Controlling college costs means choosing colleges carefully

She’s happy her son was accepted to an elite university, yet this mom tells me she lies awake at night worrying about the costs and works extra shifts as a nurse to save up. This university costs $86,363 per year. It awarded her son $20,000 in need-based aid and $5,500 in a federal loan to the student, who will also try to earn $2,363 in a part-time job. This college met 100% of this family’s demonstrated financial need, so they’ve done their part. The $58,500 is the family’s self-help portion, an obligation that colleges will not fund except through loans. 

 

“It’s like paying for a new car each year,” says the dad. They’re looking to retire soon and shelling out this kind of money is a hardship. Had they come to me in their child’s junior year, this talented young man would have applied to well-matched colleges where the needs-analysis would have excluded the principal residence. With over 4,000 colleges in the U.S., there are options, especially since this young man wanted to go out-of-state. 

 

The lesson here is that some colleges’ financial aid policies affect a family’s bottom line more than others, and the best time to run these calculations is in the junior year and the summer before senior year. 

 

If families have a high expected contribution, they will pay the full cost, even though colleges tout that the sticker price is not what families pay. It matters how a college evaluates families’ finances. The elite colleges typically use both federal and institutional methodologies to calculate financial need. 

 

The institutional methodology includes an assessment of the value of the principal residence which they see as a source of funding. Given the high valuation of Daniel Island homes, it doesn’t take much for a family’s expected contribution to be high or higher than the cost of attendance. 

 

When that happens, families pay the full price, whereas they would pay less at colleges that use the federal methodology alone, and award substantial merit aid. “It’s as if I’m writing a home equity loan and a lien is being put against my house,” laments the dad.

 

I’m no financial planner but I know how college financial aid and loans work. I used to work for a SallieMae private lender and I learned that Sallie is not a girlfriend. This dad is better off with the federal Parent Loan. If they default on an equity loan, the bank can repossess the house. The federal government as the lender can make life miserable when students and parents don’t repay their loans, but they can’t take back an education.

 

For the 2022-23 academic year, the PLUS loan interest rate is 7.543% with a 4% origination fee and up to 1% disbursement fee. Although the terms are high, the 4% fee is a life insurance policy on the parent borrower. The loan will be cancelled in case of death or disability. 

 

Students who file FAFSA automatically receive a $5,500 Federal loan. It’s a lower cost loan than the parent loan and studies show parents will borrow less in the upper years if their student accepts loans all four years. The student will have more skin in the game and will build credit.

 

C. Claire Law, M.S. IECA, Certified Educational Planner, serving Daniel Island, since 2004. For more info, claire@eduave.com.