Gary W. Pelletier, CLU, ChFC, AIF®

Northeast Planning Associates, Inc.

Corporate, Estate

& Financial Planning


College Planning – Costs of Inflation and Savings

| July 21, 2015
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From 1982 to 2012, costs of tuition, room, and board for 4-year institutions increased at an average rate of over 14% per year. This increase has been more modest recently (4.65% per year between 2007 and 2012), but still outpacing inflation by more than 2.5% per year during this time1. Based on this information, when planning for college, we use a conservative inflation rate between 6% and 7%. This is also a good place to remind you about the helpful calculators available on my website for various planning items, including college.

Now that we have a handle on the inflating cost, we might want to reconsider saving for college because that could jeopardize the ability for the child to get financial aid, right? Many people believe that saving money for a child’s college expenses means that they will not be eligible for financial aid. While college savings can reduce financial aid eligibility, the formula’s that schools use through FAFSA and the CSS PROFILE assess non-retirement assets (such as 529 College Savings Plans) at between 5% and 5.64%. This means that $100,000 in savings would reduce eligibility by approximately $5,000. Note: The vast majority of public universities use only the FAFSA to determine aid, while many private schools use the additional CSS PROFILE.

The effect non-retirement assets have on aid eligibility can be further shielded based on the older parent’s age. For example: If the older parent is married and 52 years old, the family would be able to shield $33,500 in non-retirement money (using FAFSA formula2) for a student applying for aid in the 2015-2016 school year. Assuming $100,000 in non-retirement savings, the result would be a total reduction in eligibility of $3,750 [($100,000 - $33,500)*0.564].

With costs rising at a faster rate than inflation and minimal impact of savings on aid eligibility, it more important than ever to start saving now. Let us know how we can help.

Sources

1 http://nces.ed.gov/fastfacts/display.asp?id=76

2 http://ifap.ed.gov/efcformulaguide/attachments/090214EFCFormulaGuide1516.pdf

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