"College graduates earn a median salary that is 64% higher than high school diploma graduates"
The fact is that in the past 10 years published tuition rates have grown anywhere from 2.1% - 3.5% year over year inflation adjusted (source: collegeboard.org). While that seems high and scary by all accounts, the silver lining in that statement is that they are "published rates". An important fact to know about college education is that published rates are like MSRP'S for cars. There is a sticker price (or maximum suggested retail price) and then there is a price the dealer sets for you based on your negotiation power and other factors. Similar to the car industry's discounting practices, the college education industry follows a common old standing tradition of "tuition discounting". To read more about tuition discounting read the article "Tuition Discounting: Not Just a Private College Practice" in our Investment IQ –College Planning section of our site. A good take away is that you will probably not end up paying that sticker price the university of your dreams has on its website. But the question still remains, how much will you pay?
How much to save for college ?
One good place to start is to calculate your Expected Family Contribution (EFC). The Expected Family Contribution (EFC) is a measure of your family’s financial strength and is calculated according to a formula established by law. Your family’s taxed and untaxed income, assets, and benefits (such as unemployment or Social Security) are all considered in the formula. Also considered are your family size and the number of family members who will attend college during the year (source: FAFSA.ED.GOV).
"No matter how rich or poor you feel you are, we all have an EFC number out there and it is important to know that number in order to plan effectively for college expenses. "
Let me illustrate the concept of EFC with this example:
From a financial planning point of view there are several advantages of calculating your EFC :
1. You will have a starting minimum saving goal – Granted your finances will change overtime and so will your EFC, but you need to start somewhere in terms of your goal. EFC gives you that starting point. If you have an EFC of $19,000 then you know that you need to at least save $19,000 * 4 = $76,000. Of course if you have more than one child then that number needs to be multiplied by the number of children in the family.
2. You can design your college saving plan strategically – Knowing how the EFC is calculated can help you make smart financial decisions regarding your college saving plan. Since you know your EFC early, you can have enough time to save in ways that can make the EFC change for your benefit. There will be more on this in upcoming posts regarding college planning but for now sort of think of 'knowing your EFC' is like knowing your credit score before applying for a mortgage.
3. A roadmap to college selection – As you can SEE in the above illustration, cost of college can become a little bit easier to understand once you know your EFC. Of course there is no guarantee that you will get the maximum financial aid you qualify for but at least you can narrow down the price range of the universities based on your EFC and your target saving number.
I personally like to start with the EFC as the base number and then dive into Net Price Calculator when the student is closer to selecting schools. But it is important for you to know that it is there and can be used before your child applies to the college to avoid any surprises later on.
For now, let's start by calculating your EFC. There are many online EFC calculators , I personally like the one on the collegeboard.org but you can use anyone you prefer. Of course if you need help calculating your EFC or have a question regarding financial planning please feel free to contact me.