College Funding: Helping Clients Evaluate What’s Best

Start by helping them navigate how to select and pay for the “right” college for their children.

Parents only want the best for their children. This is especially true when it comes to college. However, there may be different ways to think about what’s “best,” particularly in the face of dramatically rising student debt levels in America and the impact that can have on retirement security. Your clients may look to you, as a financial professional, for help. The following outlines some things to consider.

The average amount of student loan debt for borrowers at every age has more than doubled between 2003 and 2015. This means that it’s not just students who are borrowing much more — parents are, too.1

How Families Pay for College Today

Your clients must balance their emotions against the risk of taking on a level of debt that may burden their children, and possibly themselves, for years to come.

a level that captures the maximum amount their employer will match.

The typical family today relies on a web of resources to pay for college. Fifteen percent of the cost is funded by student borrowing, 7 percent by parent borrowing, 12 percent from student income and savings, 30 percent from parent income and savings, 31 percent by grants and scholarships, and 4 percent from contributions from other relatives.24

Qualifying

The effect of higher borrowing is emerging as a concern among economists, policymakers, employers and retirement experts. Young consumers already carrying student loans may not be willing to take on debt to buy a house or a car. If they are willing, they might not qualify. 2

Research conducted by the Center for Retirement Research at Boston College (CRR) and sponsored by Prudential indicates that student loan debt may jeopardize one’s golden years if it impacts the ability to save adequately for retirement.3 The CRR found that 49 percent of households without student debt were at risk of not being able to maintain their standard of living in retirement; that percentage soared to 60 percent for households with student debt.4

How Families Pay for College Today

Prestige versus cost

The typical family today relies on a web of resources to pay for college. Fifteen percent of the cost is funded by student borrowing, 7 percent by parent borrowing, 12 percent from student income and savings, 30 percent from parent income and savings, 31 percent by grants and scholarships, and 4 percent from contributions from other relatives.24

What’s more, when it comes to retirement, 401(k) plans have replaced traditional pensions as the predominant workplace retirement plan. For 401(k) plans to work effectively, individuals must save an appropriate amount, especially at

So, what’s “best” when it comes to a child’s college education? There is more than one way to look at it. Attending what is considered a more prestigious college has often been viewed as the best option for a child, even though the associated cost may be higher.

Another school of thought is that it may not be best for a child to choose a college that requires

In 31 percent of families, the student provides all funds not covered by financial aid.25 In another 31 percent of families, significant student loans if those loans hinder the long-term financial prospects of the child (or parents) after graduation. This can be a difficult challenge for parents, as tackling this issue with a high-school student is not an easy task. Emotions can run high. Their children have worked hard, both in and out of the classroom. What’s more, in an era of social media, they face much greater social pressures when selecting a college than their parents did.

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Qualifying for Need-Based Aid: The Federal Methodology and FAFSA

Your clients, as parents, may feel similar social pressure — in addition to self-imposed pressure — and must balance these emotions against the risk of taking on a level of debt that may burden their children, and possibly themselves, for years to come.

Understanding options

In 31 percent of families, the student provides all funds not covered by financial aid.25 In another 31 percent of families, parents pay enough of the costs such that the student pays nothing, either out-ofpocket or borrowed.26

There is no doubt about the value of a college education. College graduates, on average, earn 65 percent more than their counterparts without college educations.5 However, careful consideration must be given to how

As noted earlier, need-based financial aid is awarded based on a family’s income and assets. It takes the form of grants, loans, and work-study programs. Colleges typically employ one of two methodologies for calculating whether a student qualifies for need-based aid: the Federal Methodology or the Institutional Methodology. This section of the paper highlights the workings of the Federal Methodology, which is used by the federal government, all public colleges, and many private colleges. The next section is devoted to the Institutional Methodology, which is used by some private schools to determine eligibility for non-governmental financial aid.

The FAFSA

Qualifying for financial aid under the Federal Methodology always begins with completing and filing the FAFSA—the Free Application for Federal Student Aid. The form requires financial information from both the student and at least one custodial parent, and must be filed for each year the student will be attending college. While awaiting the results of their FAFSA filing, students can get an early estimate of how much federal aid they may qualify for by completing another online form, the FAFSA4Caster, at the website of the U.S. Department of Education’s Office of Federal Student Aid.27

Family

Families should file the FAFSA as soon as possible after January 1 of the year in which the student will enroll in college, since some colleges award aid on a first-come, firstserved basis—and because missing the final deadline, which

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