I attended a webinar yesterday hosted by Joe Messinger, CFP®, ChFC®, CLU®, co-founder of Capstone College Partners. He and his company provide expert advice and train other advisors in helping their clients navigate college funding. Their mission is to end the student loan crisis one family at a time.
We fully support his mission of ending this crisis and helping families make college more affordable, so I want to share with you what I learned.
Paying for college for their children is often the largest investment and highest priority for Generation X clients (those who are 39-54 years old in 2019). Many of those folks are still paying off their own student loans and they are trying to prevent that burden for their children.
The student loan crisis is real. According to Joe, student loan debt increases $2,666 every second, and is currently more than $1.5 trillion.
Joe did offer a couple of bits of good news:
- Inflation of education costs has slowed from 6% to 2-3%. (Our financial planning software uses a projection of 4.18% inflation for education, compared to a projection of 2.25% for general inflation).
- Need-based financial aid is available and is often very generous for high-merit students applying to prestigious private universities.
- A clear head and careful planning in the college search process can prevent excessive costs and debt.
Here are the highlights of the guidelines that Joe would share with families:
- Think about the repayment burden in advance: he estimates that for every $10,000 borrowed, students will be paying $100/month for ten years. For example, borrowing $50,000 means a monthly payment of $500 for ten years after graduation. That is sobering, especially considering the high cost of housing relative to salary in the early years of most careers.
- Plan for your child to be able to fully repay student loans in her early 30s. Don’t extend the debt to 25 years like is possible under some federal programs now. This leads to extremely high interest costs.
- Don’t borrow more than the expected first year salary in your student’s chosen field. If your child is majoring in Computer Science, that number might be $70,000. If he chooses Education, it is more like $35,000.
- Avoid parent loans. These are very easy to get and have a high origination cost and interest rate. These should be the last option.
- Realize that colleges are in the business of attracting top talent to their school. If your child is in the top 25% of the applicant pool, there is a good chance that she will be offered a financial aid package. Don’t rule out private schools who know they are competing with state schools for top candidates. Also, don’t accept their first offer. Ask for a better deal.
- Be an informed consumer. Find out the percentage of students who graduate in four years. The fifth year is a huge variable in your cost.
What is the timeline for college funding discussions and planning?
- Before involving your student, both parents should be on the same page in terms of what they can afford to contribute to college.
- Complete a “College Pre-approval TM” before selecting your list of potential colleges. Just like you wouldn’t shop for a home without knowing how much of a mortgage you can afford, you should not shop for colleges without regard to cost. Your advisor can help you with this.
- Use the net price calculator on each college’s web site before you visit. The “sticker price” of private colleges is often much higher than what most students actually pay to attend. The calculator will allow you to enter your financial information and your child’s academic credentials to get an estimate of what your net cost will be (based on what had been done the prior year). This can help you rank schools in advance and choose the ones that are most likely to work for your family. Also, look for the “average non need-based aid” awarded by the school in the prior year. This is a quick way to estimate what might be offered.
- Income is the biggest driver in the calculating the “Expected Family Contribution” on the FAFSA (Free Application for Federal Student Aid). The income number used will be from the tax return that you file two years before applying for financial aid (so in spring of your student’s sophomore year in high school). It would be ideal not to have an unusually high income on that return.
- Assets are assessed at the time of the application, so in fall of the senior year of high school. On the FAFSA, basically all non-retirement, non-residence assets are part of the equation. For colleges who use the CSS profile, more assets may be included.