When saving money for college education, you should be aware of your Expected Family Contribution (EFC). EFC is how much money your family is expected to contribute to your college education — the lower your EFC, the more financial aid you will receive.
One of the great things about not having children is that you can make comments on the way other people raise theirs with basically no comeuppance. One of the slightly disturbing things about blogging on personal finance is that because most personal finance bloggers are American, even as a British person, you can end up knowing an awful lot about American finance topics — if it weren’t for the spelling issues I reckon I could go by for months blogging as an American before anyone realised that I wasn’t.
All this brings me to the post at hand. For the reasons that I’ve outlined above (and others including my onetime desire to do a Math PhD at Northwestern) I know a little about U.S. college finances. For reasons unknown to me or anyone else, I have felt a deep-seated need to share that knowledge and offer my opinions.
When students apply to college, many of them look to the financial support from federally and privately funded sources — i.e., financial aid. Financial aid includes loans, grants, scholarships, and work-study programs. In America (as in the U.K.), there are three main sources of financial aid:
and there are two main types:
and it’s given for two reasons:
For the purposes of this article, I’ll assume that people (students/parents) are aiming to get a degree from the best-fit college at the lowest cost. I’m assuming this because it seems patently sensible to me. Naturally, it’s for individuals to decide what best-fit really means and to make the trade-off between fit and cost. But lowest cost means lowest total of out of pocket plus loans.
Typically students apply to college in the autumn of the senior year. You should know if you have a place, and the financial package they are offering to you in the following spring.
When colleges consider need-based financial aid, they do it in roughly the following way:
First they work out how much the family is expected to pay (student and parents) — the EFC (expected family contribution). If the cost of tuition is more than this, then there is a need. If the cost of tuition is less than the EFC there is deemed to be no need and no need-based aid will be offered (regardless of whether the family believe they can afford to pay).
Need can be met by a combination of grants and loans — some of which may be expensive private loans. If all the aid is need-based then you will always have to pay your EFC, and very roughly speaking a $100k family income can easily produce a $20k per year EFC. (You can find a good EFC estimator at FinAid.org — broadly speaking, federal methodology is for public colleges and institutional methodology for private colleges.)
Where parents are separated or divorced, both parents may be expected to contribute, plus stepparents income and assets are also taken into account. There is no allowance made for consumer debt (even where this affects what the parents can actually contribute), and the equity of your home may be taken into account under the institutional methodology.
When we’re talking about need-based aid, it doesn’t matter whether the parents are willing to pay the EFC or not. Each college will assume that it will be met by the family (student/parent), and will not provide need-based aid to cover that portion.
Generally, speaking to apply for need-based aid, you need to file a Free Application for Federal Student Aid (FAFSA), plus additional forms for private colleges.
The situation is actually really similar for merit-based aid. Except that the order generally goes scholarship, EFC and then if there is still need left grants or loans. Most institutions will always give some loans out. Only the really, really rich ones like Harvard promise not to.
This can mean that getting more scholarships does not reduce your out of pocket costs. If you get a merit scholarship, then the university may reduce the amount of need-based grant you get, or the amount of need-based loan you get – it will not reduce the amount the family is expected to contribute unless the total of the merit scholarship plus EFC is greater than the cost of attending the college.
Requirements for institutional scholarships are found on college websites, they may include writing additional essays and attending interviews. Typically only the top applicants for a college will get a scholarship, so you need to be an above average to well above average candidate for that college. Outside scholarships can be worth applying for also, for financial aid purposes the same rule about not reducing your EFC will generally apply.
Suppose there was a really clever person living in Milwaukee, Wisconsin who applied and was accepted to Harvard University (uber smart Ivy League), Howard University (top historically black college with excellent scholarships), University of Michigan-Ann Arbor (top Midwestern university), University of Wisconsin-Madison (another top Midwestern university) and Milwaukee Area Technical College (local 2-year college).
In order of sticker price from most expensive to least expensive these go:
But with an EFC of $10k, perfectly possible financial aid offers could look like:
Now, whether you’d rather go to Harvard or Howard probably depends on more than finances — but for the money you certainly might choose one of those private colleges over the public ones, even the 2 year college.
Private colleges may be cheaper than public colleges, especially if you are applying from out of state to a particularly well-known public university, and many private colleges offer substantial scholarships to applicants they really want. On the other hand, in-state tuition can be very reasonable, and many public universities are also world-class academic institutions (e.g. UNC-Chapel Hill, UT-Austin) or offer innovative and unusual programs (e.g. Evergreen State College, The Citadel).
It’s perfectly possible for college A to have a higher overall price than college B, but for college B to cost less for one individual student. Also, because financial aid at private colleges is idiosyncratic, you’re not guaranteed any money from anywhere. Always either apply to one college that you can (a) afford to attend at full price, (b) are very, very likely to get in to and (c) would be willing to go to — or be prepared to take a gap year and reapply. This college, by the way, is likely to be a public college in your state.
Similarly, (and more excitingly) students shouldn’t be put off applying to a college just because it is expensive. Look at their financial aid and work out whether you might be able to get a scholarship. If you are true Ivy League material then they will give you substantial need-based aid, and you may get a lot of merit aid at another college. If you are not Ivy League material, there are plenty of excellent colleges that would love to attract a student like you, some of them probably have generous aid programs.
Key terms to look out for, are need blind (good), need aware (not good), and meets full need (very good). A college that is need blind will admit you whether you can afford to pay full price or not. A college that is need aware takes into account whether you need financial aid in making admissions decisions, so if you need a lot of money they may well reject you. A college that meets full need will generally require only the minimal amount of federal loans and work-study on top of the EFC and make the rest up with grants/scholarships.
Honestly (and especially as I don’t have to do it myself) I think this means that parents should be saving up at least enough to pay their share of the EFC (there is a student work / summer work component). Ideally, the EFC plus a little bit more to allow for some of the non-budgeted expenses.
If you are a long way off having a child actually in college, then it’s still possible to make an estimate as to what your EFC is likely to be (good enough for a ball-park figure). Make a guess as to your pay (in 2008 $) when your eldest is 18. Play around to see the effect that adding more savings makes to your EFC. Compare the EFC you get to college cost of attendances which currently run from $5k-$10k for community college, $15k to $25k for in-state public college, and $25k to $55k for private and out of state public colleges.
If you calculate your EFC and it is higher than full-freight college budgets ($50k+) then I think you should be saving up to pay for almost all college expenses – less a reasonable amount of money that your student could earn during term time and/or in the summer vacations. Naturally, encourage the said child to apply for merit scholarships but it seems unduly harsh (if you can avoid it) to restrict your child’s college choice because you will be too rich for them to get need-based aid but you are not willing to contribute your share.
If this is not possible, it means that realistically your son or daughter will be restricted to attending colleges where they can either get a substantial merit scholarship (they may then be much brighter than average at the college) or colleges that you (between student and parents) can pay for in full. Because they won’t be getting any need-based financial aid to cover the money that you didn’t save up (or choose not to give).
Of course, not everyone will be in a position to save enough money. Particularly if your children are older, there may well be less time to save up the money that the financial aid people think you can afford. Never, ever damage your retirement for your children — it is not being kind to make them support you in old age, and you run the risk that they will choose not to do so.
As children approach college age, the most important thing, even if you can’t afford to contribute anything (or choose not to) is to let the student know and understand well in advance what the financial constraints on their college choice are. And by that, I mean by telling them how much money they have to work with and helping them appreciate what that is likely to cover, and the effect that loans are likely to have on their post-college life.
I really hate it when people say that they will only cover public college for their kids. I think it’s stupidly restrictive. It’s absolutely ok to have limits on how much money you’re willing to fork out. And even to refuse to enable someone to take on crippling debt. But restricting college choice based on money, when it’s not necessary is dumb. Taken literally, that’s saying that they’ll pay $45k to send their kid out of state to Berkley or UMich, but won’t spend $30k to send them to a private college. What parents could be saying is that they’ll cover the equivalent of in-state public college, (or half or whatever). This annoys me mostly because, as parents, you don’t get to vicariously live your life over again through your kids — it’s their education, they pick the college, you merely provide limits on what you are willing to do to support that choice. These limits might also include, “I am not driving more than 3 hours away to pick you up”, as my parents said, or “I am not willing to cosign for loans of more than $8k per year”.
I think parents should attempt to cover at a minimum their share of the EFC. I appreciate that in lots and lots of cases, that isn’t possible — particularly if you haven’t got 15+ years to save up. But it’s the minimum that the government thinks you should be able to afford and it will open up a lot more choices for them. The whole point is that it’s a reasonable contribution, taking into account your income, assets, and family situation.
Finally, and if nothing else, I think parents should be honest with their children about how much they are willing to pay, well in advance of anyone beginning a college search. Money limits everything and money issues need to be laid on the table to avoid bitter disappointment later on. You might not want to share details of your financial position with your kids, which is fine, but when it’s effectively their financial position too, they deserve the information they need to make great choices.
Thanks from Plonkee, whose parents provided more than their expected contribution which enabled her to get an excellent degree from a great university in the U.K., and who is also hoping that she’s not obliged to save up for anyone else’s college fund.
This article was featured in the Carnival of Education at The Reading Workshop.