Email question: Late to the game, how should we save for college?

Written by
Peter Dunn

Dear Pete

My daughter is in 10th grade, and my son is in 8th. With very little in a 529 plan, what advice would you give to put us in the best position to receive financial aid/ scholarships? How would you suggest we save/pay for college for the next 8-10 years?



Fort Wayne, IN

Hey, Sean (I just pronounced it Seen).

By the time you stop reading this, you're going to come to the conclusion that you either asked the absolute right person or the absolute wrong person. I'm biased, but I'm pretty sure this will be a great answer. It's not a tidy answer, by any means. But it's practical and real. Enough stroking. Here we go.

College financial aid is one of the most misunderstood concepts in finance, from the snout down to the tail. We first must examine why financial aid is given, and in what form. One of the most frustrating aspects of this conversations for parents is that FAFSA (Free Application for Federal Student Aid) has a much different definition of need than parents do, and FAFSA's idea is the only idea that matters.

Financial aid means many things. It means student loans, both public and private. It means scholarships. It means grants. And it means a bunch of other random stuff. When you seek aid, you simply are looking ways to pay for school, ideally in a way that lessens the cost. When FAFSA gets involved, and they almost always do, two things are determined: how much you are expected to personally pay and how much you will easily be able to borrow. That leaves out one weird factor: how much you NEED to borrow.

We should start with what you are responsible for. This is called your Expected Family Contribution. I ran some info through an EFC (Expected Family Contribution) calculator to help illustrate FAFSA's perspective. Sean (pronounced Seen), I don't know your particulars, so I ran some random numbers through the calculator. Here are the numbers I used.

Household income: $75,000

Investments: $50,000

Cash, checking, and savings: $5000

Parents ages: 45

Based on the estimates above, the fake family I created would be responsible for somewhere between $6,400 and $8,800 per year in college costs. As notes:

"Your real cost—also called your net price—includes your EFC, plus any financial need that your college doesn't cover and any financial aid in the form of loans or earnings from work-study. You will have to cover any unmet financial need from your own resources, repay loans, and work the hours required for work-study aid. The real cost of attending a college includes all the dollars you must spend out of your own pocket, either now or later."

All this is to suggest that someone in your house is going to be borrowing a significant amount of money unless your children receive merit-based scholarships or they go to an inexpensive school. The original question you asked about how to get financial aid should actually be a different question. You will get some financial aid, but you should be more concerned about covering your EFC. You will most likely fund this with your 529, your current income (when they are in college), and additional borrowing.

As far as scholarships go, I recommend you buy my book, Avoid Student Loans. Look, I realize how crappy it is for someone to say "buy my book." It hurts me more to say than it hurts you to hear it. But the reality is that I spent months researching the best ways to reduce college costs and win scholarships. I'm not going to be able to jam all that knowledge into this post.

In my opinion, and my opinion is the one you asked for, the key to this whole game is to select a school that doesn't break the bank. I realize that I'm oversimplifying a complicated issue, but a lower-cost education really does solve a tremendous number of problems, especially if you don't have as much money as saved as you'd like.

Step up your financial wellness game.

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