You are probably wondering, how can I possibly determine my cost before I know to which schools my student will apply or ultimately attend. For the most part, it does not matter which school. What matters is what you will be expected to pay in the form of your Expected Family Contribution (EFC). Just as important, you need to know your ability to pay the EFC. Since schools differ in the amount of aid they can provide, your cost will definitely be your EFC; and in most cases, some unmet need. How much Need Based Aid you will be eligible for is determined by subtracting your EFC from the Cost of Attendance at the school. Remember, your EFC remains constant. These examples will illustrate the point.
School A: Cost of Attendance $20,000 less EFC of $20,000 equals $0 Need.
School B: Cost of Attendance $40,000 less EFC of $20,000 equals $20,000 Need.
Your need is what you are eligible for, not necessarily what you will receive.
Let me better explain. In the college planning and financial aid world, every family will have an Expected Family Contribution (EFC), based on financial aid formulas. Be prepared, because this number usually results in shock or tears of disbelief when families learn what their EFC will be. It is not worth arguing or debating whether the formulas are right or fair. Parents often laugh or panic when we tell them their EFC and commonly say, “How do they expect us to come up with that kind of money?"
The point is: you need to know your EFC, and realize it will be the same regardless of the school; so why wait to find out and further delay planning. The only way to pay less than your EFC is if your student goes to a school that cost less than your EFC; for example, a community college. Once you determine your EFC, it is time to determine how you will pay that amount, regardless of the school. Need based aid is meant to help cover your financial need, not your EFC. Therefore, you will pay your EFC from either, savings, investments, your income, or by borrowing. Many families do not have enough savings to cover their EFC for the first year, let alone four or more years. Therefore, most families will be borrowing to cover a portion of their EFC.
Once you determine how much you are expected to pay (your EFC and unmet need), it is important to determine how much you can pay, or more importantly how much you should pay. It is crucial to determine how much you should pay early on, because if you don't, you could paint yourself into a corner financially. You should know how much you may have to borrow to cover your EFC and what that means in monthly payments. If you have found it difficult to set aside money each month leading up to college, what will change to make money available to make the monthly payments on college loans. It is very important to know the answer to this. If things are that tight, the answer should not be deferring all payments on all loans until after college is completed. That just might be a temporary deferment resulting in a much bigger problem. By deferring, the payments will be larger, so you must be comfortable with the future career direction and earning potential of the student and the ability to cover the loan payments. Assessing the various loan options is a topic in itself.
Back to determining how much you (specifically the parents) should pay. While it is a noble and preferred goal for most parents to cover the majority of college for their children, you must determine in advance the impact your college contributions will have on your own retirement. The reality is that most parents may have fifteen to twenty years left of high earnings potential, once their children are out of college. If you continue to pay off loans for college expenses after your student has graduated, your time frame to bolster your retirement becomes even shorter. In addition, should a parent get laid off or is ever disabled for any period of time, both college and retirement may take a hit.
Before committing to a contribution amount, parents should do a detailed analysis of what their retirement picture might look like, based on their efforts to date and reasonable projections into the future. Many people fall prey to seeing large dollar amounts in their retirement plans and thinking they will be fine when their retirement day arrives. Take the time to confirm what will probably be, and don't rely on what you think will be in retirement. If you are not comfortable with your retirement picture, you may have to reduce your contributions toward college. The bottom line is that your student will have their entire working lifetime to address loans, while you may have a limited window to pay down mortgages and bolster your retirement before going on a fixed income. Just remember, at the time you might be running short of money in your retirement, your children who you have kindly helped through college may be struggling financially as they are raising their own families. Therefore, you cannot necessarily count on them to pay you back later in life.
In summary, families need to determine their EFC and their ability to pay as early as possible. Determining this in an eleventh hour reactionary mode typically does not work out in your favor. In essence, paying for college may not be just a college problem; do not let it become a retirement problem as well.
Chuck Drawbaugh is President of College Funding Associates, LLC, a firm he founded in 1999 to specialize in saving families time, money and stress when it comes to planning and paying for college. Chuck can be reached at 732-224-1496. Visit the College Funding Associates Web site to learn how to:
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