Finally, some good news on college financing
For those of you fretting about sending Junior off to college with fears that you don’t have the income or the savings to pay for college, here is some good news for you.
Over the last five years the increase in the cost of college has slowed (when compared to the two previous five year periods). In addition, funds from federal aid (mostly in the form of Pell Grants and veterans & military benefits) and Federal Direct Loans increased over the past 10 years at a higher rate than the cost of college. (The Pell Grant is “needs-based” aid that does not need to be repaid, but the Federal Direct Loans must be repaid after the student completes enrollment in college.)
Along with the increase in funding available for Pell Grants, the percentage of students who qualify for the grant has also increased by more than 30% over the past 10 years. Unfortunately, the average Pell Grant only covers 20% of the average cost of public four-year college, so those students who do not have sufficient income or savings may rely on federal student loan programs to cover the difference.
More good news… Interest rates on Direct Federal Student Loans have decreased over the past 10 years from 6.8% in 2006 to 4.29% in 2016. Below are the current loazn limits for the Federal Direct Loan Program:
• 1st Year: $5,500
• 2nd Year: $6,500
• 3rd Year: $7,500
• 4th Year: $7,500
• 5th Year: $7,500 (subject to an aggregate debt limit of $31,000)
For most students, the Federal Student Grant and Loan programs will cover less than 50% of the annual cost of a public four-year college. Although it may be late in the game, you may still have some time to do last minute planning.
Applying for Aid: Your needs-based financial assistance is determined by your “Expected Family Contribution” (EFC), which will vary slightly depending on the college and source of aid. You may have the opportunity to reposition your assets and income to decrease your EFC and improve your odds. For example: Assets in a student’s name are counted more heavily than assets in a parent’s name. Income and capital gains are more accessible to pay for college outside of retirement accounts.
College Selection Process: The college selection process is often driven by emotions and qualitative criteria – location, degree opportunities, reputation, etc. However, your student should also be mindful of tuition and living costs. In addition, most colleges offer some opportunity to apply for merit-based scholarships in a variety of interests along with needs-based grants that should be vetted during the selection process.
Private Scholarships and Grants: Numerous private or nonprofit organizations at the national, state, and local levels offer grants and scholarships. Do your research, and apply for any grants or scholarships you might be eligible for. Start early to meet the application deadlines!
Outside 3rd Party Loans (with caution): After mortgages, college associated loans are the second largest consumer debts, with many graduates and their families struggling to deal with the aftermath of loan repayment. Some options for securing loans to pay for college include; utilizing your home equity, borrowing against your 401(k), and unsecured personal loans.
As parents, we want to provide the best opportunities for our children. However, we also know that at some point we’ve got to let our children make their own decisions and take responsibility for the outcome. The goal is to guide them through the college selection process and teach them how to properly manage debt, without allowing their education to railroad your financial future.
Dave Homan, M.S., CFP®, is a CERTIFIED FINANCIAL PLANNER™ with Willow Creek Wealth Management, Sebastopol. Willow Creek Wealth Management has served North Bay clients since 1984 and has been ranked one of the top 300 fee only financial planning firms in the United States. For more information go to www.willowcreekwealth.com or call 707/829-1146. Wealth Matters is a monthly column from the firm’s partners.