for higher education. The plans have grown in popularity in recent years — they held about $110 billion in assets at the end of the second quarter — although the pace of net new investments into the plans has started to slow, according to Citigroup Inc.’s Financial Research Corp..

Amid the current market turmoil, more investors like Mr. Strawbridge are running into one of the quirkier restrictions of these state-sponsored plans: an Internal Revenue Service rule that limits investors to one investment change per calendar year. The rule is intended to keep people from making knee-jerk reactions to market moves, but some investors and financial advisers say it makes the plans overly restrictive. Indeed, the College Savings Plan Network, a membership organization of state 529 officials, investment firms, program managers and others, is considering asking the Treasury Department to raise that limit to four times a year.

But that’s not the only feature of 529 plans that’s causing investors grief right now. Many investors use age-based portfolios that automatically shift to more conservative investments as the child nears college. Yet some of these conservative portfolios may actually hold a high percentage in stocks. North Carolina’s National College Savings Program has an age-based portfolio that can hold just over 50% in stocks, including real-estate securities, just one year before the child starts college. That portfolio, which is part of the state’s CollegeHorizonFunds managed by J.&W. Seligman & Co., was down 15.7% for the 12 months ended Sept. 30. Given the big market drops this month, the plan has likely posted additional losses.

Seligman’s age-based portfolios were designed to create “the opportunity for capital appreciation” while becoming “extremely conservative” in college, says Charles Kadlec, the firm’s managing director. The CollegeHorizonFunds move to 100% cash in the last two years of college, he says.

Other plans with more-aggressive portfolios include Nebraska’s broker-sold AIM College Savings Plan, which can have as much as 40% in equities when the child is one to three years away from college, and South Carolina’s Future Scholars direct-sold plan, which can have up to 33% in equities with college enrollment one to two years away.

Keeping Pace With Tuition

Such equity exposure may help investors keep pace with tuition increases, some investment managers say. “If you’re a senior in high school, you still have five years before you hit your senior year of college,” says Tom Kazmierczak, senior product manager for T. Rowe Price Group Inc.’s 529 unit, whose portfolios for students starting college in 2009 can hold up to 28% in stocks and up to 20% while the child is in college.

Now more than ever, spending the time and effort to plan correctly for college is critical.  Analyzing the family financial circumstance as it relates to the calculation of the Expected Family Contribution (EFC), which drives need-based assistance, shopping for the right college in terms of the student’s academic, financial and personal needs, maximizing the student’s achievements, and exploring alternative payment and financing options, are so important to increase the potential to receive a value education.

Choices become more limited and planning becomes paramount.

Deciding which loans are best for the family depends on these different factors:

1  Who will repay the loan

2  Repayment terms

3  Tax bracket

4  Cost of getting the loan

There are two loans the dependent student is legally obligated to repay: the Stafford and the Perkins loans. Any other loans are the parents’ responsibility unless they have jointly co-signed a private loan from a commercial lender.

Federal Loan Programs

These are the Perkins, Stafford, and PLUS loans, all of which have very good repayment terms and interest caps. Currently the repayment period for federal loans is 10 years.

Here is what the monthly payments would look like:

Besides the standard payments available, there are other repayment options available. The family can consolidate loans and stretch payments out over 20 years. There are graduated repayment plans which have smaller payments in the earlier years and gradually increase over time (these have higher interest costs).  Income contingent plans base the amount of payment on the level of income of the student after graduation. As income rises or falls so does the amount of payment.

Home Equity

Another viable alternative is a home equity line of credit where the family borrows only what they need, when they need it, paying interest only on the amount that’s borrowed. There is a minimum monthly payment, and the interest is normally tax deductible, but also variable.

*Make sure to compare the benefit of a federal loan vs. a home equity line of credit.  For example, a federal loan at 6% is equal to an equity line at 8.3% for someone in the 28% tax bracket because of the tax deductible nature of the equity line interest.

Second Mortgage

With a second mortgage a fixed amount is borrowed, and there is generally a fixed interest rate and repayment schedule. While it provides for a more consistent budget plan, the family is paying interest on money before it’s needed and have higher payments before it’s necessary.

401(k)

In some cases borrowing from the parents 401(k) retirement account is

possible. There are federal limits on the amount that can be borrowed.  Also,

the loan must be repaid in 5 years or stiff tax penalties apply as it becomes reportable as a premature distribution if the owner is under 59 ½ years of age.

Life Insurance Policy

Borrowing against the cash value of life insurance policies is another option. The repayment terms are often very lenient and may provide the option to only repay the interest. The loan may affect the death benefit and the interest rate earned by the remaining cash value.

*Remember that with every loan there are processing fees. These charges should be considered as well when comparing loans.

I can’t stress enough, the importance of the personal statement and/or essay  that is submitted  with the application.  The process of writing needs to begin early and continue through the application process.  Spring of the Junior year of high school is not to soon to begin brain-storming ideas and putting notes down on paper.  If writing is not strong skill, it is even more important to practice writing, share your efforts with family and teachers and rewrite and rewrite until you feel you have a polished piece that truly sets you apart.

As I pointed out in Chapter 8, the essay is the one thing that hangs over every would-be college student’s head.  It’s the one thing that could make the difference between getting in to your dream school or ending up attending a college or university that’s farther down on your list.  The dreaded essay won’t go away.  It will always be a part of the application process because it is the tool admissions officers can use to make those hard choices between two equally qualified students.  And it may be used to determine who gets the scholarship and who doesn’t.

Because so much of the colleges’ and universities’ non-need based scholarship and grant money is administered by the admissions offices, your first impressions, made with your application and accompanying essays, becomes critical, not only in getting “in” but also in “buying in” to merit-based assistance. 

Write an essay about yourself?  Sounds like a fairly easy task, even when they impose some restrictions.  You can’t merely summarize your life.  You must focus on a person or experience that profoundly effected you or speak to personality traits that portray who you are.  Getting tougher?

Marketing yourself is so much a part of the process that it can’t be emphasized enough and the essay is your golden opportunity to shine.

1.      Don’t procrastinate: 

          Career exploration should start during middle school.

          There are private scholarships that high school freshman can apply for.

          Shopping for the right school should begin as a sophomore in high

          school. 

          Planning for need-based aid should begin no later than fall of the junior

          year of high school.

College applications should be filed before winter break of the senior year to get a “better look.”

Financial aid applications should be submitted as soon as possible after Jan 1^st of the senior year.      

2.      Don’t rule out private colleges: 

Depending on the numbers, it may be less expensive to attend a private college.

3.      Don’t assume you’re not eligible for aid:

           50% of students at public schools and 72% at private institutions receive

           aid.        

You won’t know unless you apply.  The formula is complex and there are many variables.

4.      Don’t ignore deadlines:

            Missed deadlines reflect poorly on the student and mean missed

            opportunities.

5.      Don’t spin your wheels chasing private scholarships:

            Less than 7% of all aid comes from private sources.

In most cases, if “need” is established, private scholarships will not reduce the family’s share of the cost.

Maximize government and school resources, then look for private money.

6.      Don’t accept attendance without a campus visit.

             Every school is different.  Spend time there. It will pay off.

Colleges sell education.  Those glossy brochures can be misleading.

7.  Don’t shy away from loans:

Government-backed loans are considered financial aid.  Interest rates are capped and they offer attractive repayment options. 

              Consider letting investments grow while using borrowed funds.

8. Don’t think you and the college have the same goal:

              Their job is to use their resources to help as many students as

              possible.  Your

              job is to get as much aid as you can through marketing.

9. Don’t apply early decision:

Early decision locks you in and limits your ability to facilitate the financial aid offer. 

              Early Action is not binding and can be used to test a student’s

              perceived value. 

10. Don’t ignore the process:

Filing for aid and letting the system take its course is like letting the IRS do your taxes. 

The forms ask for numbers.  You need to let the college know if there are extenuating or mitigating circumstances. 

 11. Don’t forgo filing the FAFSA:

Most schools will not offer you any aid unless you file the forms.

            In order for the school to certify your student loan, you must file. 

12.  Don’t limit your applications to a couple of colleges:

            Apply to at least six schools to increase your chances of being accepted.

            Once accepted, you’ll have more than one offer of aid to consider. 

13. Don’t forget the financial aid office:

Merit assistance is controlled by the admissions office. Need-based aid is controlled by the financial aid office.  Don’t assume they share information.

If you want to make even the most stalwart investor weak in the knees, calculate how much four years of education will cost ten years from now. 

That’s what traditional college savings calculators do.  It’s fairly simple.  First, the future cost of college when your child reaches age 18 is determined.  Second, based on the current rate of return, the future value of your investments and savings is calculated.  Then future investment value is subtracted from future college costs which gives you the amount you’ll need to save in the given time period. 

Based on what you need to save, how long you have to save it, and what your investments are returning, a monthly figure is calculated.  That’s when the well-intentioned parent faints, realizing that they will have to save some huge monthly sum, totally beyond the family’s budget to absorb. 

So what’s a parent to do?  Create options, by investing both educationally and financially.  Educationally, parents need to invest their time to insure their child is given every opportunity to excel in school, provided the opportunity to explore the world and broaden their horizons, and encouraged to participate in activities that develop teamwork and leadership. Maximize their strengths and help them compensate for their weaknesses.  Yes, parents may feel like taxi drivers and might even have to read that text book along with their child, but that small investment in time will be returned ten fold when admissions officers start separating the sheep from the goats.  If they’ve done a good job preparing their student educationally, he or she has many more options in shopping for the right college or university.  The student might even qualify for merit scholarships and grants.

Financially, traditional college savings calculators are too simplistic, often resulting in an unreasonably high investment figure.  But consider whether most folks paid cash for their home—probably not.  So they shouldn’t expect to pay cash for college.  If they have four years of college expenses saved by the first day of college, they are, in effect, paying cash for college.  That’s unnecessary and unrealistic. Most families simply cannot save that amount of money, nor do they need to. 

Furthermore, the government doesn’t expect the family to pay the entire cost of a college education, only their fair share based on their financial circumstances.  Thus enter the financial aid formula for calculating Expected Family Contribution (EFC).   This is the method the Department of Education uses (or The College Board via the CSS Profile) to determine the student’s fair share of one year’s cost of education, and then their financial aid eligibility. 

There are two basic types of financial aid: Self-Help Aid, which consists of interest subsidized loans and work study, and Gift Aid, which consists of grants and scholarships.

The amount and type of financial aid is based on two factors: the merit of the student  (scholarship, athletic achievement, musical or artistic ability, etc.) and the financial need of the student.

Need is by far the most important factor in determining financial aid, but that

is slowly changing.  Most of the financial aid given by the federal and state governments is based on the financial need of the student, while most of the

financial aid given by colleges is merit-based.

How is the financial need of a student calculated?  “Needs Analysis” is the process of determining the financial need of the student. It is calculated using the following formula:

1         Cost of Attendance (COA)

      -     Expected Family Contribution (EFC)

      =    Financial Need

2         Financial Need

      -     Resources of the Student

      =    Adjusted Financial Need

Example: If the cost of attendance at a particular college was $12,000 and the expected family contribution was calculated to be $4,000, the financial need of the student would be $8,000. In this case the student would be eligible to receive $8,000 in financial aid. Whether he receives a financial aid award for the entire $8,000 is up to the discretion of the individual college. Nonetheless the financial aid eligibility of the student is directly related to the financial need.

If the student had other resources to help pay for the college cost, the financial need would be reduced on a dollar-for-dollar basis for these resources. In this example assume the student had received a $1,000 private scholarship from the local Chamber of Commerce.  Since private scholarships (scholarships which are not given by the college) are considered a resource, the $1,000 scholarship would reduce the financial need down to $7,000. This means the student would now be eligible for only $7,000 in financial aid from the college.  Merit-based scholarships may be added to the mix as well.

The bottom line is parents don’t have to save the whole enchilada, but they need to invest something.  If they can have a year or maybe two of college expenses ready when the student begins college, they’re in good shape.  They have options–choose to pay for college from loans, from the investment account, from your income or a combination of all three.  They can also take advantage of the monthly installment plans.

How can parents use this information?  They should combine the traditional savings calculator with the needs analysis process.

­­­

1  Using the traditional calculator, determine what college is going to cost X number of years from now  (figures will be different depending on whether one uses a current public or private college dollar figure).  It would serve to use both for planning purposes.

2  Determine, based on a given annual cost of living adjustment and appreciation rate, what the parent’s income and assets will be at that same time in the future. If they are going to use the institutional method (used by the College Board), they’ll need to figure out what your home equity will be worth as well.  The student’s income and assets will also have to be fabricated ($1,500 to $2,000 is a good estimate of a high school senior’s current income who is working part time.)

3  Using a EFC estimator (Finaid.com and collegeboard.com have these available),determine what the student’s  EFC will be (see Appendix B).  This is assuming that today’s rules will still apply in the future.

4  Compare the future cost of education to the EFC.  If the EFC is less, subtract it from the cost.  The difference is need-based financial aid eligibility, the remainder is the family’s cost.  If the EFC is greater than the cost, there is no need-based aid in the student’s future.

This information allows us to make some judgment calls.  First, the remainder would be their dollar goal in terms of investing—the family’s cost after aid.  Based on this they can go back to the traditional calculator to determine their monthly savings goal.  And it is just that, a goal; they should not put retirement savings at risk.  What parents want is to have financial options when it comes time to pay for college.  Even a small educational nest egg is better than none.

Second, and most importantly, it gives parents the guidelines they need to determine where best to invest their college savings.  It’s important for

parents to remember that whatever investment strategy they choose will ultimately have consequences in terms of taxes, rate of return vs risk, and financial aid eligibility.

Whether or not need-based financial aid eligibility is established dictates whether or not the parents should concern themselves with looking for options to shelter assets from the needs analysis formula.  If there is no need-based aid then parents need only concern themselves with the tax and rate of return questions of investing.  However, if it appears that need will be established, then parents should make every effort to shelter assets from the formula, divert income, and so on to lower the EFC as much as possible, thus increasing the amount of need-based aid they are eligible to receive.

There is no magic formula.  No one college saving strategy will work well for every family because the right approach is dependent on several variables including, tax bracket, the student’s age, anticipated financial aid (both need

and merit) and how much control parents wish to retain over their investments. 

The goal of young parents should be to invest in their child, both educationally and financially, so when the reality of college stares them in the face, they have the latitude to make decisions.  “Creating Options” is what we want to achieve and given a good job of planning, the next phase of the process could more pleasantly be referred to as implementing rather than reacting.  

“You can pay me now or you can pay me later” was the tag line to an automotive maintenance commercial that aired a number of years ago.  Its meaning was quite obvious–pay a little now for maintenance or pay much more later for a major repair.

We should heed the same warning in regards to college planning, the financial consequences of which could be much greater than a $2,500 transmission job. 

Yet, research conducted in the summer of 2006 by AllianceBerstein College Savings Crunch study, revealed, that while 95% of parent surveyed intended to pay some or all of their children’s college expenses, even though one-third of those parents hadn’t started saving yet, and 64% had saved less than $10,000.

A recent report from The College Board showed that tuition and fees at public colleges and universities rose 6.3 percent for 2006/2007, an average of $5,836 a year, while private institutions saw a 5.9 percent annual increase to $22,218 on average.  That doesn’t include room and board, books, etc., which you can count on costing another $7,000 to $8,000 a year.  If you want to make even the most stalwart investor weak in the knees, calculate how much four years of education will cost ten years from now. 

That’s what traditional college savings calculators do.  It’s fairly simple.  First, the future cost of college when your child reaches age 18 is determined.  Second, based on the current rate of return, the future value of your investments and savings is calculated.  Then future investment value is subtracted from future college costs which gives you the amount you’ll need to save in the given time period. 

Based on what you need to save, how long you have to save it, and what your investments are returning, a monthly figure is calculated.  That’s when the well-intentioned parent faints, realizing that they will have to save some huge monthly sum, totally beyond the family’s budget to absorb. 

So what’s a parent to do?  Create options, by investing both educationally and

financially.  Educationally, parents need to invest their time to insure their child is given every opportunity to excel in school, provided the opportunity to explore the world and broaden their horizons, and encouraged to participate in activities that develop teamwork and leadership. Maximize their strengths and help them compensate for their weaknesses.  Yes, parents may feel like taxi drivers and might even have to read that text book along with their child, but that small investment in time will be returned ten fold when admissions officers start separating the sheep from the goats.  If they’ve done a good job preparing their student educationally, he or she has many more options in shopping for the right college or university.  The student might even qualify for merit scholarships and grants.

Financially, traditional college savings calculators are too simplistic, often resulting in an unreasonably high investment figure.  But consider whether most folks paid cash for their home—probably not.  So they shouldn’t expect to pay cash for college.  If they have four years of college expenses saved by the first day of college, they are, in effect, paying cash for college.  That’s unnecessary and unrealistic. Most families simply cannot save that amount of money, nor do they need to. 

Furthermore, the government doesn’t expect the family to pay the entire cost of a college education, only their fair share based on their financial circumstances.  Thus enter the financial aid formula for calculating Expected Family Contribution (EFC).   This is the method the Department of Education uses (or The College Board via the CSS Profile) to determine the student’s fair share of one year’s cost of education, and then their financial aid eligibility. 

There are two basic types of financial aid: Self-Help Aid, which consists of interest subsidized loans and work study, and Gift Aid, which consists of grants and scholarships.

The amount and type of financial aid is based on two factors: the merit of the student  (scholarship, athletic achievement, musical or artistic ability, etc.) and the financial need of the student.

Need is by far the most important factor in determining financial aid, but that

is slowly changing.  Most of the financial aid given by the federal and state governments is based on the financial need of the student, while most of the financial aid given by colleges is merit-based.

How is the financial need of a student calculated?  “Needs Analysis” is the process of determining the financial need of the student. It is calculated using the following formula:

1         Cost of Attendance (COA)

      -     Expected Family Contribution (EFC)

      =    Financial Need

2         Financial Need

      -     Resources of the Student

      =    Adjusted Financial Need

Example: If the cost of attendance at a particular college was $12,000 and the expected family contribution was calculated to be $4,000, the financial need of the student would be $8,000. In this case the student would be eligible to receive $8,000 in financial aid. Whether he receives a financial aid award for the entire $8,000 is up to the discretion of the individual college. Nonetheless the financial aid eligibility of the student is directly related to the financial need.

If the student had other resources to help pay for the college cost, the financial need would be reduced on a dollar-for-dollar basis for these resources. In this example assume the student had received a $1,000 private scholarship from the local Chamber of Commerce.  Since private scholarships (scholarships which are not given by the college) are considered a resource, the $1,000 scholarship would reduce the financial need down to $7,000. This means the student would now be eligible for only $7,000 in financial aid from the college.  Merit-based scholarships may be added to the mix as well.

The bottom line is parents don’t have to save the whole enchilada, but they need to invest something.  If they can have a year or maybe two of college expenses ready when the student begins college, they’re in good shape.  They have options–choose to pay for college from loans, from the investment account, from your income or a combination of all three.  They can also take advantage of the monthly installment plans.

How can parents use this information?  They should combine the traditional

savings calculator with the needs analysis process.

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1  Using the traditional calculator, determine what college is going to cost X number of years from now  (figures will be different depending on whether one uses a current public or private college dollar figure).  It would serve to use both for planning purposes.

2  Determine, based on a given annual cost of living adjustment and appreciation rate, what the parent’s income and assets will be at that same time in the future. If they are going to use the institutional method (used by the College Board), they’ll need to figure out what your home equity will be worth as well.  The student’s income and assets will also have to be fabricated ($1,500 to $2,000 is a good estimate of a high school senior’s current income who is working part time.)

3  Using a EFC estimator (Finaid.com and collegeboard.com have these available),determine what the student’s  EFC will be (see Appendix B).  This is assuming that today’s rules will still apply in the future.

4  Compare the future cost of education to the EFC.  If the EFC is less, subtract it from the cost.  The difference is need-based financial aid eligibility, the remainder is the family’s cost.  If the EFC is greater than the cost, there is no need-based aid in the student’s future.

This information allows us to make some judgment calls.  First, the remainder would be their dollar goal in terms of investing—the family’s cost after aid.  Based on this they can go back to the traditional calculator to determine their monthly savings goal.  And it is just that, a goal; they should not put retirement savings at risk.  What parents want is to have financial options when it comes time to pay for college.  Even a small educational nest egg is better than none.

Second, and most importantly, it gives parents the guidelines they need to determine where best to invest their college savings.  It’s important for

parents to remember that whatever investment strategy they choose will ultimately have consequences in terms of taxes, rate of return vs risk, and financial aid eligibility.

Whether or not need-based financial aid eligibility is established dictates whether or not the parents should concern themselves with looking for options to shelter assets from the needs analysis formula.  If there is no need-based aid then parents need only concern themselves with the tax and rate of return questions of investing.  However, if it appears that need will be established, then parents should make every effort to shelter assets from the formula, divert income, and so on to lower the EFC as much as possible, thus increasing the amount of need-based aid they are eligible to receive.

There are several different financial vehicles for educational savings.  Each has it own unique requirements and financial consequences.

Our founding fathers eloquently stated in the Declaration of Independence, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.” 

That one sentence displays such keen wisdom, yet most overlook its subtle intent.  The statement so precise, it’s very interesting to note that the authors framed our last right to be the pursuit of happiness, not happiness itself.  As the well-known adage states, “no one promised you a rose a garden,” yet today we, as a culture, have come to expect happiness.  Simply the right to pursue our dreams is no longer adequate.  We must have our dreams, our happiness, served up on a silver platter.  Anything less and we feel slighted, or at least unfulfilled.  As well, we’ve past this attitude on to the younger generations.  Somewhere along the line we decided as a society that we are owed happiness, whatever size shape or color we believe it to be.           

After many years of providing college and financial aid planning services for families and students, certain trends have become evident and troublesome.  The majority of parents believe that they owe their children a college education and their children aren’t about argue the contrary.  Without blinking an eye, parents are prepared to give up their life savings to serve up a college education on a silver platter.  Whether or not their child is prepared to effectively attend an institution of higher learning has no bearing on their rush to sacrifice their retirement.  Suggested options of attending a community college, pursuing technical training, or even working for a year or two before going on to college are treated as heresy. 

The fact of the matter is, in many cases, both parents and students would be better served to look at the alternatives.  How many unhappy freshman have returned home to seek another school or decide a different path.  Had options been entertained initially, how much time, energy and money might have been saved?  The emotionality that surrounds the college selection process cripples most families.  Whether it’s due to the unrealistic expectations of the parents or the less than practical desires of the student, poor decisions are made.  In our blind haste to serve up happiness, we end up dropping the plate. 

It has been said that the sportsman finds exhilaration in the hunt.  The kill is ante climatic.  So it is with happiness.  It is the pursuit of it that brings joy, the attainment is often times disappointing, at a minimum fleeting.  Do not deprive your child of the pursuit.  Ownership in the process makes the result that much sweeter. 

That being said, you should consider the student taking on some or a majority of the financial responsibility for their own education.  That responsibility doesn’t necessarily need to be cold hard cash, but a financial commitment on the part of the student.  If the student can’t excel academically or participate in extracurricular pursuits, which may result in scholarship assistance, then they need to step up and be willing to compromise on the college or university they attend or the path they take to get there.  A focused commitment to the application process with all its administrative requirements can have positive financial results. Taking on the responsibility for educational loans, holding down a part-time job, or even living at home and attending a local college for a year or two are other ways students can help financially, yet achieve their educational goals.                   

There is more than one way to college education.  Get in touch with what yours or your student’s strengths and weaknesses are.  Consider the alternatives, not only from a financial perspective but academically and personally as well.  As you will see, all three must be entertained and all three affect each other.