People have often asked me, “what’s the cheapest way to get my kids through college?”  My typical response is “have triplets.”  Generally that is followed by a quick laugh by everyone involved.

By the time I am talking with families, their “family planning” is long over with.  So my response is at least half jesting.  But there is a tremendous amount of truth to the comment as well.

College finances are typically more manageable the more students you have enrolled.  The expected family contribution (EFC) is substantially affected by the number of students you have in school at the same time.  In fact for the parent’s portion of the EFC, it is split equally among the students enrolled in college.  So if the parent’s EFC is $20,000 with one child in college, it will be $10,000 for each child when there are two in college.  Now this may not sound like that big of a help at first, but consider the following.

The Ellis family has two children, two years apart.  The oldest will start college in 2010, and the second child will start in 2012.  We’ll assume for this example that each child will complete college in four years.  For the first child, the Ellis’ EFC is $15,000, and because they have done proper planning, the children will not have an EFC contribution to add to the parent’s.  So their total EFC is $15,000.  Now suppose that the EFC remains constant throughout the two students’ time in college.  For the two years that both are in school at the same time, 2012-13 and 2013-14; their EFC will be spit between the two students.  Each will have a $7,500 EFC.  So for all six years, the combined EFC is $15,000 x 6 = $90,000.  And because they also chose very generous colleges, that $90,000 is all they had to come up with out of their own pockets.

Now let’s look at the McNeal family.  The McNeals have two children who are twins.  Both of them will be going to college in 2010.  Again we’ll assume each child will graduate in four years, and they also have a $15,000 EFC.  In the McNeal’s case since both students enter and leave college at the same time, they will only have to come up with the EFC for four years instead of six.  So their cumulative EFC is $15,000 x 4 = $60,000.  Now if they chose very generous schools as well and were only expected to pay the EFC, then their out of pocket costs would be $60,000 to get both their students through college.

Consider one more example… the Jones family has twins.  Their EFC is $15,000.  One child wants to go to an “expensive” private college (sticker price: $50,000 per year).  The other twin really wants to stay around home and goes to the local community college (sticker price $5,000 per year).  The EFC is still split equally between the twins, both at $7,500 each.  For the one twin going to community college, their EFC doesn’t even get down the the cost of the school and doesn’t really give them much benefit.  But for the student going to the “expensive” private college, they still receive the full benefit of the split EFC.  The first student’s cost will be $5,000 per year.  And because the family chose a college with a generous financial track record, the second student’s out of pocket cost will be $7,500.  So the family’s annual out of pocket costs will be only $12,500.

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Once again I have been in an online debate on one of the college financial aid forums about the likelihood of finding money to pay for college.  There is a pervasive misconception out there that only the most selective colleges provide the needed money to only the most excelled students.  This is a crock!

First a quick definition… “need” is a term used to describe how much money the government and schools think you need help with after subtracting your expected family contribution from the school’s cost of attendance.  COA – EFC = Need.  You can get a copy of my manual if you want to know the ends and outs of that process.

There are only a handful of colleges across the country that guarantee in writing that they will meet 100% of the student’s need.  Many parents and students get hung up on these few schools and think they are the only legitimate options for getting the most money.  What they are not taking into account are the hundreds of colleges across the country that routinely meet 100% of the students’ need but never put it in a written promise.

Now what are you most interested in?  Do you want a promise?  Or do you want the money?

If you want to get the most money for your student, it is foolish to focus on a few highly selective colleges.  You want to have a well thought out college selection strategy.  It is the strategy you employ that will get your student the money they need and deserve, not some illusory promise.

The basics of that strategy are:

• Always apply to 6-10 colleges.
• Focus on colleges with generous financial track records.
• Always have a safety school where you know your student will get in no matter what.
• Always have 4 or 5 match schools where your student will likely be in the top 50% to 25% of the incoming Freshman class.
• Never short the safety school or match schools if you want to add stretch schools.

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So college and retirement have come at the same time.  Is there a best course of action?

As families have decided to have children later and later, it is not uncommon for college to come right at the time that many parents decide to retire.  This will have an impact on how you will want to pay for college.

First off, it is important to remember that the money you have in your retirement accounts (ie. 401k, IRA, Roths, SEP’s, etc.) will not count towards your FAFSA expected family contribution (EFC).  It probably will count towards the Profie EFC, but this is not any different than for those who are 20 years from retirement.  So it is wise to keep your funds in your retirement accounts as long as possible.

However, any distributions you take from your retirement accounts will be considered as income for your FAFSA and Profile EFC calculations.  Even if that distribution is coming from a Roth IRA and is non-taxable, it will still be considered as income for financial aid purposes.  Again this is a good reason to keep money in your retirement accounts as long as possible.

So are there any benefits that retirees have when sending children to college?  Let me propose the following and you decide.

Typically, personal expenses go down during retirement.  You no longer have to make social security contributions.  You don’t have to make any more retirement contributions.  For you and your wife, you should be able to maintain your standard of living on 75% to 85% of your previous full-time income.  This can be beneficial because income is counted as high as 50% towards your EFC.

However, you still have to pay for your student’s college, or at least contribute to it.  How do you cover that additional expense?  My recommendation… borrow it.  Whether it be through student loans or home equity, borrowing the money will save you more in the long run.  Remember, if you withdraw the money from your retirement account, you will be assessed as high as 50%.  But if you borrow the money, even at a lousy interest rate, the most you would reasonably expect to pay would be 11%.  Once your student gets past the time when your income is being assessed, typically when filing the last FAFSA during their junior year in college, you can withdraw that money from your retirement accounts that you planned on spending on your student’s college and pay down those loans.

I highly recommend you do a thorough EFC analysis before making any decisions.  The impact of the strategy outlined above will vary greatly depending upon your unique financial position.

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“Why did my financial aid award change?” is typically a question asked after the student has lost money compared to the previous year.  Rarely does anyone ask this question if they received more money.

Here are 6 reasons why a student’s financial award offer will change from year to year…

1.  The family’s income has changed.  If income goes down, then the expected family contribution (EFC) will likely go down.  This typically results in a better fianancial aid package.  However, it is more likely that your income went up from the previous year.  This means your EFC went up and your financial aid package will be lowered according to the establised guidelines.

2.  The family’s assets have changed.  As with income; if the assets go up, EFC goes up.  If the assets go down, EFC goes down.  Since most families will spend assets while their students are in college, this will most often have a downward pressure on your EFC (good for you).  But if you won the lottery or inherited money, those new assets are going to drive your EFC up (bad for you… sort of).

3.  The number of students in college changed.  The more students you have in college… the lower your EFC will be.  If a student graduated last year and you only have one in college this year, then you will see a big spike in that student’s EFC.  Consequently, they will get less financial help from the college.

4.  Changes in the federal Stafford loans.  Stafford loan amounts increase as a student progresses through college.  Currently freshman students can borrow $5,500; sophomores – $6,500; juniors – $7,500; and seniors – $7,500.  As students are able to borrow more under the Stafford program, colleges will typically lower the other sources of help in the financial award.  For instance, the student get’s an addition $1,000 in a Stafford loan, but their college grant is lowered by $1,000.

5.  Your college’s endowment has taken a hard hit in the market.  One of the unfortunate results of the current recesion is many colleges have seen their investments drop… big drops in some cases.  This means the schools have less money they can give to their students.  The recession is unfortunately limiting the amount of money many schools are able to give away compared to previous years.

6.  Your college is a cheap-skate.  It is rare, but some colleges will do a bait and switch to get freshmen students.  They will give them very generous offers their first year, but then pull back the money in the subsequent years.  This is not common, but there are unfortunately some institutions that will do this.

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I was absolutely stunned when I watched this video.  It’s all the more impressive when you realize… this is a commercial for shampoo!  Why don’t they make commercials like this in our country?

Please watch this.  It is a very powerful life lesson.

YouTube Link

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It’s the beginning of July.  All the graduation parties are over, and the summer is in full swing.  Now is a time when a lot of soon to be high school seniors and their parents begin thinking about what colleges to look at.  In conversation… on the web forums… I hear over and over again:

• “Is this school prestigious?”
• “Does this school rank high?”
• “What does the US News report say about this school?”
• “How does this school compare to Harvard… Yale… Georgetown… etc?”
• “What’s the toughest school I can get into?”

The genesis of these questions is the perception that a degree from a select group of schools is somehow going to make your life easier.  You’ll earn more money.  You’ll know the right people.  You’ll get a better job upon graduation.  It’s as if there is an ivy fairy who is going to sprinkle gold dust on a graduating student and their whole life is going to change.

Come on… every one knows that if you make it into Harvard, you are far more likely to earn more money.  Right?

I’m going to let you in on a little secret.  Now be careful who you tell this to, because it could start a fight at numerous block parties and soccer games.  It’s not true.  Yep.  It’s not true.  It’s a lie.  It’s that common sense that if far too common, but makes no sense.

The truth was documented several years ago in a study conducted by Alan Krueger, an economist at Princeton, and Stacy Berg Dale, a researcher at the Andrew W. Mellon Foundation.  They published a study in 1999 that proved incredibly controversial, and has been generating heated debates ever since.  So what did they find?  They found out that where a student goes to school does not impact their future success in life.

They studied 1976 students from 34 colleges across the country.  They did find that some students who went to an Ivy League school were more successful in life than those who didn’t.  But the real shocker was they found that students who were accepted to Ivy League schools but chose to go to a less “prestigious” school did just as well if not better than their Ivy League counterparts.  Their conclusion was that it is the student, not the school that dictates the opportunities for success.

This goes right to the heart of a very big problem.  Many students are basing their self-worth on whether or not they get into the right school.  After all the adjustments of adolescence, along comes the college search process.  Grades evaluate them.  Sports evaluates them.  How they do in the talent contest evaluates them.  The acceptance or decline of one particular college has become the referendum on the sum total of the first 18 years of their life.  This is wrong.

We have to get away from this unholy authority that a single college’s decision has upon the value of a student’s life.  Students must understand there is no such thing as the “best” college.  There is only the best colleges for them.  Colleges… plural.  The college search and selection process needs to be fluid and encompassing.  The student should not be expected to make a rifle shot in the bulls-eye at 600 yards.  This is much more like trying to get the right shotgun pattern at 20 yards.

The student’s goal in the college search process is to find one safety school where they are getting in no matter what.  They want four to six match schools where they have a good chance of coming into the school in the top 50% or top 25% of the incoming freshman class.  Then they may want two to three stretch schools; these are the schools where they are not sure they could get in.

The students also need to be comfortable with the idea of going to any of the six to ten schools that they will be applying to.  If they are able to take this kind of an approach to the college search process, then they will be under far less pressure and have much better opportunities for the monies than are available at the colleges to which they apply.  This selection strategy is not just about finding the colleges that feel right, but it is also about positioning your student to minimize their college costs.  Follow this strategy, and you will do far better than most.

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