financial literacy

College savings dilemma

  The problem

Qualify for financial aid
Like the great majority of young people entering college (more than 60 percent), the Roe children will be able to qualify for some type of financial aid. The next step is to calculate how much financial aid they can expect and how much they will be expected to pay themselves. The easy way to do this is to use a financial aid calculator.

There are many financial aid calculators available online. While various calculators use different methodologies and inputs, you can just pick one to get a general idea of the resources necessary for college. A rough idea of how much you will need to save is fine due to all the uncertainties about the data inputs. We used the Roes' income, assets and expected college costs to plug into a calculator to arrive at our estimate. Mike and Chris's expected family contribution, or EFC, for their two children will be in the range of $32,000 over a seven-year period.

Two points about this EFC should be discussed for planning purposes. The first is that the estimated college costs do not impact the EFC very much. The Roe children can look at much more expensive colleges, if they wish, and this will not make much difference to the expected family contribution. Higher college costs increase the amount of financial aid they are eligible to receive. Regardless of whether they will seek financial aid, they should fill out the Free Application for Federal Student Aid.

The second is that the family's EFC might be higher, or lower, than we calculated. The uncertainty comes because a large part of the assets used for the calculation depends upon the value of Mike's closely held business, which is hard to pin down. Because their EFC can come from a combination of personal assets, current income or borrowing, the value of their assets will have a big impact on their contribution.

Tap retirement savings?
While the Roes have managed to save more than $50,000 in cash and investments, not including retirement accounts, it would take a large amount of these funds to fulfill their obligation. As an alternative, if needed, they should be able to borrow against either their two rental properties or Mike's business. However, it would be more in keeping with their goals if they could have a plan to save enough money for education expenses without having to rely on these two options.

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-- Posted: Sept. 17, 2007
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