For most students, college is the pinnacle of academic excellence. With a college education, the thought is that a student can go anywhere, do anything, and become whatever version of themselves that they desire. And for most, that is true. College can provide you with the education and training to perform specific work in our economy that would otherwise be impossible. Without a college education, there is no way you could ever become a professional in the field of medicine. You can't grind and work your way into the pharmacist profession. You need the education first. The same goes for many other professions out there. So college is important, I think we can all agree on that. But how do you pay for college? It's continuously getting more and more expensive. The burden of carrying student debt over a long period of time is not optimal, but for most it's required. In this blog we are going to break down what PharmD parents need to know when it comes time to figuring out how to pay for college.
- FAFSA EFC Formula Basics
- What is Assessable on FAFSA
- Finding Schools that are Generous with Financial Aid
- What Can you Actually Afford
- Student Loans
First, before you continue reading, grab this free checklist of "What Issues Should I Consider To Fund My Child's College Education?"
FAFSA EFC Formula Basics
FAFSA stands for Free Application For Student Aid. EFC stands for Expected Family Contribution. The two combined give parents an idea of how much they will be expected to contribute toward college costs. You filled out your FAFSA and it tells you how much you will need to pay out of your own pocket toward your child's college education. So how does this Expected Family Contribution number get calculated? The four main areas of finances that are considered (among others) when calculating the EFC number are Parent Assets, Student Assets, Parent Income, and Student Income.
1.) Parent Assets: So there is an Asset Allowance that each parent gets. Call it a freebie. After that asset limit is reached, the remaining asset amount is multiplied by a percentage. This percentage can range anywhere between 2.4% to 5.6%. The resulting number is what FAFSA feels a parent can afford to spend from their assets to pay for college. "The FAFSA also has an asset protection allowance that shelters a portion of parent assets based on the age of the older parent. The maximum asset protection allowance, however, has decreased from $84,000 in 2009-2010 to $9,400 in 2020-2021 and will eventually disappear entirely." How to Shelter Assets on the FAFSA by Mark Kantrowitz September 14, 2020. As the asset protection number goes down, your EFC goes up.
2.) Student Assets: The FAFSA will want to know how many assets the student owns. For this part of the calculation, FAFSA does not give any sort of asset allowance (or Freebie) to the student. Instead it takes all the students assets and multiplies it by 20%. The remaining number is what FAFSA feels a student can afford to use to help pay for their own college costs.
3.) Parent Income: Its very similar to Parents Assets. A parent will list their income and will be allowed to subtract certain taxes and a living allowance. The remaining income number will be multiplied by a range between 22% to 47%. The left over number is what FAFSA feels a parent can afford to use from their income to pay for their kids education.
4.) Student Income: Same as the parents income. It's the students income subtracted by certain taxes an a $6,600 allowance. Anything left over after that will be multiplied by 50% to determine what income number FAFSA will assume a student can afford to use to help pay for their own college education.
You add up 1 - 4 and it will give you a very close estimate of what your EFC is going to be. This is what the FAFSA feels you can afford to pay from your own pocketbook toward college expenses.
What Is Assessable On FAFSA
So now that we know that in order to figure out your EFC, the FAFSA is going to want to get a good idea of what kind of assets the parents and children have. But which assets are they going to count? Well to give you an idea, below are the assessable assets that FAFSA will be including in their calculation and the non assessable assets they will be leaving out.
|Non Assessable Assets|
|529 Savings Plans (for all children)||Roth IRAs|
|Coverdell ESA||401(k)s, 403(b)s, 457 Plans|
|Mutual Funds||Small Businesses|
|Rental Real Estate (the equity)||Primary Home Equity|
|Vacation Properties||Cash Value Life Insurance|
Finding Schools That Are Generous with Financial Aid
Schools want to help you fund your education costs. They do this through two forms of financial aid. You can either earn aid, which is more commonly known as Merit-Based. These are generally given out in the form of scholarships. Or you can be awarded financial aid based on need. Need-based financial aid can be gifted through scholarships or grants. Or it can be more self help in nature through student loans or a work study programs.
Finding schools that are generous with financial aid can be a big boost in determining affordability of a school. Some big name schools offer many different scholarship opportunities for students who have high enough GPAs and have scored well enough on ACT or SAT exams.
So let's assume you find a college that is a great fit. The cost of college is $65,000/year. After filling out the FAFSA, it's determined that you can afford to pay $28,000 (EFC) of that price on your own. That leaves you with $37,000 of need. Filling this need either through merit based aid or needs based aid will determine what direction you take next in figuring out how you pay for college.
"Finding schools that are generous with financial aid can be a big boost in determining affordability of a school. Some big name schools offer many different scholarship opportunities for students who have high enough GPAs and have scored well enough on ACT or SAT exams."
A few great resources you can use to determine how financial aid is awarded are:
What Can You Actually Afford
The FAFSA will tell you what they believe you can afford. But what can you actually afford? You are going to want to do a little projecting. Having an idea of what you will be able to contribute will allow you to narrow your college choices down further. First, take an audit of all your resources that are ear marked for college expenses. Those could be 529s, Coverdell ESAs, brokerage accounts, etc. Next add to those accounts what you anticipate contributing to them from now until it comes time to spend that money on college expenses.
Ex: You have $20,000 saved in a 529 account. You expect to add $250/month for the next 4 years. With an expected rate of return on that money of 5%, you can confidently say that you will have a total of approx. $38,000 in that account when it comes time to start writing checks. Then factor in any amounts that the child will want to contribute on their behalf. Let's say that it's $3,500/year. Finally, figure out if any other funding sources will be available. Will grandparents want to kick in any specific amount each year? Let's assume they do and they can afford $5,000/year
Now we can start to see what you can actually afford take shape. $9,500/year from the parents. $3,500/year from the student, and $5,000/year from grandpa and grandma. Essentially you are pre-approving yourself for $72,000 for a four year college program. This will go a long way in helping you understand if you can actually afford to go to school at a university when the FAFSA is completed, the EFC is calculated, and financial aid is received.
The dreaded student loans. You hate them but also can't live without them. When you've exhausted all your options and there is still a funding gap left over, sometimes the last resort is borrowing that money. This is where the rubber meets the road. Very poor decisions were made in the past about utilizing student loans. Parents and students were dead set on a specific university and didn't care what it would take from a debt standpoint to make that happen. Today that results in a tremendous amount of student loan debt being owed.
There is a better way. Instead of blindly taking a leap into the student debt pool, run the numbers to determine if the long term carrying costs of that debt is actually worth it to attend a specific college. Now compare that to other university alternatives that may not be as expensive. Is it worth it to you as a parent or to your student to potentially carry a 10 year loan payment for over $1,000 after graduation just to attend a specific school? Or would you be better served to attend another school and not have to worry about it because the $72,000 you pre-approved yourself for is enough to cover the entire cost?
I bet if you asked one of the millions of people who currently struggle with student debt, which route they would take if they could do it all over again, I'm sure they would jump at the chance to do it differently. The out of pocket cost isn't just the cost to attend the school. It's also the cost to repay any student loans back and the opportunity cost of missing out on other things in life after graduation because you have those student loans hanging over your head.
You want to buy a home, start a family, travel, or start your own business after graduation? Great, but how well will that work with a $1,200 student loan payment each month? And does that match up with the income you anticipate earning? It's important for parents to have these types of conversations with kids when it comes to college and student debt. Most 18 year old's don't care enough now to want to spend time thinking about it. As a parent, you need to find a way to break down that wall and to help them understand the long term opportunity costs of student loan debt.
So how do you pay for college? You start by trying to determine how much colleges actually think you can afford. FAFSA and EFC go a long way into determining this for many universities. Next, do your best to figure out how much you can actually afford. What is your "out of pocket" maximum? Be realistic. Then try to determine how generous schools will be when it comes to financial aid. If you can find big differences in what they offer, use that information to negotiate with admissions offices. Finally, do your best at quantifying the long term opportunity costs of funding a college shortfall with student debt. In the long run, is that student debt worth it just to attend this school? Or would a student be better served to enroll somewhere else that is more affordable? Having these type of conversations, along with some thoughtful planning could make a big difference in your total cost of college.