Misunderstanding Your EFC
The Expected Family Contribution (EFC) is the portion of your family’s income and assets that the government expects you to cover out of pocket each year before financial aid kicks in. The EFC comes from filing an annual FAFSA, the Free Application for Federal Student Aid. Unless your student qualifies for Merit Scholarships, financial aid will only cover the costs leftover above and beyond your EFC.
Many parents, when they learn what their family EFC will be, often ask if one parent should stop working to reduce the EFC. While it doesn’t make sense to earn less money to receive more financial aid, you can reduce the EFC considerably by structuring the family assets into accounts not counted on the FAFSA. Everyone should file the FAFSA!
Education Tax Breaks
The Hope Scholarship and the Lifetime Learning Credit are substantial college funding tax benefits available to many middle-class Americans. These benefits, which come in the form of a tax deduction or tax credit, can put $1,500 to $2,000 back in your pocket at tax time. The key on qualifying for these benefits depends on how you paid for college tuition the year before. Unfortunately, many parents miss out on these credits or deductions by not understanding the strategies needed to take advantage of these credits and deductions.
Not Accepting the Federal Stafford Student Loans
Every year in the spring and summer I receive calls from parents that start out: “Luanne, you don’t know me. Terri suggested we should call since you are probably the only person who could help us”. I dread these calls because I already know where this conversation is going. They have a child already in college. They have used up their personal resources to pay for college. They have just been turned down for the parent PLUS and private lender loans. They are looking for a miracle so their son or daughter won’t have to drop out of college. They usually have 2 other children at home who now have NO college funding since they used up their resources for the oldest child. The sad part is most of the time I find they turned down the offer of the Federal Student Loans. If they hadn’t turned down those loans they may have had enough resources left to finish paying for college. Why did they not accept those loans when offered on the student’s financial aid award? They didn’t want their child to have any student debt. What they failed to realize college costs have risen faster than most Americans can keep up. None of us can save enough to fully pay for college anymore. The Federal student loan program helps parents and students finance a college education for a minimal interest rate and fairly reasonable terms. Plus, I am a firm believer our kids need to have some skin in this game of paying for college!
According to the College Board, college costs increase on average 4-6% every year. Well over 500% since the 1980’s when you went to college! The average family can’t possibly save enough to fully fund a 4year university program anymore. With proper planning and time on your side you can take advantage of the other areas where you can save ON the cost of college that will help offset the never-ending creep of inflation.
Not Understanding Savings Options
You can save money for college in many types of financial vehicles, from a simple savings account, checking account, CD’s, stocks, life insurance, annuities, real estate, Roth IRA, 529 plan, etc. Unfortunately, not all of these accounts are created equal. Some will count against you on the FAFSA, others have fees and expenses or taxable consequences. The first step in choosing the right vehicle to save for college is to understand your options. Know the pros and cons to find the right account for your family. When it comes to saving, there is no right or wrong way, there are just some accounts that will be more efficient than others.
Using Your Retirement Funds to Pay for College
The biggest college planning mistake many parents make is using existing retirement funds to pay for college. Whether you take out a loan or cash in your retirement account, either way you are setting yourself up for retirement failure. You may have extra fees, expenses, tax consequences and lost opportunity of compounding interest. Just remember, if you don’t have sufficient funds saved for college you have other alternatives. You can borrow for college, start at a 2year college and transfer, scholarships, military, trade school, etc. Once you are ready to retire the one thing you can’t do is to borrow for retirement!
There are many other funding mistakes we could add to this list but we will run out of space. Don’t go into this most expensive time of your life with your head in the sand. Don’t follow the crowd. Know what options you have that will be right for your family.
Luanne Lee, CCPRS