College acceptance letters are out, and millions of high school seniors are eagerly anticipating the next step in their educational lives.  Meanwhile, their parents are worried about whether and how they’re going to pay for it.  After all, the all-in cost for a good private school is close to $60,000 per year and rising. 

Your starting point if the Free Application for Federal Student Aid (FAFSA).  All aid and loans begin with the FAFSA, so even if you’re confident you earn too much for a direct grant, you still must complete it.  Exactly how the data you submit translates into an aid decision is a closely-guarded secret, but general guidelines exist.

The FAFSA is based on the calendar year beginning in the student’s junior year of high school.  It looks at both current income and family savings to calculate the Family Contribution—what it expects the family to pay out of pocket. 

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In broad brush terms, the family is expected to contribute a percentage of income based on a formula:  multiply the older parent’s age by $1,000.  That amount of income is outside the Family Contribution.  Above that amount, twenty percent is included in the Family Contribution. 

For assets, your principal residence and retirement plans are exempt.  Above that, six percent of the value of your assets goes to the Family Contribution.  The Family Contribution is then divided among the number of college students you have.

This suggests some basic strategies—to the extent possible, defer income until the following year, maximize contributions to retirement plans, spend as much cash as possible during the base year (particularly, pay off consumer debt, which the FAFSA doesn’t consider). 

The FAFSA also looks at the student’s resources and earnings.  If you child has an UTMA, 35 percent of is treated as paying for the first year of college.  Similarly, if your child has a job, FAFSA will earmark a significant proportion of those earnings for college.   Interestingly, if you established a 529 plan, it is considered your asset, not your child’s. 

The FAFSA doesn’t take into account other financial circumstances—younger siblings in private school, support of aging parents, or a myriad of other situations.  So if your Family Contribution is an unrealistic number, don’t despair quite yet.

Most private schools also require you to complete the College Scholarship Service (CSS) Profile form.  Some have their own, supplemental questions.  This allows for more professional judgment in the financial aid process.

Any financial aid package you receive is likely to consist mainly of loans.  It’s no surprise that loans have their own varieties and complications. 

Loans can be federally guaranteed or private.  Some federal loans have their interest payments subsidized—these are the loans that go to the neediest students.  Further, loans can be made to the student or the parents. 

The interest rate on federal parent loans is 7.9 percent.  Compared to a mortgage, that’s unattractive.  However, this is unsecured debt, much like a far costlier credit card.  Thus, one major consideration is whether to finance college by using a less expensive home refinancing or home equity line of credit.  Only you can decide if you want to put your home on the line to pay for your child’s college degree. 

Some tax breaks may be available to help.  Start with the American Opportunity Credit, which can reduce up to $2,500 in taxes.  This credit fully phases out at $180,000 of income, and it is the most generous.

Consider alternatives to generating $60,000 a year.  Just as high school students are urged to apply to a safety school for academics, they should apply to a safety school for their parents’ finances.  Another way to make the numbers add up is to consider community college.  In New Jersey, any student in the top 15 percent of his or her high school graduating class can attend community college tuition-free. 


Note:  Claire E. Toth, JD, MLT, CFP™, is Vice President of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit. The full-length version of this article is available at: