By David Ressner
Knowledge is power.
That fact applies to so many parts of life, especially college planning. Until recently, college admissions and financial aid were black boxes. But lately, light has been shone into that box. You can take advantage of that knowledge, rather than being taken advantage of, when searching for and applying to colleges. With that in mind, let’s talk about finding schools that fit your budget and—most importantly—fit your child.
Every year on October 1, the two major financial aid applications become available. The first application is the FAFSA (Free Application for Federal Student Aid). The FAFSA is required by all colleges and universities that participate in the Federal Student Aid program, which are most schools. The second, lesser-known application is the CSS Profile, which is required by approximately 200 schools that award their own aid. So, if you are applying to or already attending any of the 200 CSS Profile schools, you should complete both financial aid applications. Otherwise, the FAFSA is the only application you will likely need to submit.
The point of both applications is to determine your Expected Family Contribution (EFC), which is the minimum amount that schools will expect you to pay each year. Once you know your EFC, you can plug it into the following simple but important formula to see if you might qualify for need-based financial aid: Cost - EFC = Need.
An easy way to find a school’s cost is to search online for that school’s name and the phrase “cost of attendance” (COA). For example, NYU’s all-in cost is $78,742 this year. And for a New York state resident, the City University of New York (CUNY) costs $31,851. If your EFC were $40,000, you would have no financial “need” at CUNY, but you would have more than $38,000 of need at NYU. Unfortunately, most schools do not “meet” 100% of every student’s need. In this common situation, called “gapping,” families are on the hook for more than their EFC, which is often a big, scary number to begin with.
For families with need, the holy grail of college planning is to find good-fit schools that meet 100% of it with free grants and scholarships, not loans that must be repaid. Many of the lists published recently contain about two dozen so-called “no-loan” schools. They happen to be some of the most highly regarded schools with some of the biggest endowments, including Amherst, Chicago, Davidson, MIT, Pomona, Stanford, Swarthmore, Vanderbilt and most of the Ivy League.
Close behind are schools that make the same promise, but only for families below certain income limits. For example, Cornell promises to meet 100% of need without loans for families whose total income is less than $60,000, and Dartmouth draws the line at $100,000 of total income. Other schools in this group include Colgate, Duke, Haverford, Lafayette, Lehigh, Rice, Tufts, UNC, Vassar, Wellesley, Wesleyan and Williams. As you may suspect, financial aid policies change, especially in the COVID-19 era, so those lists are far from static.
Both financial aid applications ask more than 100 questions, but the most important variables are income, non-retirement assets, and the number of students in college at the same time. Most families don’t have much control over their income or number of students, but sometimes, assets can be rearranged to reduce one’s EFC. One common strategy is to use non-retirement savings to pay down the mortgage or other debt because the FAFSA ignores home equity and debt. All else equal, paying down $20,000 of debt with non-retirement savings can reduce the FAFSA EFC by more than $1,100 per year. If your school meets 100% of need, that equates to $4,500 in savings over four school years.
It is worth noting that the FAFSA and CSS Profile assess income and assets differently. For example, whereas the FAFSA ignores home equity, the CSS Profile counts it—at least partially. So, if your child is considering a school that requires the CSS Profile, paying down your mortgage might not be helpful.
A second EFC-reduction strategy is to use a child’s custodial account (UTMA or UGMA) to fund a custodial 529 college savings account. According to both EFC formulas, this transforms the asset from student to parent. And both formulas assess parental assets at a much lower rate than student assets. For example, converting $10,000 from a child’s custodial account to a custodial 529 account could reduce a family’s EFC by $1,400 to $2,000 per year.
Of course, if you are self-employed or can defer income, that certainly could reduce your EFC, too. And if you are going to have more than one child, it is best to have them all at once (from a college planning perspective, anyway). The FAFSA divides your EFC equally among each college student in your family, so if you have twins and a total EFC of $60,000, the EFC for each child would be $30,000. And for triplets, the EFC would be $20,000 each. But the CSS Profile is not quite as generous. For example, if you had twins and a total EFC of $60,000, the CSS Profile EFC for each child would be about $36,000 (60% instead of half). And the CSS Profile EFC for triplets would be about $27,000 each (45% instead of a third). Of course, the children don’t have to be twins or triplets. Even if different-age kids overlap in college for a year or two, the savings during the overlapping years can be significant.
If you don’t know your EFC and want to see if these strategies or others will move the needle on your EFC, you can run some what-if scenarios on the College Board EFC Calculator. If you have the flexibility to rearrange assets, defer income, or even time college so two or more kids attend at the same time, you might find that you can significantly reduce your EFC and thereby increase your eligibility for need-based aid. But for high-earning families or prodigious savers, no amount of tinkering will be a game-changer.
College search strategies for families with high EFCs are often very different from what works well for low-EFC families. High-EFC families should consider seeking compatible schools that are generous with merit aid. While being a good student certainly helps, “B students” can find merit aid if they know where to look. Simply put, the key is targeting schools where your grades and standardized test scores put you in the top 25% of applicants or higher. One source for this type of information about schools is the website CollegeData.com. Of course, it helps if you have something else to offer, like an extracurricular talent.
Not all schools, however, give merit aid to such applicants, so you must find schools that are trying to improve their rankings by attracting good students using cold, hard cash.
Inside the college business, this aid is called a tuition discount. Since 1994, the National Association of College and University Business Officers (NACUBO) has studied tuition discounting at four-year, private, nonprofit schools because those schools engage in discounting much more than public colleges and universities. The 2019 study found that “nearly 89 percent of all first-year undergraduates received institutional grant aid, which covered, on average, almost 60 percent of the published tuition and fees. Among all undergraduates, nearly 82 percent received institutional grant aid, which covered about 55 percent of the tuition and fee sticker price on average.”
Admittedly, much of those discounts were need-based, but as much as 20% of discounts went to families with no need. Again, according to the NACUBO study, the most common reason that a school gives discounts to high-EFC families is to try to attract high-achieving students to boost its ranking.
It should come as no surprise that merit-generous schools are often not the most prestigious, because elite schools don’t need to entice anyone with discounts. Due to the “Harvard or homeless” mentality of many parents, many elite schools have an abundance of applicants who are ready, willing and able to pay full price. As the recent admissions bribery scandal illustrates, many families are happy to pay more than full price—much more! As a result, elite schools tend to devote most of their financial aid to need-based aid—just like the “no-loan” schools.
Having said that, many merit-generous schools are fine institutions where you can get a Lexus education at a Toyota price. You can use this knowledge to find a high-quality education at below average cost.
However, many families are hesitant to consider lesser-known schools because they believe their children need brand-name degrees to be competitive in the job market. For the most part, that is a misconception that high-priced colleges and universities are happy to perpetuate. In a widely cited study, researchers Stacy Dale and Alan Krueger compared the career earnings of two groups: 1) people who were admitted to and graduated from some of the most selective schools in the U.S., and 2) people who also were admitted to those same highly selective schools, but chose to attend less-selective schools.
When the researchers simply compared post-graduate earnings of the two groups, they found what you would expect—alumni of selective schools earned more than alumni of less-selective schools. But when they controlled for variables like academic ability and personal ambition, they found virtually no difference in career earnings—with a few exceptions. For black, Hispanic and first-generation college students, the researchers found that graduates of the most selective schools did earn more than graduates of less-selective schools—between 5% and 17% more—even after controlling for ability, ambition and other personality traits.
So, for many—but not all—college graduates, the logo on their diploma matters far less than the brain in their head and the heart in their chest. I’ll paraphrase one author who put it this way: Harvard does not create successful people. Harvard attracts people who already have the makings of success, and Harvard’s job is to just not screw that up.
More evidence of this phenomenon lies in a great book, “Where You Go Is Not Who You’ll Be.” Author Frank Bruni wrote, “Elite colleges don’t have all the best teachers, students and facilities. What elite colleges have is a set of characteristics that are accepted as synonyms for quality, along with a history of acclaim that is easier for parents and children to buy into than to examine and question. The same cast of colleges gets the same adulation year after year, and students target colleges that are comically redundant and sadly unimaginative.”
Throughout his book, Bruni makes a convincing case that where one goes to college matters much less than how one goes to college. Here’s what he means by that. In addition to getting a good education and career preparation at a reasonable price, there is yet another benefit of considering slightly less-selective schools. That is the Big-Fish-Little-Pond Effect (BFLPE), which is also well-documented in education research. BFLPE states that two equally capable individuals will view themselves very differently if their peer groups are different. Malcolm Gladwell wrote about this phenomenon in his book “David and Goliath.”
Gladwell described a woman he called Caroline to protect her privacy. Caroline loved science and excelled in it throughout grade school. When it came time to choose a college, she chose Brown University, a prestigious Ivy League school, rather than the University of Maryland. In a nutshell, Caroline struggled to keep up at Brown. She became discouraged and eventually abandoned her dream of being a scientist. In hindsight, Caroline and Gladwell think she might have realized her dream had she attended the University of Maryland instead. She might not have been at the top of her class at Maryland, but she probably would not have been at the back of the pack either. BFLPE suggests she may have viewed herself as being more capable, better-suited to a career in science, and more likely to have persisted.
Ironically, as I write this, a quick, informal survey reveals that at least half of the University of Maryland Chemistry Department faculty have degrees or research experience from Ivy League and other elite universities. Caroline likely could have gotten a great education at the University of Maryland and literally hundreds of other schools. And so can your child.
One more important point about BFLPE and how one goes to college: At elite universities, competition is often intense for professor interaction, research opportunities, internships and other extracurricular enrichment. In a 2018 survey of 5,100 college alumni, Gallup and Strada Education Network found that extracurricular enrichment makes a huge difference to graduates—professionally and personally. Gallup and Strada found that college graduates felt more prepared for the working world, viewed their degree as a good investment, and reported greater overall wellbeing if their college experience included many of the following:
· Caring professors who made learning exciting
· Mentorship and career advice
· A job, internship or long-term project in their field
· Significant extracurricular involvement
Who is most likely to enjoy such benefits—a little fish in a big pond, or a big fish in a little pond?
If yours is a high-EFC family, would you pay full price—$75,000 to $80,000 per year—for an impressive name with few of the benefits that really matter? Or would you rather find a school where your child is likely to benefit from those important intangibles and a generous tuition discount, too?
In addition to the aforementioned CollegeData.com, another great resource is the college and career planning service Naviance, to which many high schools subscribe. It is always a good strategy to apply to a range of schools, including at least a few merit-generous ones. This is a good strategy for the obvious reason that it gives you multiple options, but another less-obvious benefit may be that doing so gives you a bargaining chip if one school is more generous than others and therefore has a significantly lower net cost.
Many families think a school’s first offer of financial aid is its final offer. Sometimes, it is, but not always. If you have a more generous offer from a competing school, you might find other schools suddenly willing to improve their aid packages.
On a related note, if COVID-19 has adversely affected your family in a financial sense, you can ask for more aid through a process many schools call Professional Judgment. This is especially true if your income or assets today are dramatically less than they were when you completed the FAFSA or CSS Profile. If so, clearly document your hardship and contact your school’s financial aid office. A great guide to the Professional Judgment process is the book “How to Appeal for More College Financial Aid” by Mark Kantrowitz. I know a family who followed the strategies outlined in his book and was awarded an additional $15,000 in grants—per year!
If college planning were not complicated enough, I will close with two final caveats—graduation rates and financial viability. When thinking about college, most families plan for four years, but the four-year graduation rate at many schools is dismally low—often through no fault of the student. Classes are often not offered in the number or at the times necessary for students to meet graduation requirements in four years. So, in addition to cost, location, size and other criteria, families should keep a close eye on the graduation rate of every school they are considering. And make sure the rate you are quoted is the four-year rate because—believe it or not—many websites and publications report six-year graduation rates!
Finally, many schools were living tuition check-to-tuition check even before COVID-19. Now, increased expenses and decreased enrollments and endowments have pushed some schools deep into the red. As a result, some schools are closing completely, and others are cutting departments, services and extracurricular activities to stay afloat. Even if your school keeps its doors open, it might lose much of the luster that attracted you in the first place.
Forbes reviewed the financial health of almost 1,000 colleges in 2019—before COVID-19—and 675 schools received a grade of C or worse. Other sources of this information include Edmit.me and the Hechinger Report on college financial fitness.
I hope this information makes your college search process a little less stressful and helps you find a school that fits your budget and—most importantly—fits your child.
About the author: David Ressner
David Ressner is a Wealth Advisor at Buckingham Strategic Wealth. He enjoys advising families on the financial aspects of college planning because educating children is the perfect storm of high cost and high emotion. By knowing how colleges operate, Dave is able to guide students to truly formative college experiences, while making sure the cost of college does not jeopardize parents’ long-term financial plans.
Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. IRN-20-1582
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