Even if you believe that future college costs are essentially unpredictable, there are still a few steps you can take to position yourself financially:
If you can, save enough to pay for the worst case scenario. This is certainly the most conservative assumption, and if are able to save for it you will be able to approach college expenses without worry. It may not maximize your aid package, but it you’ll have peace of mind.
If you use a financial advisor, be sure he is well versed in financial aid issues. Often, financial advisors understand tax law very well, but not financial aid. Here’s a test: If your advisor suggests and investment or financial strategy, ask him how that investment or strategy will affect financial aid at FAFSA-only schools vs. colleges that also use the CSS Profile. If he can’t provide a coherent answer, or seems unfamiliar with the terms, get a new advisor.
Whatever you are able to save, DON’T save it in the student’s name. This is one of the most common, and most costly, errors families make when saving for college. Colleges will generally consider about a third of student assets to be available for paying college expenses each year. By the end of four years, that means all that ten percent or so will be gone. The exact same amount saved in the parents’ accounts will be “taxed” at about a fifth of the student rate.
When possible and appropriate, invest in assets that most colleges don’t count toward your EFC. Clearly, in managing your finances, overall prudence must take precedence over financial aid considerations. However, families often must weigh investment choices that are more or less equally attractive. If one choice doesn’t count toward one’s EFC, then it might be prudent to invest more in that alternative. For example, most schools don’t count retirement accounts, home equity, and personal assets like home furnishings and autos. (Some schools DO count these in varying ways, however.) Note that most of these alternatives are much less liquid than savings accounts or marketable securities, so exercise caution. Don’t let financial aid considerations lead you to make poor investment choices.
Don’t wait until the last minute! Clearly, the earlier one starts saving, the greater the accumulated funds will be. Equally importantly, if you need to redeploy assets before college expenses start, do so a couple of years before college will begin. Colleges will look at your tax returns from the prior year (or, you will self-report these numbers on the FAFSA, profile, or other forms). If there are dramatic changes in interest income or asset amounts, the school might assume that you are hiding assets or lying.
Check our other financial aid articles and recommended reading list.