Sending Junior to College Without Going to Debtors’ Prison

College Financial Aid

Most of us realize the value of a college education. Study after study shows that a person’s earnings potential increases dramatically with that much-sought-after sheep skin bearing one’s name. But many people are beginning to question whether the cost of that education will drive them into bankruptcy before they have a chance to reap those benefits. With the costs of higher education rising faster than inflation, it’s not an exaggeration to say that college may cost $200,000 in the not-too-distant future.

This doesn’t mean that you should panic. It’s never been more true that there is a college out there for every student who wants to attend; and, if you start saving regularly and learn how to take advantage of available aid packages, you should be in reasonably good shape.

As a quick primer, but by no means an exhaustive study, let’s take a look at some common sense steps which anyone can take to meet the potential financial burden. Most significantly, there’s the fact that student aid has now grown to more than $125 billion according to the College Board, and that represents a 10% increase over the preceding year. The question isn’t whether there’s aid available, it’s how to qualify for some of it.

Start With The FAFSA 

The most common approach to financial aid is to start with the Free Application for Federal Student Aid (FAFSA). The FAFSA form is required by almost all private and public schools. You can get the FAFSA from your guidance counselor, the financial aid office at a local college, your local public library, or online at

Once a college has your FAFSA, it calculates your eligibility for aid by taking the cost of attending a particular college and subtracting the expected family contribution (EFC). Your EFC is determined by your financial circumstances and how they compare to others applying for aid. This is where you can do some advance planning and have a real impact on the amount of aid you ultimately receive.

Calculating Financial Aid

You can use the College Board’s college financial calculator to get a rough estimate of what you will be expected to pay, but it is ultimately a very subjective process. Aid awards can vary widely for the same student, and the more you can contribute to a college as a student academically, musically or athletically the less you usually have to contribute financially.

While your income is the biggest factor in determining this calculation, the EFC also considers other factors, such as your assets, the number of children you have attending college at the same time and the number of years you have until retirement. These factors are not all of the same value. Financial aid officers actually rank, or weight, the relative importance of each factor. Below is a quick list of the typical weighting assigned to some of the key factors.

Parents’ Income Assessed up to 47%
Parents’ Assets Assessed up to 6%
Child’s Income Assessed up to 50%
Child’s Assets Assessed up to 35%

As you might be figuring out for yourself by looking at this list, how your family owns assets and the source of your income are very important issues. Here are a few money-smart strategies for improving your financial-aid prospects.

Strategies to Improve Your Financial Aid Prospects 

First of all, start saving early and save in your name, not in your child’s name. As long as you, the parent, don’t own them, Coverdell IRAs and 529 saving plans don’t count as the student’s asset for financial-aid purposes. That’s a big plus, as the listing above makes clear. The parent’s assets don’t count as heavily as the child’s assets do.

Second, money saved in retirement accounts, such as IRAs and 401(k)s, generally isn’t counted in the financial aid formulas. Now, as a parent you might think your most important duty is to pay for your children’s education, but you’d be wrong. Saving for your own retirement is even more crucial. There are a lot of resources to help meet college costs, but nobody else will help you finance your retirement. It usually pays for parents to maximize their contributions for retirement before focusing on college accounts.

Third, pay down credit-card debt as quickly as you can, even if it reduces your savings. The aid formulas are a bit weird. Parents with $10,000 in savings and $5,000 in credit-card debt look wealthier than parents with $5,000 in savings. You and I might say there’s no difference between these two examples, but the financial aid formulas ignore the debt and only see the savings.

Fourth, make sure you are aggressive enough in structuring your investments in order to garner some meaningful appreciation over the years. Too often, we have found parents set up college savings accounts but put the money into very conservative, low-return investments. If you have young children, you have the advantage of time and can afford to be very aggressive. One caveat is necessary here. All “high-return” investment opportunities are not the same. Be sure to check with a professional investment advisor before making any decisions.

Fifth and last, you may want to consider transferring some assets into variable life insurance policies or variable annuities. This isn’t a carte blanche recommendation, however. While we’ve checked with several colleges to confirm that such investments aren’t considered in their schools’ aid formulas, you should check specifically with the schools in which your child is interested. Also, as we stated above, all investment vehicles aren’t the same. Check with a professional investment advisor before taking this step.

The bottom line here is that there really is a college for every student who wants to go, and there’s usually a reasonable way to finance this great investment in your child’s future. You shouldn’t break the bank, flirt with foreclosure or avoid bankruptcy by whisker and a prayer. Get educated about the aid options, consider junior colleges for the first year or so (just to get the general-ed requirements out of the way) and be proactive about savings and investments. Ultimately, taking these steps offers some great life lessons to your children about being wise stewards of your and their financial futures.

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