I am hardly a fan of graffiti. Who is? But sometimes a picture is worth a thousand words.
I’m thinking, specifically, of an incident that occurred back when I was in college. It was early spring one year, and the school had just announced tuition rates for the coming year. For the first time, the total crossed the $20,000 mark, and people were not happy. In response, someone — no one knows who for sure — picked up a can of red spray paint, headed straight to the center of campus and scrawled the following message across the front of the school’s most prominent building:
$ 2 0 0 7 0
In hindsight, tuition of “just” $20,070 seems quaint. This year, that number would be closer to $70,000. As a result, today the cost of college can be crushing even for high-income families. For that reason, if you have children or grandchildren, it is more important than ever to understand the financial aid system so you can minimize the amount you have to pay.
Here’s a quick introduction:
Financial aid isn’t as unpredictable as it might seem. In fact, it’s a system with clearly-defined rules and is nearly formulaic in many cases. Yes, there is variation from school to school, but the important point is that you should not view the system as arbitrary. If you learn the rules, you can assert some control over the outcome.
Financial aid is complicated, but you can understand the basics.Think about it this way: The Federal tax code is thousands of pages long, but it’s easy to learn the variables that matter for most people (e.g., charitable contributions and mortgage interest). Same with financial aid; you don’t need to know every detail, but you do need to learn the key levers.
Many schools use the same general formula, but not all. Most schools rely on a form known as the FAFSA (Free Application for Federal Student Aid) to gather your financial information, but approximately 300 (mostly elite and expensive) schools also use a form known as the CSS Profile. Because each will look at your finances differently, you’ll want to check the CSS Profile list against the list of schools your child is considering.
Just because a school costs more doesn’t necessarily mean that you’ll pay more. In fact, some of the most expensive schools also have the most generous and “need-blind” (i.e., unlimited) financial aid. So, don’t feel that you need to limit your options. At Princeton, for example, you could have more than $200,000 in income and still qualify for substantial aid.
Financial aid has its own language, which you’ll want to learn. Aid formulas ask about “income” and “assets” but they define both terms in specific ways that differ from what you might expect. For that reason, while your child is still a freshman or sophomore in high school, you’ll want to start thinking about the best way to structure your income and assets so that they are viewed most favorably from an aid perspective. But, also be sure to include your accountant in these discussions, because sometimes there is a trade-off between what’s good for financial aid and what’s good for your tax bill.
When it comes to aid eligibility, not every dollar is viewed equally, so you want to position your assets intelligently. The hierarchy is as follows: Colleges will look first to a student’s own income and assets. Then, they look to a parent’s income, and finally they look at a parent’s assets. And the differences are substantial. On the asset side, colleges will expect students to contribute toward tuition a full 20% of assets in their own name, but they will only expect 5-6% of parents’ assets. What this means is that you want to do everything you can to avoid having assets in a student’s own name. (One easy way to do that is to pay off any credit card debt since colleges don’t think in terms of net worth. They’ll penalize you for having the money in the bank but won’t give you any credit for having an outstanding debt.)
The most important thing is to have a plan and to get started early. Steven Mermelstein is a New York-based CPA and specialist in college financing who helps families to maximize their aid eligibility. When I asked him to name the single biggest mistake that a family could make, his response was unequivocal: “Not doing anything.” In other words, not having a plan and not being pro-active. His advice: make a plan and get started early. “Don’t just fill out the forms and roll the dice.”