Value of a College Education
Although
many opportunities exist today for students not pursuing a four-year bachelor’s
degree in college, statistics demonstrating the lifetime earning power of a
college graduate vs. that of a high school graduate are still very
impressive. As a matter of fact a 1997
research study done by the U.S. Census Bureau, demonstrates the financial
benefits at each degree achieving level.
The average earning power of a college graduate versus a high school
graduate in one year’s time was nearly double.
The earning power over a lifetime demonstrated an $800,000
difference. In our society today, we
know that education is an investment.
However,
the reality of the investment benefit should in no way diminish the reality of
the real cost to attend college today.
Like many other purchasable commodities, the listed costs of colleges
vary. The following table lists
approximate one-year total costs at four different types of colleges:
|
Community College |
|
|
|
Expensive |
|
$5,000 |
$15,000 |
$25,000 |
$30,000 |
$40,000 |
In
addition, the average college increases tuition 3 to 10% each year. Therefore, one obvious recommendation would
be to start early to plan financially for the inevitability of college
cost. The federal government has
developed several new programs with built in tax advantages that encourage long
term college savings. However, to
determine the appropriate amounts to save in investments suitable to the risk
tolerance and preferences of the family, we recommend that you consult with a
professional.
Private Agency Scholarships
Scholarship
applications can be accessed through a number of different agencies. We recommend that you first check with your place
of employment to see if your company offers scholarships to the children of
employees.
Perhaps
the most efficient method is available through the Internet. There are several prominent scholarship
search programs on the web. One
recommended program is
www.fastweb.com. This computerized scholarship search program
will provide a list of organizations that students can then contact to acquire
applications.
During
the student’s senior year, the Guidance office will make available a list of
scholarships (see checklist). This list will allow students an opportunity
to access scholarship applications whose criteria match the student’s
background.
Scholarships from Colleges
Scholarships
from colleges come in numerous forms.
The more typical ones are academic, athletic, talent, and
leadership. Each time you have a
conversation with a college representative, you should inquire about merit
based scholarships…and the criteria used for participation.
Federal Methodology
The
system that drives the process of financial aid for college is called federal
methodology. This method is based on a
simple mathematical equation:
Cost of Attendance - Expected
Family Contribution = Need
The
Cost of Attendance is broken down into 6 categories (tuition & fees, books
& supplies, room & board, personal & miscellaneous expenses,
transportation, and the cost of a personal computer)
The
expected family contribution is calculated after a family files the Free Application for Federal Student Aid
(FAFSA) after January 1st of the student’s senior year in high school. This form can be filed the traditional way
via paper or it can be filed on the web… www.fafsa.ed.gov
Aid Programs
Financial
aid programs are broken into three general categories (grant & scholarship,
work, and loans)
If
your expected family contribution (EFC) is assessed at app. 4000 or lower, the
student will be eligible for a program called the PELL GRANT. This grant is
federally funded where the proceeds (maximum appx. $4000) can be used to offset
any of a student’s cost for college.
If
the student attends a college in
If
the family contribution is calculated at less than the total cost of the
college, oftentimes the student will be offered an opportunity to work on a
college campus in a program called Federal
Work Study. Students typically can
earn up to a couple thousand dollars working 10 to 20 hours a week in a variety
of positions (athletics, admissions, business office, financial aid, library,
cafeteria, student life, protective services, student union, etc.)
Also,
if the family contribution is less than the total cost the student could be
eligible for one or more of the attractive student loan programs. These student loans (Perkins or Subsidized Federal
1) They are written in the student’s
name, not the parent’s
2) No interest accrues on the loan
while the student is in college
3)
The interest rates are relatively low
4)
The repayment program can be structured long term, after the student graduates
The
Federal Stafford loan has certain maximums:
$2625 in freshman year, $3500 in sophomore year, and $5500 in each of
junior and senior years.
If
your family contribution is equal to or greater than the total cost of the
college, the student can then access the unsubsidized Federal Stafford
loan. This loan has many of the same
features as the subsidized loan with one major difference. The interest accrues immediately on the
unsubsidized loan. If you as a parent
need this capital to pay for college, you might want to pay the interest only
on behalf of the student while (s) he is in colleges that the loan does not capitalize.
The
maximums of the unsubsidized loan are the same as the subsidized loan: $2625 in freshmen year, $3500 in sophomore
year, and $5500 in junior and senior years.
Grant Money From Colleges
Perhaps
the most misunderstood element of the financial aid system, yet one of the most
important, is the method used by colleges to determine the amount they might
contribute in grant money to offset costs.
What
makes this somewhat confusing is that the colleges are not tied into any
particular system to distribute their money.
Some colleges will skew much of their award to the merit side. Other colleges, with their own money, will
supplement the need-based awards received from outside sources. Colleges can do whatever they want with their
own money.
That is why one of our
recommendations is to encourage your son or daughter to apply and complete the
financial aid process with multiple colleges.
This will give you an opportunity to compare awards before the final
college decision is made.
What Drives The Family Contribution?
Obviously,
one of the most important variables in whether or not your son or daughter is
able to receive financial assistance is the calculation called expected family
contribution. In the space below we will
cite the important elements that drive that contribution under the current
system.
Parent’s Income:
The
specific element required is the Adjusted Gross Income from the tax return of
the year prior to student enrollment.
The AGI is the bottom line on the front page of the tax return. Untaxed income, like
contributions to a 401k or similar program, child support and / or Social
Security benefits, are added to determine total income.
Student’s Income
Every
student is given a $2400 income allowance.
In other words, if the student earns $2400 or less in the year prior to
student enrollment, no dollars are expected from those earnings. Dollars earned beyond the $2400 are expected
at the 50% rate.
Parent’s Savings
Every
family has an asset protection allowance calculated. This is the amount of savings and investments
the system allows. No dollars are
expected up to this allowance. The
expectation kicks in after the assets go over the allowance.
Almost
all categories of savings and investments are expected to be listed as such on
the document. However, certain
categories should not be listed. These
categories include equity in your home, qualified plans, annuities, and life
insurance contracts.
Student’s Savings
With
no money protected, 35% of any savings under the social security number of the
student is expected in the system.
Forms
To
receive any type of financial aid every family must file the FREE APPLICATION
FOR FEDERAL STUDENT AID (FAFSA). This
form is used to officially calculate your federal methodology expected family contribution (EFC). As we stated earlier, it cannot be filed
until after January 1st of your son or daughter’s senior year in high school.
The
form, once filed, will be sent to a processor.
The processor calculates your official expected family contribution
number and transmits that number to every college listed on your FAFSA.
The
financial aid officers of the college will then determine eligibility for
programs; i.e. PELL GRANT, ILLINOIS MONETARY AWARD, WORK-STUDY, and STUDENT
LOANS.
Colleges
may also take the information off the FAFSA to determine eligibility for their
own money. However, some colleges will
ask for another form to be filed. This
form, the PROFILE, will request additional information. It will allow the college to calculate a
different family contribution, which will then be used to determine your
eligibility for their own money. Sometimes,
colleges will use their own institutional form instead of the Profile. Therefore, as you research colleges, it is
best to learn whether or not they use FAFSA only, FAFSA and Profile, or FAFSA
and institutional form.
The Student Aid Report (SAR)
Perhaps more important than any other piece of information
in this system is a form called the Student Aid Report (SAR). This form will be
received approximately 4 to 6 weeks after you file the FAFSA. On the SAR you will notice your official EFC.
The
SAR needs to be examined in order to check accuracy. If the information on the
SAR is inaccurate, make the corrections on the form and send it to each of the
colleges to which the student has applied.
If there are new schools that have emerged as options from the time you
filed the FAFSA, send signed copies of the Student Aid Report to those new
schools.
ISAC’s Monetary Award Form
If
you would like to assess your potential eligibility for the State Grant (MAP),
you need to list a school in
Award Letters
The
colleges will receive the results from your FAFSA and determine whether or not
they want additional information. If
they request other documents, send it to them immediately. If no other documents are required, the
college financial aid officer will evaluate the information, examine any other
documents required (PROFILE, tax returns, etc.) and determine your son or
daughter’s financial aid award. They will
put this in writing... called an award letter.
This
award letter will illustrate your aid from all of the various sources (Pell,
State, Student Loan, Campus Employment, Money from the
college). At this point we recommend
that you gather each of these award letters and determine your
out of pocket cost at each school.
To
determine this out of pocket cost you would want to take the school’s listed
charge: (yearly tuition & fees if the student is a commuter,
or yearly tuition & fees and room & board if the student lives on the
campus), and subtract from that any grants, scholarships, and student loans in
your award letter.
Once you assess this
out of pocket cost, you should be able to make a good, value vs. cost
decision. The more college options you
have the more control you will feel in this process.
Special Circumstances
At times there exists circumstances where additional information is
necessary. Below are four examples of
circumstances that need additional clarification.
Divorced Families
Federal
methodology’s rule for divorced families is that it is the custodial parent’s
total household income and assets that counts.
Custodial parent is defined as the parent where the child has resided
for more than 6 months during the last 12-month period. If the parent has not re-married, the income
and assets that should be reported would be the custodial parent’s and the
child’s. Not the non-custodial
parent’s. If the custodial parent has
re-married, it would be the new spouse’s information as well. Some colleges, however, use non-custodial
parent information to determine what they will do with their own money.
Independent Student
To
be independent, thus file the FAFSA with student information only (not parent’s), the student needs to be 24 years of age or older,
be a ward of the court, be married with dependents, or be in the military.
Change in Financial Status
If
your financial situation changes after you file the FAFSA, you should send a
letter to the financial aid administrator of the college explaining this
change.
Extraordinary Expenses
If
you have expenses like extraordinary medical or payments for private tuition
costs for other children in the family, you should also document those expenses
and send it to the colleges.
Tax Credits & Tax advantaged Savings Programs
Two tax credits are available to help offset the costs of higher education. These credits, the Hope credit and the Lifetime Learning credit, can reduce one’s taxes in the year of college costs. Check with your tax planner to determine eligibility for these tax credits.
Tax advantaged savings programs for college programs have proliferated in
the last several years. Some of these
programs include the Roth IRA, 529 College Savings Accounts, 529 pre-pay
tuition accounts, and college bonds.
Check with an investment professional to assess the suitability of any
of these programs.
Timeline & Review
þ
calculate your
family contribution in advance (junior
year or earlier)
þ
research private scholarships (junior yr. & early senior yr.)
þ
market the
student’s abilities to the colleges (fall of senior year)
þ
apply to 3 - 6
colleges (fall of senior year; prior to
December 15th)
þ
file the FAFSA
and other supplements if required (after Jan 1)
þ
await the
award letters (March - April)
þ
analyze the
award letters to determine out of pocket cost
þ
make the
college decision (by May 1st)
AID BOOK:explain