Why Should You Care About Student Debt?

The New York Times kicked off its series “Degrees of Debt” with an article entitled A Generation Hobbled by the Soaring Cost of College. This article touches on how the cost of college has skyrocketed and how that increasing cost has and will affect the current generation of students.  This is a very timely piece with the state of the currentUS economy and the impending debate on student loan rates on Capitol Hill.

I’ve discussed this issue with my friends over the past week and have heard repeatedly- ‘why should I care?  I’m not in college.’  My response (much to the chagrin of my father) is in the form of a question- why would you not care?  If only because one day your children will want to go to college and their tuition bill will follow, but more so because of the lasting affects this will have on the American economy.  In the article Rajeeve V. Date, deputy director of the Consumer Financial Protection Bureau, draws likeness to the predatory lending norms associated with the current housing crisis- and we have all felt the lasting effects of allowing that crisis to continue on too long.

But could this be worse? An entire generation is graduating from college with a student loan payment that is double (or triple) the amount of an average mortgage payment. These students should be coming out of college, finding jobs, buying new cars, traveling the country, getting married and buying houses (they are our economic stimulus package!).  But instead, they are living with their parents, taking on whatever job they can find to make ends meet and putting every cent they have into paying off their debt to keep from defaulting on a loan that was taken out so they could better their lives through education.  Ironic, right?

So what is the answer?  Not go to college? Increase taxes to fund higher education?  Very few would agree that those are good answers.  My answer is proper planning.  Choosing the right college and knowing how you are going to pay for it BEFORE your tuition bill comes.  One could argue that proper financial planning for college should start at the moment a woman finds out she will become a mother, but we live in the real world and life often gets in the way of funding a college savings plan. Most parents don’t start planning for college until their student starts seriously talking about going college (sometime around their sophomore year of high school), and that’s OK.  Just make sure that you have a plan; this will help you avoid the last minute panic of taking out too much in student loans.

Let’s face it, student loans are a reality. Most students are going to need to take out some amount in loans to pay for college, but there is no acceptable reason that a student should be surprised by a $900/month student loan payment after graduation.  Proper planning for college is about knowing what to expect.  If you’re wondering what to expect in the coming years- sign up for a free consultation with one of our College Planning Advisors or submit a question.  We’ve been there and we are here to help.


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Estimating College Aid Eligibility Part 1

The process of applying for need-based financial aid for college begins by students and parents completing one or two financial aid forms, the FAFSA (Free Application for Federal Student Aid) and/or the CSS Profile. Any college or university that awards federal student aid must require that students complete the FAFSA in order to determine eligibility for federal aid (it works for most state aid too). Most colleges and universities nationwide use the FAFSA as their sole application for need-based financial aid, so students applying for aid at those colleges only need to complete the FAFSA.

However, there are about 300 colleges which require that the CSS Profile also be completed in addition to the FAFSA. Those colleges use the CSS profile to assess the student’s eligibility for the college’s own institutional aid dollars. Typically, “Profile” colleges are very selective private colleges, including the Ivies, but the University of Michigan at Ann Arbor and the University of North Carolina at Chapel Hill are examples of flagship state universities that also require the Profile.

Calculating the Family’s Expected Contribution (EFC)
Regardless of the aid form (s) the student is required to complete and submit as part of the process of applying for financial aid, and after all of the time and information it takes to complete the form (s), it all boils down to three letters, EFC.

You provide your financial information on the aid forms (FAFSA and CSS Profile), submit the forms online to the processing centers for each respective form, and the information from the forms goes into the aid calculations (the Federal Methodology and the Institutional Methodology). The output of those need analysis calculations is the student’s expected family contribution (EFC) toward the cost of college. The student’s EFC is the minimum amount the student is expected to contribute toward the cost of college. Thus, EFC represents a dollar amount. It is the “output” of the aid forms and calculations.

Both of the EFC formulas focus primarily on the assets and income of the parents and student, family size and the number of dependent children enrolled in college in a given year to assess the family’s ability to pay for college using the income and assets that they have. And because the two formulas calculate EFC differently, it’s likely that the student’s EFC under each formula will also be different.

Using a Student’s EFC to Determine the Need for Financial Aid
EFC is used to analyze a students’ need for financial aid using a simple formula that subtracts the student’s expected family contribution (EFC) from a college’s total cost of attendance (Cost of Attendance – EFC = Financial Need). If a student’s EFC is less than a college’s cost of attendance, then the student qualifies for need-based financial aid.


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Financial Aid Question of the Month

Q. For several years, I have been taking care of my brother’s student. I’m not the legal guardian and my brother and his former wife are rarely seen or heard from. How does this affect the FAFSA?

A. As long as at least one of the student’s parents is still alive, the student is considered a dependent person and the parent’s information must be reported on the FAFSA even if he has a guardian, legal or not…Unless the school has a documented reason to perform a dependency override which will convert the status to independent. To get a dependency override you will have to contact the financial aid department.

If a student is living with her grandparents or other relatives, the same principle applies. Unless the relatives have adopted the student, their income should not be reported on the FAFSA as parental income. Any cash support from persons other than the student’s parents should be reported as untaxed income. The school may also consider other kinds of support as part of the student’s financial resources and use professional judgment to include the support under the item for student’s untaxed income. Any support the student receives from his or her legal guardians gets reported on one of the FAFSA worksheets, but the student does not list them as parents on the FAFSA.

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What To Do If You Need More Financial Aid

Appealing a financial aid award is a common practice but has its challenges. Many parents need more aid than ever, and college endowments have yet to gain back their losses. Some colleges will respond to your request to review your student’s award letter. Reasons why they should do so: your finances have changed; you had unreimbursed employee business expenses, unusually high medical expenses, or your student was offered a much better offer at another college that is very similar to the one he or she really wants to go to.

However, if you ask for more money without documentation of your problems or other award offers, it is doubtful that the school will see it’s way clear to offering your student more money. In fact, when you ask for money and don’t get it, 90% of parents end up sending their student to that college anyway. And financial aid directors know this.

Even if the odds appear to be against you, if you feel that you honestly deserve more help, then ask. The worst thing that can happen is they say no.

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Should I Wait Until I’ve Filed My Taxes…?

Don’t miss financial aid deadlines because you haven’t filed your taxes yet! Most schools have January and February deadlines for first-year students. Because they don’t expect parents to have their taxes done that soon, income estimates are perfectly fine! Use last year’s taxes and end-of-year pay stubs to make an educated guesstimate. Assets should reflect last known values. Usually this will be your most recent statement. Unlike income figures, asset values should NOT be changed on the FAFSA without a really,
really, good reason.

Business owners may use estimates based on 2010.

In the meantime, make every effort to get your taxes done by March 1st. I know this can be a difficult task, but some colleges and universities will ask you to send them a copy of your tax return and your student won’t get a dime until they receive them. If you will owe money to the IRS, send in your return anyway. The rule is that you send a signed and completed return, even if it hasn’t been filed quite yet.

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Before You Do Anything Else…

You and your student have been so busy with the application process for so long that it feels as though you should still be working at it until your student has that acceptance letter in hand. It’s difficult to stop. Here are a couple of things not to do:

  • There is no reason to call admissions to check on the application. The admissions process takes time. Calling constantly to check on the status of the application will not help. Calls from parents especially will not help. Unless there is a major change in some information in the application, do not call.
  • Don’t ask your student if she has heard anything, or whether her friends have heard anything. It’s time to put this on the shelf and let her enjoy high school for a while knowing that the job was well done. Let her live in the NOW.

If you wish to discuss graduation rates with admissions, I’ve found it productive to ask what steps your student can take to increase the chances of graduating in four years rather than asking why the four year rate is low (or low compared to others).

Here are some top reasons why a student might not graduate in four years:

  • Transferring to another college
  • A change of direction or major
  • College not offering enough classes each semester
  • Completing a double major
  • Failing too many classes
  • Artificially raising GPA to keep scholarships by withdrawing from too many classes
  • Low GPA
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Hedging Your Investment


Here’s a leading question: Would you rather put your money in something that had a 70% chance of paying off or an investment that had only a 25% chance? Without knowing the four, five and six year graduation rates of the colleges your student is considering, you could be backing a losing horse! You might be awestruck to learn that many parents are sending their children to colleges with a four-year graduation rate of less than 25%.  I’m not going to show you the worst of the worst so let’s assume that your student has an SAT score between 1090 and 1300 Math and Verbal, or an ACT composite score between 24 and 31.  Here are some public and private institutions where they would have a good chance of being accepted and their four and six year graduation rates:When comparing apples to apples you can see that choosing the right college means graduating sooner for less money.  If you wish to discuss graduation rates with admissions, I’ve found it productive to ask what steps your student can take to increase the chances of graduating in four years rather than asking why the four- year rate is low (or low compared to others).  Here are some top reasons why a student might not graduate in four years:

•    Transferring to another college

•    A change of direction or major

•    College not offering enough classes each semester

•    Completing a double major

•    Failing too many classes

•    Artificially raising GPA to keep scholarships by withdrawing from too many classes

•    Low GPA

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Your Best Strategy® to Pay for College

The four key areas that must be considered in the process of determining Your Best Strategy® to pay for college and save for retirement are: College selection, financial aid, tax aid and personal resources.  To make intelligent decisions in these four areas requires specialized knowledge of college admissions, financial aid, taxes, and financial planning. Even if you have people advising you in these areas, it can be difficult to pull that expertise together specifically for college planning and retirement purposes. Let’s take a look at an example to gain perspective. Parental income is the biggest factor in the calculation of a student’s expected family contribution (EFC), the minimum amount the student/family is expected to contribute toward the cost of college. The most common allowances against income in the EFC formula are: federal taxes, state taxes, FICA taxes, and an income protection allowance.

So the amount of taxes you pay helps reduce the amount of income that gets calculated in the EFC formula. Therefore, the more tax the parents pay, the lower the EFC is. But conventional financial planning strives to help parents pay less tax, not more. So you can begin to see how complicated college planning can be by just looking at two variables.Things like retirement plan contributions, whose names assets are saved in and what types of ac‐ counts those assets are in, are also big factors in determining EFC. The reason that a student’s EFC is so important is because it is part of what is referred to as financial need analysis, where the EFC gets subtracted from a college’s total cost of attendance to determine if the student has “need” for financial aid (Cost—EFC = Financial Need).

So it is safe to say that anything that affects your income, taxes and non‐retirement assets may also affect a student’s EFC, and therefore possibly the student’s aid eligibility. However, note that the first variable in the need analysis formula is the cost of college.Therefore, you can see that college selection may directly affect a student’s aid eligibility because, based on cost, a student with an EFC of $20,000 will demonstrate need at a college costing $45,000, but not at another college costing $18,000 per year. Moreover, the American Opportunity Tax Credit is an example of what we refer to as “Tax Aid”, and is available to some taxpayers when they pay qualified college tuition costs. So college selection, financial aid, tax aid and your personal resources are all interconnected. Which is especially important considering that what parents spend on college they don’t have to save for their retirement. It is fair to say that there is a lot more to college planning than applying to a few colleges and completing a financial aid form. Moreover, the college decisions you make today will create ripple effects for years to come. Hopefully this newsletter will help you make them well.

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