Going Beyond the 529 for More Sophisticated College Planning

By Douglas J. Watts

The American dream has many faces. One of them is a college education.

Like many new parents, I find myself fantasizing about my child’s future. I wonder what talents he will have, what passions he will discover as he moves through life, and what he will be when he grows up. Will he be a doctor, an engineer, or maybe a financial planner like his dad? Many of my dreams for my firstborn child have one thing in common: the need for a college education.

Growing up in a middle-class Black family, the importance of education was a constant message in my household. My mother would tell us stories of the sacrifices our ancestors made. She told us how Booker T. Washington walked more than 300 miles from Malden, WV, to attend Hampton University in Virginia, where he worked as a janitor to pay for his studies; how Frederick Douglass risked his life to teach himself to read and write because, “knowledge is the pathway from slavery to freedom”; and how it took a Supreme Court case, Brown v. Board of Education, to secure my right to a fair education.

Given its cross-cultural, social, historical, and economic importance, it should come as no surprise then that higher education is serious business. Demand for post-secondary education is incredibly strong. According to the College Board, the organization behind Advanced Placement classes and the SAT, more than half of graduating students will enroll in a two-year or four-year college immediately after finishing high school.¹

As we all know, college ain’t cheap. High demand allows educational institutions to set high prices. According to the Trends in College Pricing and Student Aid 2022 report, “average estimated budgets (tuition and fees, room and board, and allowances for books and supplies, transportation and other personal expenses) for full-time undergraduate students range from $19,230 for public two-year in-district students and $27,940 for public four-year in-state students to $45,240 for public four-year out-of-state students and $57,570 for private nonprofit four-year students.”²

Calculating College Costs Is Complicated

As financial planners, it is easy to fall into the trap of looking at the estimated budgets and then funding 529 plans accordingly. However, the cost of a college education is more complicated. For example, the published cost of attendance is $27,940, while the average net cost of attendance is $19,250.³ That’s a discount of 31%.

Determining the cost of education is further complicated by the need to calculate the expected family contribution (EFC). The EFC is used to determine how much a family is expected to pay toward a child’s education and how much financial aid the student will receive. The amount of EFC may vary from institution to institution as there is more than one methodology for calculating it. These include the federal, consensus, and institutional methodologies.

The best-known way to calculate the expected family contribution is the federal methodology, which uses the Free Application for Federal Student Aid (FAFSA) to determine how much financial aid a student can receive from the U.S. government. The FAFSA is the gatekeeper for programs like Pell Grants, work-study programs, and federal student loans.⁴ In addition, many colleges and universities use this information to determine how much aid the institution will provide.

The institutional methodology relies on the College Board’s College Student Service (CSS) Profile. The CSS is an application that allows students to apply for nonfederal financial aid. More than 300 schools require that students submit a CSS Profile in addition to the FAFSA.⁵ One major difference between the FAFSA and the CSS is that the latter has more specific questions and requires more detailed financial information. For example, the CSS takes into account additional family assets when determining financial need, including farms, businesses, home equity, and more.⁶ Assets like home equity are not considered under the federal methodology.

The consensus methodology is generally used by the most competitive schools,⁷ and it may capture even more specific data than the federal and institutional methodologies. In all methodologies, tax-exempt retirement assets are excluded from consideration.^8,9 However, the treatment of income will vary. For example, under the federal methodology, in the event of a divorce, only the income of the parent the child lived with for the majority of the previous year is used in EFC calculations.

If your head is spinning a little, you can see how a family’s dream of sending their child to college can feel like a nightmare. The process can be overwhelming and stressful. Mistakes are common with the FAFSA.¹⁰ According to grantford.org, “1 in 7 FAFSA forms is submitted incorrectly, resulting in an average of $9,000 in missed financial aid.”¹¹

How Advisors Can Help

Clearly, there are more opportunities for impactful financial planning than just funding a 529 plan and completing financial aid forms. As financial planners, we have the opportunity for more sophisticated college planning, including helping clients understand and maximize their financial aid opportunities; helping to optimize the funding mix between savings, loans, and tax credits; helping to determine the affordability of an institution based on the child’s intended major or profession; and more. (For another perspective on how advisors can help, see “College application trends and how advisors can help clients navigate them” in the December 2022 NAPFA Advisor.)

We can use tools like Federal Student Aid’s estimator tool, the College Board’s EFC Calculator, and emerging advanced planning software like College Aid Pro and Collegiate Funding Solutions to project how our clients’ individual circumstances can affect their college-funding journey.

My challenge to the advisory community is that we recognize the positive effect we can have across generations by being mindful of the fact that funding college is a complicated and emotional process filled with bureaucratic hurdles. Reach out to clients who have children or family members entering high school to offer your help in demystifying financial aid. Consider pursuing a college planning credential like the Certified College Planning Specialist¹² (CCPS) certification or a certificate program.¹³ You may also consider building a referral relationship with an advisor who specializes in this area of planning. Performing the kind of sophisticated advanced college planning outlined above is an amazing opportunity to provide value to clients, be they parents or grandparents, as they shepherd the next generation.

 

1. College Enrollment and Retention in the Era of Covid: Fall 2021 Update on Continued Pandemic Impacts, The College Board, Howell et al, 10/2022, p.10.
2. Trends in College Pricing and Student Aid 2022, The College Board, p.3.
3. Trends in College Pricing and Student Aid 2022, The College Board, p.18.
4. “How Financial Aid Works,” Studentaid.gov. 
5. “How to Complete the CSS Profile,” U.S News & World Report, Sept. 27, 2022.
6. “Financial Aid Consensus,“ Grantford.org, March 3, 2020.
7. “The 3 Different Types of Expected Family Contribution Explained,” College Aid Pro, Sept. 8, 2022.
8. “Completing the CSS ProfileTM? Check Out These FAQs,” MEFA Massachusetts Educational Financing Authority.
9. “How do I complete the question ‘Does the total amount of your parents’ asset net worth exceed the amount listed’ on the FAFSA^® form?” Studentaid.gov. 
10. “10 Common FAFSA Mistakes to Avoid,” Studentaid.gov.
11. “Welcome to Grantford,“ Grantford.org.
12. National Institute of Certified College Planners^®
13. “FPA Launches College Planning Certificate Program for Financial Planners” 

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Douglas J. Watts, CFP^®, ChFC^®, CIMA^®, is a wealth advisor with Mercer Advisors. He graduated from the University of Pennsylvania with a degree in philosophy, politics, and economics.

image credit: istock.com/alexsl