For the second time in the last few months, my oldest and I spent a few hours surfing YouTube looking at various campus tours and other informational videos on her current list of potential colleges. While only a freshman, Dad apparently passed down some of his early planning genes.
I have been planning in one way or another for her first day of college since a few weeks before the day she was born. Opening a 529 through Ohio’s College Advantage program was the first step. Doing some research on historical inflation rates for tuition was second. Eventually, a conversation with my wife about how much tuition, room & board we’d want to be able to cover for our children and whether that would be true at an out of state public or private institution.
There are no right answers to these questions or at least no way to come to the correct answer nearly two decades in advance. As with most major financial planning issues, the variables are vast and ever changing. But as this journey begins for our family, I notice some things changing in the landscape that I thought would be worth sharing. I plan on writing quite a bit about this process over the next few years as, while she’s just a freshman, I know this time will fly.
This is by no means a comprehensive look at the college savings process. Your advisor can be a tremendous resource for talking through this process regardless of where you, your child, grandchild or other family member might be.
It’s been tough to miss the topic of college tuition costs in the news over the last several years. Despite long-term average cost increases of 6.7%, nearly double the rate of inflation, the rise in tuition on campuses across the country has slowed significantly over the past 5 years to somewhere between 2-3%.
This creates challenges for those planning to save for college, especially for younger children. Assuming that tuition will stick to this 2-3% inflation rate could leave parents well short of meeting their savings goals if historic trends continue. But saving under the expectation that long-term historic norms of 6-7% will return could leave parents over saved and facing years of unnecessary cash flow strain.
Still, the cost is significant and, especially at the most competitive institutions, the lengths parents will go to improve their student’s test scores, grades, resumés and other acceptance boosters are at an all-time high. If you’ve missed any of the recent controversies, take a few minutes and check out the Netflix documentary, The College Admissions Scandal, which provides not just the dirt behind the scandal, but also an in-depth perspective of just how out of control some of what I described above has become.
The “Expected Family Contribution” or EFC is the amount that a student (or theoretically, their family) is expected to cover for higher education costs. This is determined based on the information gathered on the FAFSA (Free Application for Federal Student Aid). This is largely based, in most cases, on the income and asset level of the family involved, but not all assets are created equal.
Assets held directly in the student’s name are counted the most aggressively in the EFC calculation along with parent’s income and assets, which are weighed on a sliding scale between 22% – 47%. Assets held in a 529 owned by a parent with the student as beneficiary are assumed to be the asset of the parent and applied to the EFC calculation at a maximum of 5.64% of its value, making this a great tool for college savings even beyond the significant benefit of tax-free growth and tax-free use of funds for educational purposes.
It’s important to note that the term EFC will be eliminated and replaced with The Student Aid Index. This was part of legislation described in the section below.
FINANCIAL AID CHANGES
Changes beyond the slowing rise in costs are on the horizon. As part of legislation passed at the tail end of 2020, the FAFSA will be shortened from six pages and as many as 216 questions to two pages and no more than 36 questions. This will simplify the process for nearly all applicants, but will also take away some key benefits. Chief among those is the benefit to parents with children attending colleges simultaneously. Currently, having a second child attending college at the same time cuts the EFC in half, essentially dividing the EFC for the family between the two students. The same is true for three or four children. Starting with the 2023-2024 school year, this will no longer be the case.
I’ve been fortunate to have children at roughly the same time as author and New York Times columnist, Ron Lieber. It has prompted Ron to write first what I consider to be the go-to source for talking to your kids about money, The Opposite of Spoiled, and now one of the most comprehensive and easy to read manuals for considering your values around and how to think through making the best college decision for your family with The Price You Pay for College.
Check out The College Board’s Trends in College Pricing report. It’s a pretty comprehensive look at the changing dynamics of college costs and worth looking back at the last several years’ reports to see how things have been changing.
As I mentioned, this won’t be the last time I cover this topic over the next several years. As my family navigates the process with our daughter, we’ll be sure to find areas where our planning pays off and areas where we find we’ve miscalculated. I can’t stress enough how quickly the time between a child’s arrival on this planet and surfing college videos and planning some initial college visits passes. Planning, whatever that means for you and your family, can’t start soon enough.