Financial considerations — where is the money going to come from?

where will the money come from?I touched on this subject briefly in the prior section, but let me go into more detail here.

There is no doubt that the drop in the stock market along with other bad economic news will affect college choice for the high school Class of 2016. If I am correct in my view, it will bring the issue of cost from its customary second class citizen status to the forefront for many families. Colleges that may not have been on a student’s radar screen in previous years will be added to the college list, and as I mentioned in my previous post on matching student credentials to college selectivity, this is a necessary part of good planning in the current economic climate.

Let’s now turn our attention to the affordability issue and look at it from two points of view – the family and the college.

The family. Going into 2016, most families with college-age children will have fewer financial resources than they did a year ago. More than likely savings have gone down, and in some cases, income as well. So what should a family do in this situation? They should treat college tuition more like a controllable expense than generally has been true in the past.

Where in prior years the parents’ attitude might have been something like:

“Suzie, you have worked so hard in school, if you get into your #1 college, we will find a way to pay for it.”

Parents might now be thinking,

class“Suzie, you can apply to your #1, but you need to have some other less expensive schools as well. When the acceptances are in, we are going to have a serious discussion about which of your colleges we can reasonably afford, and that will be an important factor in your final decision.”

However, moving cost considerations to the front burner is not as straightforward as simply comparing “sticker price” (the published cost of attendance) among the various colleges.

Accurate cost comparisons should be based on “net price,” that is, cost of attendance minus whatever discount the student is eligible for. In the world of paying for college, these discounts are known as financial aid. Financial aid comes in two forms. There is aid based on the family’s financial picture (need aid) and aid based on student ability or characteristics (merit aid).

A necessary part of sensible college planning in tougher times is to learn how financial aid applies to you. What does it take to win a merit scholarship and what are the eligibility rules for receiving need-based aid?

To gain this knowledge means looking into and learning about financial aid in much the same way as the effort you put into understanding the admission process. And, by the way, there is another similarity between learning about aid along with admissions. In much the same way that each college has its own admission standards and procedures, they each do financial aid differently. In other words, in both cases, you have to “drill down” to the school level to get the true picture.

off to collegeBut before you get to the individual college level, your first step should be to learn the “big picture.” Learn the basics of financial aid by browsing sites such as the College Board or NASFAA. Once you have a basic understanding of the subject, it is time to learn about the specific aid policies of the colleges on your list. There can be tremendous variations among schools in the way they fund and administer their need and merit aid programs. You should become familiar with the financial aid and scholarship sections of each college’s website.

Since about 90% of all aid is awarded based on financial need, early on (11th grade is a good time), you should find out if you might qualify by getting an estimate of your Expected Family Contribution (commonly known as the EFC) and comparing it to the cost of attendance. This result will tell you if it is worthwhile to fill out the aid forms or whether you will be limited to looking for merit scholarships.

But realize that running an EFC calculator will only give you a rough estimate of your eligibility for financial aid. No matter what the result, the best advice is:

If there is any doubt about your ability to pay the full cost at all of the colleges under consideration, apply for financial aid.

Colleges are not immune from the current economic problems. Much like corporations that have had to trim their spending, I would guess that every college in the country is revising its 2008-09 budget and making cuts in one area or another. And no sector is immune. In general, public colleges have had their state funding cut while private colleges have seen their endowments drop in value.

collegeAfter colleges reduce their expenditures to the extent they can before threatening academic quality, they look at the income side of the equation. In other words, how much can they raise tuition and still attract the quality and number of students they need to keep the institution healthy?

The answer to this question is to expect tuition rates to rise at a higher rate. This will likely occur more among public colleges as they are starting with a lower price tag and do not have much in the way of endowment funds to fall back on. However, even though they may be less expensive, public colleges do not have especially strong financial aid programs (their lower tuition is in a sense their main financial aid program), so needy students will likely find their aid “gap” – the money they qualify for but that the college can’t fund – will increase. The likely result is that both aid and non-aid students will be facing a larger college bill.

For private colleges, the decision to raise tuition an extra percentage point or two is a trickier one. They are already more expensive than public colleges and, as mentioned above, they are concerned about the possibility of serious “economic flight” by students to less expensive schools. This will temper their tuition increases to some extent, but the real question among the private colleges is whether they will be able to maintain their current level of financial aid support or whether they must necessarily cut there as well. There is no blanket answer to this question as each college will respond in its own way.

To summarize this section on financial considerations:

It is going to be a difficult financial year for both families and colleges. Whereas a number of you may not have thought much about applying for aid up to this point (and making sure affordability comes into play in making up a college list), it may be a good idea to increase your awareness of the subject, make a determination of whether or not your child might be eligible, and complete the aid application.

On the expense side, anticipate that tuition rates will rise, most likely at a higher rate than has been the case for the last five years, with public colleges leading the way.

But remember, the tuition “sticker price” only matters if you are paying the bill without either merit or need aid. If, at any of the colleges under consideration, your child has the academic ability or talent to win a merit scholarship, or you believe you will demonstrate financial need, you should interact with each college. You should first visit its website, and then, if the college is a top choice, make direct contact with the aid office on campus to get an indication of the type and amount of aid your child is likely to receive. This last piece of advice about “aid investigation” is important. If you make up a good colleges list, and do all the work involved in completing the admission applications, you don’t want to end the process with an affordability crisis.

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