14 Ways Families Can Lower the Cost of College before Freshman Year

Early in my career as an investment banker to colleges and universities, I sat in on meetings with CFOs and Treasurers of hundreds of institutions. I learned tuition rates are not based on the services provided to students, nor the affordability for students or parents. In large, senior management simply analyzed their peer groups, and based future tuition rates on whether they wanted to be more or less expensive relative to their peers. And most of the time, they chose to be more expensive than their peers. So it’s no wonder college costs have outpaced inflation for decades and students are saddled with unnecessarily large debt balances.

The consequences of this debt on the students after graduation last for decades as graduates may be pressured to take on ill-suited jobs. They could also delay life goals such as buying a home, saving for retirement, and/or having a family. Parents can not only save money for college, but also lower the cost of college itself. Here are some ways to cut the cost of college so that doesn’t happen:

1) Understand that everyone pays a different price.  

One of the biggest misconceptions about paying for college is the idea of a fixed tuition. While tuition prices are fixed, the effective cost of college after tuition discounting through grants, scholarships and loans varies dramatically from student to student, and even between students who have similar financial resources as well as test scores. More so, tuition discounting increases over time. At the end of the day, a lot of schools have slots to fill and it’s not just “A” students getting the grants and scholarships.

2) Maximize your savings.

Strategies and Tips to Lower the Cost of College

Setting aside money in a 529 plan to get tax advantages is important. Under the new Tax Cuts and Jobs Act (TCJA), many states allow these accounts to be used for private schools as well. Thirty-four states offer a deduction and growth in these accounts is tax-free. But be careful about your state rules, as about 10 states require you to be the “owner” of the account to get a deduction on contributions. If a parent saved $50,000 into a 529 at birth, the family would have $10,000 more in the account by age 18 than if they put that money into a taxable brokerage account (assuming a 6% rate of return, a 25% marginal rate and 15% capital gains rate).

Some states even allow a one-day deduction loophole, wherein you could theoretically put aside money into a 529 on day one, receive a deduction on day 2 and then pay for college expenses out of that account on day 3. Another strategy would be to open a 529 before you even have kids with yourself as the beneficiary. You could change the beneficiary to the child when he or she is born to maximize compounding.

Another effective way to save for college is to fund Roth IRAs for children when they have “earned income” from summer jobs or work in the family business. Distributions from Roth IRAs for higher education are not subject to a 10% penalty under 59.5. Moreover, distributions for non higher education expenses are taken out principal-first and not earnings-first, so those might escape the 10% penalty.

3) Know your effective family contribution (EFC) before you step foot onto any campus.

We recommend that parents estimate their EFC years before they go through the college application process. EFC is a dollar figure that represents what a household should pay in college expenses over one year. Having a sense of EFC early on (i.e. freshman year of high school or even in middle school) can dispel some of the mystery of whether a family will qualify for need-based financial aid. This early analysis can help guide which strategies are best to save them money on the cost of college.

The EFC attaches certain percentages to parent-student income and assets to arrive at a specific number. If this number is above the cost of attendance (COA) for a particular school, the difference translates to need as well as eligibility for financial aid up to that need amount. The higher the cost of the school, the higher the need.

There are two categories of EFC calculations:

1) the FAFSA EFC, which is mainly for public universities and

2) the CSS/Profile EFC, which is mainly used by private universities.  

Lower Cost of College Tips Checklist

Both have some significant differences with the Profile EFC; most schools have their own variation on the calculation. For example, if you’re house-rich, but investment account-poor, you’ll likely qualify for more aid under the FAFSA than the CSS/Profile. Another difference is that the CSS Profile looks at the assets of the student’s siblings, while the FAFSA does not. Our suggestion is to calculate them both on EFC calculator on the College Board’s website or work your financial advisor to estimate your EFC.

Parents should know their financial aid strategy will be different, depending on whether based on their EFC they’ll likely be getting:

  • need-based aid (low and middle income students) — Need-based aid students should focus on the percentage of students that actually received financial aid out of those that applied, the percentage of students receiving aid that get their full need met, and the average financial aid amount.  

  • merit aid (high income students) — Affluent families seeking merit aid should focus on the average merit scholarship, the percentage of students who receive merit aid, and the requirements to keep the merit aid.  

  • both need and merit aid — Between the College Board site and collegedata.com, parents can find out the information they need to find the most generous schools for their situation.

4) Everyone should fill out the FAFSA, carefully.

The most frequent mistake we see is families not filling out the FAFSA, because they don’t think they will qualify for financial aid. It helps determine whether they qualify for need-based as well as merit aid. And while financial aid isn’t necessarily first-come, first-serve, the sooner you apply, the more time you’ll have to analyze the various financial aid offers and potentially appeal for additional aid.  

Admittedly, the FAFSA can be confusing, but mistakes can cost you thousands of dollars, so filling it out correctly is imperative. Even seemingly simple questions, like questions on household size, can be entered incorrectly and cost families money. For example, an unborn child, or an uncle or grandparent living in the home can increase the household size and qualify your family for more financial aid.

Other common errors we see are families failing to exclude home equity as an asset, divorced parents putting both of their assets and income instead of just the custodial parent, mistakenly including retirement accounts (IRAs, 401K, Roth IRAs, etc.) as investments, and including the value of a small business when they have fewer than 100 employees. Also, 529’s should not be listed as a parental asset, not that of the child.

As parents move into the base year for applying for financial aid for the first time, i.e. the prior-prior calendar year of your child’s freshman year enrollment, there are a few financial transactions parents should probably avoid. We’ve seen IRA rollovers or Roth IRA conversions mistakenly be counted as income in the FAFSA, so it’s probably best just to avoid them altogether during this period. As well, any sort of IRA distribution should be reconsidered, given it would count as additional income under the FAFSA formula.

5) Carefully consider CSS/Profile Strategies.

For CSS/Profile schools that include home equity in their EFC calculation, special attention should be paid to the home valuation. Using an appraisal value could unnecessarily lower your chances for financial aid, so we suggest using the federal housing index, typically far less than market value. If you have a lot of equity in your home, consider focusing on just FAFSA schools.

6) Put in the prep work, plus other extracurriculars.

Higher test scores can translate into savings on the cost of college. It’s obvious advice, but SAT review courses work and there even free ones online. Students should take the SAT more than once since college admissions committees take the highest score into account.  

Most people know AP courses can count as college credit and save on the cost of college, but another option is CLEP testing. These courses allow students to test out of certain subjects for college credit.

And, while SAT scores and grades dramatically impact the net cost of college, packaging a student correctly can also save on the cost of college. Significant community service, multiple on-campus visits, and/or leadership positions in clubs that match areas of study can make prospective students more attractive to admission directors as they look to build a diverse, well-rounded student body.

7) Focus on greater sources of college aid.

Annually, the federal government, schools and private scholarship distributes $125 billion in student aid. But private scholarships account for only 13% of aid given and most of these scholarships are $1,000 or less. We guide parents into focusing most of their time and energy on identifying the right schools for their children to apply to and receiving aid from the colleges themselves. Focusing primarily on private scholarships can take away from valuable time in the critical decision period where financial aid offers need to be evaluated, and potentially appealed in the spring.

If you do have time to apply for private scholarships, we recommend focusing on local scholarships, many of which are not posted on the large scholarship databases. As well, you can increase your chances of getting these scholarships by focusing on ones that require essays, since most students don’t want to shy away from that.

If you do garner a private scholarship, recognize it might end up being offset by a decrease in aid from the school itself. Even worse, the school might decrease the grant portion of its financial aid package and not the loan portion. If this happens, we recommend writing to them directly and requesting to reduce the loan portion of their financial aid package and not the grant portion. A private scholarship doesn’t hurt an high income student, since it won’t replace merit aid from the school.

8) Research the graduate rates and the potential return on investment of prospective colleges and universities to save you thousands dollars.

Parents should research the four year graduation rates when creating a universe of schools to apply to. There are significant differences in graduation rates among similar schools. One sure way to add 25% to the total cost of college is for a student to graduate in five years instead of four years. In our view, low graduation rates are more of an institutional issue than as a result of laziness.

Parents and students can analyze their potential return on college investment by looking at expected financial outcomes of the schools they’re looking at. Parents should know the value of a degree and major, and what internship and job placement opportunities are available for graduates. Research shows brand names are often overrated and overpaid. There are vast differences in quality among departments, even at brand name schools. A Stanford study looked at the ineffectiveness of rankings on success and this article further explores how to dig deeper than just the rankings.

College Strategies CFP

We recommend looking at schools that go out of their way to secure high-paying jobs after graduation. There are several resources online for parents, such as Payscale.com, that can show return on investment by major (educatetocareer.org and collegescorecard.ed.gov are also helpful).  

9) Apply to schools that compete against each other.

As students and parents narrow the universe of schools to apply to, we recommend they garner a sense of how financial aid is offered at prospective schools, and how generous those gifts are (i.e. % of student need met, average need-based grant, and % of students offered aid). We recommend looking into which schools compete for the same students and consider applying to a handful of them to potentially leverage offers against each other later in the process.

10) Use net price calculators (NPC) to see which schools will give them the most aid.

All schools that participate in federal aid programs are required to have net price calculators on their websites. Parents can use these calculators to get a better sense of how much how much aid a school will offer — well in advance of application deadlines. Some calculators will ask detailed financial questions, while others will ask just a few questions. While we recommend that parents calculate their estimated EFC as early as middle school, you won’t be able to use NPCs effective until around sophomore year since NPC need student academic info.

Our experience shows the more detailed the calculator, the more accurate it is. Parents can also change variables, like SAT scores, in the calculators to see how much, if any, the net price of the school changes. Then, one could potentially quantify how much that expensive SAT prep course could save you in financial aid in the longer run. Additionally, families with large home equity relative to their total net worth should run the calculators with and without home equity to get a sense of which schools will penalize them the most and which ones won’t for having such a valuable home.

11) Budget for your retirement, not just your child’s college years.

We see it again and again: parents struggle to stay on track for their own retirement after putting their kids through college. The biggest issues arise when kids get to choose whatever school they want to go to, regardless of cost and/or the expected career economic payoff after graduation.  

We recommend parents work with their financial planner or CPA to run projections, taking into account their income, expenses, assets, debts and an expected college budget to see if they are on track for retirement and paying for college. If the margin of error to accomplish both retirement and paying for college is too thin, then they should lower the budget for college and look primarily at colleges within that budget. When faced between an expected shortfall and funding an expensive college education for their kids and funding retirement, many parents choose funding college at the expense of their retirement. We think this is a huge mistake, since running out of money in retirement is worse than not being able to attend a student’s dream college. We highly encourage parents to say no to dream colleges out of their budget and not succumb to pressure from their 17-year-old child — if it means jeopardizing their own financial stability.

12) Recognize repositioning assets to maximize financial aid is probably a terrible idea.

We see many “financial advisors” advocating for dramatic asset repositioning, often times to the detriment of parents’ financial well-being. Yes, you can potentially lower your EFC by converting your brokerage assets to annuities or cash value insurance life insurance, but you’ll like pay more in fees than receive in college savings by doing so. Even worse, you could spend all those fees and effort in making those changes, but it could backfire if your child ends up going to an out of state public school that won’t give aid to out of state students or a private school that only gives loans.

There are certain cases where asset positioning might work. However, we recommend deliberate discovery on what the EFC change would be, and even run the changes through net price calculators on a few school. One of the surest asset strategies is to improve financial aid eligibility down the road by maximizing contributions to retirement plans and IRAs, since this money doesn’t apply towards the FAFSA calculation. (Here’s an article of ours on pro-active financial aid maximization strategies, including moving money out of the child’s name, paying off credit card debt, and spending the student’s fund balances first).

13) Leverage financial aid offers to save money.

When financial aid letters come in, most families either accept them and move forward, or decline them to choose a different school. This is a big mistake. In our experience, schools often low-ball parents with their initial offers. We recommend researching what the average need-based and non need-based awards are, and compare your own award against the average. Contrast the school’s average test scores against the student’s test scores. If the award is less than the average, we suggest the student directly appeal the offer in writing (not the parent). Moreover, if the offer is in line with the averages, but student’s test scores are higher than the the average, the student should appeal in this situation as well. Most people see test scores as tools to getting admitted to college, but they can be tools to save money as well.

If you have offers from colleges the target school competes with or have had a change in financial circumstances since the FAFSA was filed, we recommend you also include that information in the appeal letter. A detailed letter about a serious medical issue, a job loss, or other major change in financial circumstances could persuade the school to offer more aid.

For families that can’t pay full price for college, we recommend students avoid early decision all together and consider early action instead. For students that have applied via early decision, your chances of negotiating a better offer are probably low.  

14) Choose wisely on loan decisions.

The stakes are high when it comes to taking on debt. There’s over $1.5 trillion of outstanding student loan debt. Every $50,000 of student loan debt translates to approximately a $550 payment per month for a decade after graduation. If students save and invest that money instead, they’d have about one million dollars by the time they retire (assuming an investment return of 7.5%). We recommend that families stay away from parent plus loans, which have high interest rates and upfront fees. As a rule of thumb, students should take on no more debt than their expected first year starting income in the major at the college they choose. For most parents, we advocate not taking on more student loan debt than their gross income if they are more than 10 years away from retirement. If they are five years away from retirement, they should probably limit student debt to no more than half their gross income.

The best type of loans to take on are the subsidized loan, which don’t accrue interest while the student is in school. For affluent parents that are footing the bill for college, we recommend taking on these loans, investing the proceeds and then paying the loans off upon graduation.  


David Flores Wilson, CFP®, CFA is a New York City-based Certified College Financial Consultant & Wealth Advisor at Watts Capital. He can be reached at dwilson@planningtowealth.com.