This video was recorded on April 10, 2018.
Robert Brokamp: If you pay enough attention to the personal finance news, you’ll see that some things seem to never change. Americans don’t save enough. The current savings rate is just 3.2%. People have too much debt. For example, credit card debt is at over $1 trillion, now. At an all-time high. And the cost of college just keeps going up, often at a rate that exceeds inflation.
According to the College Board, if you were to look back 30 years to the 1987-1988 school year, tuition at a four-year public college cost $3,190 [and that’s adjusted for inflation $2,017, so $3,000]. Nowadays, it’s almost $10,000, so the cost has tripled on top of inflation, and that is just tuition. The all-in costs these days for the current academic year for a public institution — if you’re in-state — are about $21,000 and at a private school, it’s $47,000 a year. That’s the sticker price.
Fortunately, you can ideally attend at a discount through something called financial aid, and to talk about that with us today we have Brock Jolly and Tim McFillin. Welcome, gentlemen!
Brock Jolly: Thank you! Appreciate it.
Tim McFillin: Yes, thanks for having us!
Brokamp: You guys are here from TheCollegeFundingCoach.org and Brock, you founded the company. Tell us a little bit about it.
Jolly: Sure, it’s interesting. I usually tell the story that I started in the financial planning business around 1999-2000, that time frame, which I think coincides with about the time you started The Motley Fool.
Brokamp: That’s right.
Jolly: So, you remember those days, well. Think about it. In the late ’90s, what was going on in the stock market?
Brokamp: Everyone was making money.
Jolly: Everybody was making money. I always say untrained monkeys were throwing darts at dart boards and making money for people. I got into the financial planning business and then what happened?
Brokamp: People stopped making money.
Jolly: People stopped making money.
Alison Southwick: So, it was your fault. I was wondering about that.
Jolly: Alison, I always tell people it was not entirely my fault.
Brokamp: Just partially.
Jolly: The question I kept getting from parents was, “How in the world are we going to pay for our kids’ education?” You had two sets of parents. You had those who had done a good job of saving and through the .com bubble crash lost it, or those other parents where other [things] had taken priority and they just didn’t have enough money. I started to research it and, long story short, in about 2002 we started The College Funding Coach with that goal.
I figured out a few things. I figured out, No. 1, most financial advisors really don’t know this material and No. 2 is that for most families, their money was in the equity in their homes and in their retirement plans, which is great for retirement. It’s not great when you need to send one, two, three, or maybe seven kids to college. You need liquidity. You need cash flow. So, the opportunity to be able to educate parents and use that as a door opener to do comprehensive planning was a really great opportunity for us.
McFillin: And so, it was Brock’s fault that the .com bubble burst, and then I started in this business, graduating from college in May of 2008.
Brokamp: So, that was your fault.
Jolly: There’s a trend here.
McFillin: So, if you recall, everybody had recovered their losses. Everybody said, “Oh, well, the key is you have to be diversified. You can’t just be in tech stocks or you risk losing large amounts of money when there’s a crash.” Well, how did being diversified turn out for everybody in the end of 2008?
Brokamp: Every stock went down in 2008.
McFillin: Exactly. So, that was his fault and this one was my fault, but we’ve worked hard, since then, and we’ve recovered a lot of those losses.
Brokamp: Anything going on with you guys that we should know about now before the market crashes?
Jolly: We’re hiring.
Brokamp: Exactly. Someone else coming onboard with you guys.
Jolly: In the beginning, it was just me, and now we’ve got about 80 advisors around the country, like Tim, who work in our local markets to be able to bring this information to the parents in those communities.
Brokamp: Great. Well, we’re going to talk a little bit about how to pay for college, mostly in terms of financial aid, so we’re thinking about people more in high school, but hopefully we’ll be able to pass a few tips along for people who have younger kids, as well. We’re going to talk about five myths about financial aid, so let’s get to it.
Myth No. 1. “I make too much money to qualify for need-based aid, so there’s no reason for me to complete the Free Application for Federal Student Aid, also known as the FAFSA.”
McFillin: I hear this one almost every time I’m sitting down with families. We’re in the D.C. area. We’ve got a lot of families where it’s two incomes. They make a good living, but if you live in the D.C./ New York/ San Francisco market [my family lives in San Diego], your income goes a lot first to pay Uncle Sam. Then what’s left over goes to the mortgage and then the bills, and after you put money into your 401(k) and everything else, it’s hard to find those dollars, so we have a lot of very successful families that don’t feel wealthy. They feel like everybody else in their neighborhood. They don’t have extra dollars for college and they think, “I don’t know what we’re going to do, but there’s no point in me completing a FAFSA. My family income is over $200,000. What’s the point?”
People are forgetting that there’s some very valuable assets, if you fill out the FAFSA, because you are eligible to receive the unsubsidized Stafford loans from the government. These are very unique loans that no private bank is going to offer a 17-year-old student that has no credit history. These loans are typically lower interest. Usually if it’s for an undergrad, it’s 4.45% interest for an unsubsidized Stafford loan. Unsubsidized just means you’re going to accrue interest while your student is in college. If you have a lower income, then you can get the subsidized ones which, again, have the same interest rate but don’t accrue interest while the kid’s in college.
Here’s the thing. If you kid takes out the Stafford government loans that pretty much anybody’s going to be eligible to get regardless of family income, they may end up graduating with anywhere from $25,000-30,000 of debt. But, if they graduate and they get a low-paying internship job [maybe the pay is $30,000-40,000 and just barely enough to make bread and buy ramen noodles], they can do an income-based repayment with early pay and 10-15% of their discretionary income. That’s defined as income earned over about $22,000.
If your income is $30,000 as an intern coming out of school, you’re not going to have to pay a whole lot on your student debt regardless of the amount. And then as your income rises, and you get to a better, higher-income position, you can afford to pay that debt back.
Or, if you’re like my stepsister who got an engineering job right out of college and is making $7,000 a month as a 22-year-old, the debt that she had she could pay off within a year or two because you’d go from being a broke college kid and all of a sudden having money, and she’s going to be in a great financial position. So, whether or not you make a good income out of school, when you have government loans, even if it’s a small amount, those have income-based repayments, they’re flexible, and can work no matter what the situation is. If you go to graduate school, you may also be able to defer some of those loans, as well.
I would say that’s the most important reason that families should do that, because you’re never going to get offered a loan that’s that good of a deal for a student, really, until graduate school and for graduate school those interest rates are much higher if they’re unsubsidized Stafford loans.
Jolly: I’ll give you a great success story. We had a family a few years ago that, like Tim was suggesting, never would qualify for need-based aid on paper, but we recommend to all of our parents, at least in the freshman year of college, to fill out that FAFSA. You might not get anything, but it’s important to do it because you might get something.
In this example, she went to what, at the time at least, was the No. 1 public high school in America. She was a good student. They regularly send about 100 kids to the Ivy Leagues, and she really wanted to go to a school called Harvard. The problem was Harvard really didn’t want her to come there. She loved Boston as a college town, and long story short, she ended up going to Boston University.
One weekend I think Dad was bored. Dad filled out the FAFSA. Long story short is she ended up getting a $19,500 Presidential Scholarship based purely on merit — based on her GPA and her test scores — that she never would have gotten had they not completed the FAFSA. Think about it. The schools want to make sure that you’re not eligible for some of the federal money like Tim was discussing before they give you their money. It was not need-based aid. It was merit-based aid that she would not have gotten had they not completed the FAFSA. So, always complete it.
Brokamp: For families who are curious about whether they would get need-based aid, how can they figure that out? On the internet there are calculators that calculate what’s known as the Expected Family Contribution. Do you recommend that people do that? Are those accurate?
Jolly: Absolutely. It’s the line in the sand, and it may not get you to the penny accurate, but it will get you pretty close. And there’s two formulas. You mentioned earlier the FAFSA [Free Application for Federal Student Aid], and what’s interesting is every single college and university in the country requires the FAFSA.
There’s a list of [I think the number is 226] schools that also require a form called the CSS Profile, and that’s going to dive a little bit deeper. It’s going to figure out some of the questions that maybe the FAFSA doesn’t ask. Things like how much money do you have in your home equity and in your retirement plans, and that sort of thing. It tends to be the more elite, more selective schools. There are seven public schools that also require it.
You want to know as you go into it what forms your school requires. But what’s really important is you draw that line in the sand. Figure out the rules of the game. Figure out whether you’re going to be eligible for need-based aid, and it may vary school to school, meaning you may be eligible for need-based aid at one school and not at another based upon the cost of attendance or the sticker price at that particular school.
If you go onto our website, which is just TheCollegeFundingCoach.org, in the upper right-hand corner there’s a big red button. You can click that, and you can calculate your Expected Family Contribution. That’s your starting point to determine if you’ll be eligible for need-based aid. If so, we’re going to take this path. Or you’re never going to be eligible for need-based aid, in which case we’re going to take this path.
Brokamp: One quick question about the FAFSA before we move on. What year is that based on? If you are, let’s say, a high school freshman, at what year do you look at in terms of your net worth and income to [know] what’s going to be figured into the FAFSA?
McFillin: Great question because this is a recent change last year. Now if you’re a senior in high school, you can start completing the FAFSA on October 1st. It used to be January 1st. If you’re a senior in high school in the fall, and you fill it out on October 1st, they’re going to look at your tax returns for your parents from the previous year. You’re essentially looking two years back from when you start freshman year.
Jolly: In other words, if you’ve got a child who would be a junior now and therefore a rising senior in the 2018-2019 school year, they’re going to complete that form in October and they’re going to look at income from 2017 to determine that. They look at the assets as of the day that you complete the form. So, it’s income from what they call the “prior- prior” year. Assets as of the day that you complete the form.
McFillin: Right. So, if you hypothetically have an 11th grader in spring…
McFillin: Hypothetically right now…
Brokamp: That’s me, by the way. I have an 11th grader.
McFillin: If you’re looking at some great Virginia schools like UVA and Virginia Tech, you’re going to want to complete that FAFSA on October 1st, because not only is it going to get the ball rolling quickly, but some scholarships are first come, first served. And some institutions, if there’s early admission, want to see it early and often.
If they see that you’ve completed the FAFSA, there’s a lot of stuff I’ve read that says that admissions officers are more likely to even accept you, because it shows that you’re a little bit more committed than somebody that’s not even completing the FAFSA. It probably means you’re not that interested in the school and they don’t want to send an acceptance letter if they think there’s low probability of you considering it strongly.
Jolly: Just a quick point on that, too. Most schools are need-blind. There are schools out there that are not need-blind. I’ll give you an example. We’ve got a family that we work with. Mom and Dad were making a little over $1 million a year. We said to complete the FAFSA, and the reason is those schools know definitively, beyond a shadow of a doubt, that they will never need to tap the resources of the financial aid office to help pay for or subsidize that child’s education. In other words, Mom and Dad are making great money. And by the way, they also may like that for future endowment purposes and things like that. Maybe this child will inherit some money. That sort of thing.