Written on: August 24th, 2024

Our eldest will be going to college soon. They are doing their best to study, take AP classes, do extracurriculars and cram in SAT prep over the coming year. I decided this was a good time to learn how to apply for financial aid to reduce college costs. In previous articles we noted how we decided upon the MI Saves 529 plan to help pay for college. A dollar saved is far better than a dollar in loans. My short conclusion after the past 3 weeks investigating: planning and paying for college sucks. I would describe it as 1000x worse than doing your taxes. Taxes are a joy in comparison. Planning for college is a multi-year experience where you re-jig your income and assets to maximize your chances of aid (and there are four types of aid too). My goal here is to share what we know and what we don’t know as we go through this journey.

A word of caution

Most college finance articles run long. They quickly get overwhelming . Our goal here is to break things into small chunks so they are easy to digest. The level of preparation needed to apply for college aid might take a few classes in a Master’s degree program. It’s that insane.

DON’T do the following

DON’T: Add in your home equity to your FAFSA reportable assets

FAFSA stands for Free Application for Federal Student Aid. The website is here (1). Adding in your home equity as a FAFSA asset can cost you by reducing college aid.

The FAFSA doesn’t take home equity into account.

Investopedia (3)

According to Bankrate (2), the average “tappable” equity is $193,000. They define tappable equity as able to be withdrawn while still maintaining a healthy 20% equity stake. Let’s round that to $200k.

How to Save for College (4) shows how Parent Assets contribute 5.64% at the maximum. For every $1,000 in assets at the top level colleges would expect you to pay $56.40 per year.

If you add in $200,000 in extra home equity reported every year, multiply it by 5.64%, and multiply by 4 years of college you get $45,120. That’s the extra amount colleges would have you pay for your simple mistake.

DON’T: Add in your retirement plans to your FAFSA reportable assets

Adding in retirement plans to your FAFSA reportable assets is another mistake.

Investments do not include retirement plans, the value of life insurance, or ABLE accounts. If they mistakenly include retirement plans, this can significantly impact financial aid eligibility.

Investopedia (5)

Nerdwallet (6) says the median retirement savings balance amount for those between 45-54 in age is $115,000. You report this as FAFSA reportable assets for each year your child is in college. We repeat the exercise above. $115,000 extra in assets per year times 5.64% times 4 years give us $25,944 extra in aid you are not eligible for from colleges. If you added in your primary home equity plus your retirement savings as reportable assets you may pay colleges an extra $70,000 over four years you don’t have to pay.

DO: Read this Atlantic article from 2005

Combine Capital One’s leading data analytics and airlines real-time pricing and apply that to college enrollment managers and financial aid officers. That’s what Matthew Quirk discussed in his 2005 Atlantic piece “The Best Class Money Can Buy.” (7) The Atlantic offers a 30-day free trial subscription to read their content. Imagine how much more advanced college data analytics is in 2024 compared to 2005. Knowing that, I am hesitant to fill out anything from College Board if it shows we are more likely to apply to a school, which may decrease our aid, if the school receives our information.

Take a $20,000 scholarship—the full tuition for a needy student at some schools. Break it into four scholarships of $5,000 each for wealthier students who would probably go elsewhere without the discounts but will pay the outstanding tuition if they can be lured to your school. Over four years the school will reap an extra $240,000, which can be used to buy more rich students—or gifted students who will improve the school’s profile and thus its desirability and revenue.

Atlantic (7)

With their ever-expanding reach, enrollment managers are inevitably dogged by controversy. But it’s the way they have changed financial aid—from a tool to help low-income students into a strategic weapon to entice wealthy and high-scoring students—that has placed them in the crosshairs of those who champion equal access to higher education. Adopting data-mining and pricing techniques from the airline and marketing industries, they have developed a practice called financial-aid leveraging that allows a school to buy, within certain limits, whatever class it wants.

Atlantic (7)

Let us know how you navigated the financial aid labyrinth to afford sending your kids to college in the comments. Honestly, I never knew colleges were so sophisticated in their data analytics and marketing. They are a business like any other, with revenues, expenses and profits to match. Some use financial aid to reach more students, others use it advance rankings prestige, and a few use financial aid to remain exclusive. If someone benefits from the broad exposure, better analytical, time management, career prospects and social aspects of college, they should be able to and afford to go. As a society, we would be better off. Colleges act as one of society’s gatekeepers to control how many pass through and advance. That doesn’t sit right with me.

Sincerely yours,

smilingdad

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(1) studentaid.gov. “A Better 2024−25 FAFSA^® Form, https://studentaid.gov/h/apply-for-aid/fafsa.”

(2) bankrate.com. “2024 Homeowner Equity Data and Statistics, https://www.bankrate.com/home-equity/homeowner-equity-data-and-statistics.”

(3) Investopedia. “Home Equity Loans and College Financial Aid, https://www.investopedia.com/home-equity-loans-and-college-financial-aid-5324003.”

(4) howtopayforcollege.com. “SAI Formula Guide for the 2024-25 FAFSA, https://howtopayforcollege.com/blog/sai-formula-guide-for-the-2024-25-fafsa.”

(5) Investopedia. “How I’m Talking to Clients About This Year’s FAFSA, https://www.investopedia.com/fa-one-thing-fafsa-8654600.”

(6) Nerdwallet. “What Is the Average Retirement Savings by Age?, What Is the Average Retirement Savings by Age?.”

(7) The Atlantic. “The Best Class Money Can Buy, https://www.theatlantic.com/magazine/archive/2005/11/the-best-class-money-can-buy/304307.”