Clients who have children heading off to college next year and beyond are facing a convergence of events that will drastically reduce the typical family's ability to cover those higher education expenses.
Most of the clients' myriad sources of money — 529 account balances, personal investment portfolios, private student loans, college endowments and parent earnings — are likely to have shrunk, and may remain that way for some time.
At the same time, the negative factors affecting affordability — tuition costs, loan interest rates and competition for available financial assistance — have all risen, and will likely continue to do so.
You can be a lifesaver to clients who have the potential to be swamped via this “perfect storm” by helping them maximize the financial aid they receive, especially by guiding them through the Free Application for Federal Student Aid (FAFSA).
First, the FAFSA form (available at www.fafsa.ed.gov) is not something that those without financial acumen will relish completing. (It was described by U.S. Secretary of Education Margaret Spellings as “longer and more complicated than the federal tax form.”)
There aren't any CPA-type professionals who can help the parents complete the complicated FAFSA form. High school guidance counselors are usually too busy to provide much help, as are college financial aid office personnel.
Besides, most parents would prefer to share detailed personal information with the fewest number of strangers possible. You, on the other hand, are already privy to most of their money secrets. And if you're not, a good way to get complete access to every penny of net worth is to demonstrate your expertise in obtaining financial aid they never thought they would otherwise receive.
No matter how willing you are to help them along the way, some parents of college-aged children may be hesitant to apply for any financial aid — especially those in the upper-income and upper-net-worth brackets.
That attitude may cost them several thousand dollars. First, whether it's based on need or merit, most financial aid awarded by public and private schools requires parents to initially submit a FAFSA form.
Even if the child doesn't get any merit-based aid, private schools with mid-five-figure annual price tags may still pony up money to parents with solid six-figure incomes — especially if the family has special circumstances, such as multiple children in college at one time.
And all families who apply for aid qualify for unsubsidized Stafford and Direct loans, which may offer rates and terms that are more attractive than tapping savings or borrowing elsewhere.
When To Do It
The deadline to submit the FAFSA form is before July 1 of the summer after a high school senior's graduation. But your clients should plan on submitting it as much as six months earlier for a couple of reasons.
First, the sooner the application gets in, the more time there is for the system to spot errors and omissions, and point them out to the parents who can then fill in the blanks correctly well before the July 1 deadline.
More important is the fact that some financial aid is awarded on a first-come, first-served basis. So the optimal day to submit the application is as close as possible to the January 2 deadline in the student's senior year in high school.
Two things about that date: One of the first bits of information required in the process is the family's tax return from the prior year. But don't be daunted by the fact that the family doesn't have them done yet. They can make estimates on the application in early January and then go back and replace those with the exact figures, once known.
The second important hint on the date is that the family is forbidden from submitting an application before January 1 of the student's senior year in high school.
Taking A Test Run
Until then, you and your clients can log on to www.fafsa4caster.ed.gov. This site helps families get an estimate of the type of aid and amount for which they may qualify. And when the student is old enough to fill out the official FAFSA form, data entered at FAFSA4caster will automatically be transferred to the FAFSA. If you or your clients aren't quite ready to go this far, there are also excellent simulation calculators at www.finaid.org and www.collegeboard.com.
After The Application Is Complete
Your clients will choose one or more schools to which the FAFSA will be sent (note that some private schools may additionally require completion of the CSS Profile, also available at www.collegeboard.com).
A few days after submitting the FAFSA electronically, the family will receive their Student Aid Report (SAR), which summarizes the amount and types of federal aid the family may receive. The SAR will also contain the Expected Family Contribution figure, which is exactly what it sounds like.
That information will be followed by financial aid offers from schools to which the student applied and was accepted. The family then has the unenviable task of weighing the net cost and benefits of attending one school versus another, or another or another.
Once they have narrowed their choices to one or two schools that have offered both admittance and financial aid, they should contact the college's financial aid office to explain any extenuating family circumstances, and ask about any other aid that might be available.
Upon receiving the final answer, the parents' next step is to consult with you to figure out how to fill the gap between what financial aid is actually available, and the cost of the first year of school.
The answer to that question is at least as much art as it is science. So you'll be relieved to know that in next month's column, you'll find out the money moves your clients can make to maximize their financial aid award in the first place.
In the meantime, it might be time to dip your toe in the financial aid waters. Otherwise, your clients' dreams of sending their children to college could be sunk.
Kevin McKinley CFP© is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid a Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. Find out more at www.advisortipsheet.com.