Ann Garcia: How to Pay for College

Our guest on the podcast today is Ann Garcia. She is a certified financial planner and the author of the book How to Pay for College. Garcia is the managing partner of Independent Progressive Advisors, a fee-only Registered Investment Advisor in Portland, Oregon, and she’s also the author of The College Financial Lady blog. She received her bachelor’s degree from the University of California, Berkeley.

Background

Bio

How to Pay for College, by Ann Garcia

The College Financial Lady blog

College/Rankings

“The Big 6 for Well-Being in College and Beyond,” by Ann Garcia, howtopayforcollege.com, June 7, 2022.

U.S. News & World Report Rankings

CollegeData

College Navigator

Financial Aid

“Student Loan Options,” by Ann Garcia, howtopayforcollege.com.

“FAFSA Resources,” by Ann Garcia, howtopayforcollege.com, Oct. 1, 2021.

“The CSS Profile,” by Ann Garcia, howtopayforcollege.com, Oct. 12, 2021.

Gallup-Purdue Index Report

Federal Student Aid Estimator

“Student Loans: The Good, The Bad and The Ugly,” by Ann Garcia, howtopayforcollege.com, Dec. 17, 2020.

College Costs/Savings

“Prepaid Tuition Plans,” by Ann Garcia, howtopayforcollege.com, June 21, 2022.

“Net Price Calculators,” by Ann Garcia, howtopayforcollege.com, Jan. 18, 2022.

“Choosing a 529 Plan,” by Ann Garcia, howtopayforcollege.com, Dec. 15, 2021.

“Budgeting for College Applications,” by Ann Garcia, howtopayforcollege.com, Sept. 30, 2021.

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning at Morningstar.

Jeff Ptak: And I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Ann Garcia. Ann is a certified financial planner. She’s also the author of the book How to Pay for College. She’s the managing partner of Independent Progressive Advisors, a fee-only Registered Investment Advisor in Portland, Oregon. And she’s also the author of The College Financial Lady blog. She received her BA from the University of California, Berkeley.

Ann, welcome to The Long View.

Ann Garcia: Thank you for having me.

Benz: Thanks for being here. We want to talk about your book, How to Pay for College. In the book, you relate an experience from your advice practice. You were working with an attorney. She wanted to change to a less stressful career path, but she couldn’t because she owed massive amounts of student debt. Can you discuss how that was one of the events that sparked your interest in wanting to focus on helping people make smarter decisions about paying for college and other types of higher education?

Garcia: I would say, she was an extreme example of people that I was talking with. But at the time that I had the conversation with her, and this was a woman who had gone to law school, she had taken out student loans for her undergraduate years, taken out student loans for her grad school years, she had federal loans, she had private loans, and she had even borrowed money from her family. And was really not happy as an attorney and wanted to make a career change, but she was absolutely stuck because of all of those loans. And like I said, she was an extreme example of someone I worked with. And ultimately, our plan was around planning for future insolvency for her, which is when she got to the end of her student loan debt and would have those loans forgiven, that she wouldn’t have to pay taxes on it because she would be insolvent in the IRS’ definition where your debts far exceed your assets and your ability to pay them.

And again, while she was an extreme example, I was talking to lots and lots of young adults who were coming in and interested in making plans but had so little free cash flow after their student loan payments that they were struggling to start a retirement account or even have emergency savings, to say nothing of buying homes or doing all the things that we think of as the standard building blocks of adulthood. And at the same time, there was another group of people that I felt like I was hearing from a lot, and those were parents who were struggling to figure out how they were going to pay for their children’s educations and putting it as a very high priority overall in their goals but not really having an understanding of how they were going to come up with the dollars to do it.

So, I realized that if I could help that group of parents that maybe I could reduce the number of those other young adults that I was talking to. But I would say the attorney really made it very tangible. I knew there were people out there who owed all these student loans. But sitting across the table from this woman and seeing the sense of hopelessness that she felt as a result of getting a great education was very life changing to me, because to me, education has always been a building block of opportunity, of adulthood, and to see that it was completely the opposite for her made a huge impression on me.

Ptak: In the book, you wrote that when it comes to college, no outside entity will protect you from making a terrible financial decision, and then you go on to note that you couldn’t get a mortgage for a house you could never afford, but nothing stops people from borrowing more for college than you can pay back. Why are there fewer guardrails around college outlays, do you think?

Garcia: It’s a great question. On the one hand, the federal student loan programs for students do have some pretty strict guardrails, but nothing prevents students from going and getting additional loans on the private market or parents from taking out parent PLUS Loans. And we as people tend to think that what our children want and need, and particularly the best possible version of that, is worthy of every penny that we have. And, unfortunately, no one will stop you from taking out these loans.

The way that the direct student loan, which is the loan that undergraduate students can take, is structured is, it’s the one loan that an 18-year-old can take without a co-signer, without any kind of credit history and still get a very favorable interest rate. And so, that opens up all these other issues that don’t exist in normal loans. There is no qualification for that loan other than filing the FAFSA. I firmly believe that if there were less loans available to parents, the cost of college would be much lower than it is, because I think that making all those additional dollars available and having an audience that’s willing to spend that kind of money has a huge impact on driving up the cost of college.

Benz: We want to spend some time on deciding whether loans are appropriate and also the FAFSA that you referenced, the application for financial aid. But before we get into the weeds a little bit in college funding, I want to hear about your own experience with this. You wove that in a little bit into your book. You went through the application and college-funding process not too long ago with your twins. So, I’m curious, what were some of the biggest surprises for you, a college-funding expert, as you went through that process with your two children?

Garcia: A great question. There were definitely plenty of them. As much as we can learn—we always learn there’s plenty more out there that we don’t know. So, I have twins who are currently college seniors, and they’re very, very different students. So, their two college application processes were very different. I think to me, one of the biggest surprises, given that I’m a really analytical person and I took a really analytical approach to college and encouraged my kids to see it the same way, I was surprised at how different the responses that they got from different colleges were.

So, for example, my son applied to two colleges. He applied early action to both, which is where you submit your application early, you get an answer early, but you have until the regular decision deadline to make a decision. One of the colleges replied instantly to him with an acceptance and a big scholarship offer and sent him stickers—put one on your laptop, put one on your phone. He was getting emails multiple times a week. Something would come in the mail periodically. And it was just crickets from the other school. And I thought we were going to receive two acceptances and two award letters on roughly the same schedule and be able to sit down and deliberate our way through them. But instead, he was getting this marketing onslaught from one of the colleges and hearing nothing from the other. And for a 17-year-old it was like, oh, somebody likes me and somebody else doesn’t. And it was a very challenging, emotional side of the college application process to deal with.

I think one of the really important lessons for me in going through this with my own kids is that planning for college is equal parts financial planning and parenting. Making sure that your kids understand the process, understand the budget, understand the priorities and what they’re trying to do and that you’re putting some guardrails around their decisions and around their exploration so that you can help them and coach them to good decisions in that process.

I think another big surprise for us was the number of colleges that use unweighted GPA to award merit scholarship. As you go through high school, the schools really encourage students to take higher-level courses, AP/IB, dual credit, whatever it is that the high school offers. That tends to be presented as the best choice in every circumstance. We learned from my son’s experience, where he took a lot of those classes and really struggled in them, they weren’t a good fit for him as a student. So, we were disappointed to see that the college that he chose awarded scholarships on the basis of unweighted GPA. And if we had not pushed him into all these higher-level courses, he would have been eligible for about $12,000 a year more in merit scholarships. I’m not going to say you shouldn’t challenge yourself academically or you shouldn’t take the hardest courses that are available to you. He certainly felt well-prepared as a student when he got to college. But having an extra $48,000 left over because of bigger scholarships would have been a real difference-maker for our family.

Ptak: I think you mentioned your twins are, in addition to being different people, they’re different types of students. How did you approach the college process differently with each of them?

Garcia: I was fortunate that they both wanted different things from the college process. My daughter, we felt, was a really good fit for a private college, a smaller environment, and she was very committed to not going to college around home. And so, we went out and did the whole college tour where we went and visited a whole bunch of colleges. We talked a lot about budgets and funding, because obviously, those were for the most part quite a bit more expensive than our in-state schools. But very much encouraged her to explore those options. One of the things that you find is that just the costs are so different across the board in colleges, and if you’re willing to use cost as one of the lenses that you’re looking at for college, you can find a lot of different opportunities. So, with her, we really explored a range of opportunities and saw that college was available to her at a range of different prices. And we were fortunate that her top choice school accepted her with a great financial aid package, but that involved writing a lot of essays, doing a lot of applications, applying for a lot of different scholarships so that she could close the gap between our budget and some of the colleges that she was interested in.

Our son, on the other hand, was I would say, a very typical boy. He thought school was OK. But he liked sports. He liked having a job. He liked having a girlfriend. So, high school was one of several priorities. And for him we sort of jokingly said, we’ll put as much effort into paying for college as you put into being successful in high school. So, his budget for college was what it would cost him to stay in state. We said, you can probably find some other alternatives besides this, but this is really what the budget is. And he was fortunate to find another option that had a scholarship just for someone like him.

But with my daughter, we used an essay coach to help her with her applications because there were just too many essays that she had to write. We joked it was our winter break vacation insurance just to have somebody else make sure that all got done. We had her do some test prep classes because she was applying to highly selective colleges. She took a full suite of IB classes in high school. With our son, it was the complete opposite. There was an after-school ACT prep class that was free at our high school that he signed up for. He applied to two colleges. He got into both and was perfectly happy with where that ended up.

I will say too now that they’re seniors and they’ve both gone very, very different paths in college, they have each accepted a job for when they graduate, which are virtually identical jobs but for the particular fields of study that they’re in. So, two important points there. One is, everyone can find a path that works for them. And two is, going to a highly selective school versus a highly not selective school does not have a huge impact on what the actual outcomes that the student should expect are.

Benz: I wanted to ask about that, Ann, because the data are fairly clear that going to college delivers a payoff in terms of lifetime earnings and so forth as well as something you talked about in the book: health and maybe even happiness. But where you go, what do the data say about that in terms of outcomes, life outcomes, earnings? The highly selective schools versus less-selective schools, what do we know when we look at the data on that?

Garcia: The data is pretty clear on that where you go to school really is not what’s going to determine who you are as an adult. You can look at big surveys. You can also look at things like where the Fortune 500 CEOs went to college. And the college that produced the most Fortune 500 CEOs is not Harvard, it’s not Stanford; it’s Texas A&M. Every year Rhodes scholarships are announced right before Thanksgiving, and the students who are selected represent an incredible diversity of undergraduate institutions and clearly not just the Ivy Leagues.

There was a great research project that was done a few years ago called the Purdue-Gallup report. In this survey, they surveyed adults who self-rated as successful. So, it’s not we’re only talking to people whose incomes are above X, but we’re talking to people who are themselves successful and satisfied with their lives. And it was all about figuring out how college had informed that success. What they found was there was no correlation whatsoever between what college they went to, what type of college they went to, or any of those “which college” questions about it. Really their success came down to specific experiences that they had in college. So, they were things like feeling like their professors cared about them, being able to apply what they learned in the classroom to the world at large, participating in extracurriculars, finding mentors who could help them explore life paths and whatnot. And I would say, my experience as a parent has been that both of my kids found environments where they engaged and really made the most of their four-year college experience, which is what has led them both to great career paths coming out of two really different colleges.

I encourage parents to think about why college as opposed to which college. So, there are lots and lots of good reasons for students to go to college—higher lifetime earnings. Your typical college graduate will make about $1 million total over their lifetime more than those without a college degree. Unemployment rates are much lower. But there are tons of noneconomic benefits to going to college as well. There’s lower heart disease and type 2 diabetes among college graduates than nongraduates. College graduates marry at higher rates and divorce at lower rates than noncollege graduates. So, there are all sorts of halo effects of getting a college education, none of which is dependent on which specific college you went to.

Ptak: But it will cost you, and that’s something that you talk about in your book, in which you note that the cost of attendance at public universities and private colleges increased by nearly 500% between 1986 and 2016. What are the key factors that has led the college inflation rate to be so much higher than the general inflation rate for the past several decades?

Garcia: It’s hard to point to one specific thing. It’s really a cluster of factors. You could talk about declining state funding, you could talk about increasing administrative costs and not just highly paid college presidents, but also the whole suite of support services that have been deployed across colleges to make sure that kids graduate in four years and move on to productive places in the world—nicer dorms, nicer facilities, upgraded labs, all kinds of things. I personally think that a big reason why the cost of college has gone up so much is that so many people are willing to pay the full price of college. As much as I talk to people about finding scholarships, finding ways to reduce their cost of college, budgeting for college and being realistic about what college costs, the number of people who go into the college application process expecting to pay full price for their child to attend a private school is absolutely mind boggling. And I firmly believe that if we all just decided we weren’t going to pay $80,000 a year for college, college wouldn’t cost $80,000 a year.

Benz: Well, I’m curious, Ann, who’s paying the full freight?

Garcia: Lots of families. Looking at the most selective colleges, anywhere between a quarter and a third of families are not even filing the FAFSA at all. So, they’re going into that expecting that they will pay full price. In my practice, I regularly talk to parents who say, “I know this college costs $75,000 a year, but it’s just perfect for my child and I really want to make that happen.” And it’s shocking to me. There is a large body of people out there who do believe that paying full price for college is perfectly OK.

Fortunately, it’s not the majority of people, and as a result, to fill the rest of those seats at the college, colleges are forced to discount tuition pretty substantially. One of the things that I pay attention to is what’s called the tuition discount rate, and that’s the average rate at which colleges discount their tuition. That rate is actually higher than 50% right now, which means that for every $1,000 of tuition that’s charged, less than $500 is paid. That does not mean that you will pay half of what list price is, but that does mean that if you are willing to look for colleges that offer scholarships for students like your child, you will find them. And in fact, the average net price of college has been pretty flat since the Great Recession, which means that, although published list prices are going up by about 6% a year, the actual amount that people are paying has stayed pretty flat.

Ptak: What role do you think a student’s anticipated career path, to the extent they have one, should play in determining how much to spend on college and whether to take loans to cover it?

Garcia: That’s such a good question because I know there’s that adage of don’t borrow more than your anticipated first-year salary. I would say to that 50% of students go into college undeclared and about 75% change their major over the course of their college career. So, it’s a little bit risky to say, “I’m going in as an engineer and engineers make $75,000 a year average starting salary. So, I’m fine to borrow that much and therefore, I’m going to choose XYZ college as a result.” You may end up being an engineer, but you also might not. And so, making a financial commitment on that basis is, I think, really unwise.

Again, this is me speaking as a parent. I feel like kids are under a lot of pressure when they’re in high school to know what they want to be and to know what their major is going to be and to treat college as a four-year pathway to a career versus an opportunity to really explore broadly. So, to the extent that we are coaching our kids that that’s what they should be thinking as a 16, 17-year-old when they have very little experience or visibility to the world of careers and in particular, a lot of those higher-paying initially fields like engineering, where they, again, don’t have a whole lot of direct experience with what that job looks like, what those courses look like, I think that’s really quite risky.

My recommendation to parents is always that they stick within the limits of the federal direct student loan program for their borrowing. Students who take out that loan every year will graduate from college owing somewhere upward of $27,000, depending on interest rates and how much interest has accrued, and that translates to a monthly payment of around $325 a month for 10 years. That’s an amount that a college degree will almost always cover. In fact, very few students who earn a bachelor’s degree and take out federal direct student loans, very few of them are among those groups of people who really struggle with student loans.

Benz: You talk about that in the book, Ann, who is struggling with student loans. Can you characterize those individuals? What sorts of decisions they’ve made? What sorts of career paths they’ve chosen, and so forth?

Garcia: Absolutely. I feel like, if you listen to the news, you think taking out a student loan is a one-way ticket to the poor house. And for a lot of students, student loans are the difference between going to college and not going to college. So, there’s definitely a universe where that’s an OK decision, and to me, that’s those students who take out that direct student loan and graduate with a reasonable amount.

The people who are really struggling with student loans fall into three categories. One is people who go to graduate school. With graduate school, you can borrow up to the full cost of attendance. Many students go into graduate school still owing on their undergraduate loans, and they end up like my attorney/client from years ago where the interest keeps accruing on those loans while they’re in college, and they graduate owing well into the six figures. We tend to think of doctors and attorneys when we think of those people with tons and tons of student loan debt and say, well, they’re going to have careers that will allow them to pay it off. But there are an increasing number of career paths that require advanced degrees. Social work, physical therapy in many states requires a doctorate, veterinarians. All kinds of career paths that don’t have anywhere near the salary expectations of doctors and lawyers and there are loads and loads of people who are in well over their head on student loan debt from graduate school.

Another group is people who go to college, take out loans, and then don’t graduate. So, those are people who have that student loan debt but don’t have the earnings power that goes hand in hand with having earned the degree. The third group is people who attend for-profit colleges, and those are the colleges that you hear about in the news for their predatory lending practices, they might be schools for massage therapy, or cooking schools, or places where you go to get a technical degree, where in many cases, the degree that a student earns from those colleges is not worth the paper that it’s printed on. Nonetheless, they’re allowed to take out student loans to go there, and they come out fortunate to be able to find minimum-wage-level work, but with oftentimes graduate-school-level student loan debt.

Ptak: What’s your take on whether parents should take on debt to help pay for their kids’ college? Do you think that’s ever a good idea?

Garcia: There are very limited circumstances, I would say, where that makes sense. I generally try to discourage it because most parents are in their 50s when their student comes out of college. And if you come out of college in your 50s with student loan debt and maybe still having a mortgage and trying to make your retirement catch-up contributions, something is going to fall by the wayside. I just feel like the timeline for parents to pay off student loans is really not favorable.

There are a few instances where that could make sense. For example, a parent who’s much older. I had a client whose dad was 71 when the daughter went off to college. The family didn’t have a lot of money. But because of quirks in the FAFSA formula, they weren’t eligible for the financial aid that they should have been eligible for. And in their case, what they ended up doing was having dad take out Parent Plus loans for college, get into an income-based repayment program, defer the loans as long as possible. And he’ll make a payment of about $60 a month for the rest of his life and then those loans will retire with him.

Another group of parents who might consider taking out loans are parents who are eligible for public service loan forgiveness. So, for example, a parent who’s a teacher or who works for a nonprofit, Parent Plus loans can actually be consolidated into direct consolidation loans, and then the parent can get into the income-driven repayment program and then make payments for 10 years and have the loan balance forgiven. It can be a bit of a risky strategy because the parent needs to be sure that they have at least a 10-year career path following their child’s graduation, so after they are able to consolidate those loans and go into repayment and get that forgiveness. Because otherwise, they’ll make income-driven payments and then be stuck without the forgiveness and with the larger balance that goes along with that.

Sometimes for parents who are quite young, it can make sense just because they haven’t had the earnings power maybe over the course of their child’s lifetime to save in high amounts. Sometimes families will talk about strategies that they might use, like a lower-income family, where the grandparents have a bunch of money and would be willing to help the student with college but taking that help might impact their financial aid. Sometimes those families will have the parents take out loans and the grandparents repay them once they’re graduated. But by and large, the direct student loan for students is really the best place to go for borrowing. And I tell parents too that even if the parent intends to be the one paying for college and being the one paying for the loan, it should still be the student who takes out the loan. There’s a couple reasons for that. One is that the direct student loan has the lowest fees and the lowest interest rates of all the federal loans. Another is that the student is more likely to be at an income level where their student loan interest could be deductible, and that could be roughly equivalent to one month’s payment every year, and it can help the student to build credit as well.

Benz: I want to stick with parental finances for a second longer. A perennial issue in households where parents have children is how to balance their own retirement savings alongside saving for college. I know there’s always that visceral pull on the part of so many parents to send their kids wherever their hearts desire. But what are practical strategies for parents balancing those two expensive financial goals?

Garcia: It’s such a good question and it’s such a delicate balancing act too, because as you’ve seen, for a lot of parents, college is such a tangible thing and retirement is this very nebulous far off, I don’t know what that looks like, I don’t know what I want to do.

Benz: Right.

Garcia: But I do know that I want my kid to go to college in 2031. So, a couple of things. One is, I think, that we as advisors need to step away from the two most common pieces of advice that we give—one is, don’t save for college; save for retirement. You can take out loans for college, not for retirement. That’s how we ended up with a trillion dollars in outstanding student loan debt. But the other thing that advisors tend to tell families is, “You want your child to go to private school, well, private school costs $80,000 a year. Inflation rate of this, times four years. That means you need to save $2,000 month every month if you want your child to be able to go to private college.” That doesn’t work for families either. So, there needs to be some sort of middle ground.

My recommendation is this: If you don’t have emergency savings, you don’t have college savings. Emergency savings should always be a family’s first priority. Families who are saving for retirement but not maxing out retirement shouldn’t contribute more than 10% of what they’re putting toward retirement into college. So, if you’re saving $10,000 a year for retirement, you should not save more than $1,000 a year for college. If you want to save more for college, then save more for retirement in addition and move those two up together. Once parents are maxing out on retirement savings, then they have more flexibility to add to their college savings. The things that families can do if they’re really not able to contribute as much as they’d like to to savings—most 529 plans have a gifting page that you can share with family and encourage them to be making contributions to that account. I also encourage families to every year on their child’s birthday look at their budget, think about who their child is becoming and who they want them to become in the future and use that as an opportunity to bump up their savings rate, even if it’s by $5 a month. The more savings you have, the more choices your child will have. There are loads and loads of pathways through college at whatever amount of savings a family has. So, certainly, if you’re not saving $2,000 a month, you have not eliminated the option of going to private school. And I say that as a parent who never contributed more than a couple of hundred dollars a month to my kids’ 529s and whose daughter is going to graduate from the world’s most expensive private college debt-free in June.

Ptak: Speaking of 529s, I think you think the 529 college savings plan is the best option for saving for college. But there’s a lot of confusion about the interplay, how savings affects financial aid eligibility. What do people need to know about that?

Garcia: And that is, I think, such a big fear for parents that if I save, I’m going to lose out on financial aid. Savings have a very negligible impact on financial aid eligibility. So, there are four components to the FAFSA’s formula for calculating expected family contribution or student aid index. It counts the parents’ income, the parents’ assets, the student’s income, and the student’s assets. The parents’ income is by far the biggest piece of that, simply because of how the formula counts the parents’ income. Any nonretirement savings that the family has, and that includes money in your checking or savings account, it includes taxable brokerage accounts, it includes 529 accounts for all the family’s children. Those are assessed at 5.64% of their value, which means that every $1,000 you have in savings costs you $56 in the financial aid formula. That puts you ahead by $944. So, yes, it will cost you a small amount in financial aid, but it will open up a world of additional choices to your child to have some savings.

Benz: I’m curious, Ann, are there any ways to think about your own household financial picture as you’re embarking on this FAFSA, which you think is really important for everyone to fill out? Any hacks that you can share to make yourself look better on FAFSA?

Garcia: So, I would say, filing the FAFSA is a lot like filing your taxes. If you wait till April 15 and just fill out the form, you’ll probably end up owing a little bit more than you would have if you had thought about it may be back in October and made some plans. The FAFSA works the same way. So, as I was saying, the biggest piece of the formula is the parents’ income. The biggest place where people put attention is the parents’ assets and that’s mostly because the assets are the only thing you can do anything about when the time comes to file it. The FAFSA uses what’s called prior year income, which means when you file the FAFSA in the fall, you’re using your most recently completed tax return, and it’s for the education year of the next year. So, it’s 2023. If I’m filing the FAFSA in the fall of 2023 to start college in the fall of 2024, I’m using my 2022 income tax return. So, that is the year that starts Jan. 1 of sophomore year and goes through Dec. 31 of junior year.

There are really limited things you can do to hack the FAFSA, game the FAFSA because of how the formula is structured. I think if you went to your manager and said please don’t pay me my December paycheck in January, please can I have that in December? Can I have that in January instead? They would say no, sorry, that’s not that’s not going to work. The biggest subtraction from your income that you have is how much you pay in taxes. So, families who are eligible for need-based aid might choose to pay more taxes in a year that counts for the FAFSA and that could mean switching your retirement contributions from pretax to Roth. That could mean pushing tax deductions into other years if you itemize. That’s really the biggest way to influence the FAFSA.

If you’re someone who has an inherited IRA where you’re taking lifetime distributions, you might increase those distributions in the years before your FAFSA income years in order to reduce the amount of distribution that you have to take in those FAFSA years. People tend to think that, oh, if I put more money into retirement, that will help me. The FAFSA doesn’t use adjusted gross income. It uses total income. So, it has you add back all of your pretax income sources. A lot of families are given the guidance that they should use a Roth IRA instead of a 529 to pay for college because they don’t report that Roth IRA as an asset on the FAFSA. The problem is that when you take the money out, you do report it as income. And every incremental dollar of income is assessed at $0.47 of its value, whereas every incremental dollar of assets is assessed at 5.6% of its value. So, not really a ton of hacks for families who have W-2 income other than putting more tax dollars into their FAFSA income years.

One thing that families tend to overlook is that student’s assets are also part of the formula. And with wages having risen as much as they have in the last few years, students often earn a lot of money over the summer—if they’re making $15 an hour working 30 hours a week for 10 weeks, that’s a pretty good amount of money that might be in their bank account still when the time comes for them to file the FAFSA. I always encourage families if the student has money that is money that’s intended for college, they can put it in the parents’ 529 and then it’s treated as a parent asset where it’s less heavily weighed in the formula.

A better strategy than trying to game the FAFSA is to first figure out if it’s even worth it. And the Department of Education has a tool on their website called the Student Aid Estimator. With a Student Aid Estimator, you can enter your family’s financial data and they’ll give you an estimate of what your expected family contribution or student aid index, which is what it will be called starting this year, what that is. If that number is higher than the cost of college, then you are not eligible for need-based financial aid and you don’t need to get into a whole bunch of games around how to file; what you’re going to do to make yourself look better on the FAFSA. Most families aren’t in that threshold. So, it certainly makes sense to do what you can to make yourself look better on the FAFSA. The other thing is, assets are a piece of it. Again, because they count for so little, you have to do some pretty big things to make them make a difference. A lot of people seem to think you have to file the FAFSA on Oct. 1. I usually encourage people to pay all their big bills before they file the FAFSA—any money that’s going to get out of your account anyway, you might as well do it before you file. So, if you can pay your property taxes before you file, if you can make an early mortgage payment. Definitely wait till after you’ve paid your mortgage and your credit card. But a lot of that really is nibbling around the edges.

Ptak: I know you said there aren’t a lot of hacks, but that was very, very educational. Thanks for that. I did want to ask you about scholarships. You note that merit scholarships are the primary means of tuition discounting. Are those based exclusively on the student’s test scores, academic performance, and other personal qualities, or do FAFSA and the family’s financial wherewithal come into play in that area too?

Garcia: It depends. There’s such a range of scholarships. To give you an example of the range of scholarships, my son has a scholarship for playing video games. Yeah, for video games, not for academics or anything else. There are some merit scholarships that have a need-based component to them. So, even families who don’t think that they’re going to be eligible for financial aid should be filing the FAFSA, because sometimes that’s a requirement to be considered for a scholarship that is a merit scholarship. By and large, the merit scholarships are based on grades, to some degree on test scores, that depends a lot on the college right now, or because the student has some other attribute that the college is interested in, such as being a good video game player.

Or alternatively, for example, a lot of the smaller private schools take a lot of pride in having students from every state. You might be the only student from your state who’s applying there, and they’re going to really want to make sure that you actually enroll and attend so they can keep saying that. Obviously, that works better for those of us from smaller states like Oregon than those of you from larger states like Illinois. But if you draw a 200-mile radius around your house and start looking for colleges that are outside that 200-mile radius, you might find that you are getting more scholarship offers than you think you are. But the majority of merit scholarships are done on the basis of grades, and the reason for that is that colleges want to attract higher-performing students because that makes them look better in the U.S. News & World Report Rankings. So, families who want to find where their student might be eligible for scholarships, there are great websites like CollegeData and College Navigator that will show you median 50 percentile GPAs and test scores for the current freshman class so that you can see if you’re above that range, you’re probably going to be eligible for a merit scholarship if that college offers merit scholarships.

Benz: You referenced those U.S. News & World Report Rankings. Can you discuss the interplay between these merit scholarships and schools’ rankings there?

Garcia: So, in case anybody still tracking, Rick Singer just got sentenced to prison. That was the guy who helped people fake their kids’ resumes and transcripts and test scores. So, the thing with the U.S. News & World Report Rankings is, colleges want to do better at them, and they want to move up in the rankings, and they use merit scholarships to attract students who will help them move up in the rankings. One of the rankings criteria is the caliber of the student body in that space, primarily now on grades, secondarily on test scores. There’s been an adjustment in the test score component of it where it used to be that colleges were downgraded if more than 10% of their students did not submit test scores. They’ve changed that. So, now, it’s if more than 50% of your students don’t submit test scores, they do get downgraded in the rankings. But U.S. News Rankings are a huge issue for colleges because so many families use them to say, oh, College X is better than College Y. And so, merit scholarships are the primary tool that colleges use to attract the students who will help them to move up in the rankings. And that’s why if your student has a GPA that’s in the upper quartile or the top quintile of the student bodies, they are probably someone that college would like to enroll.

Benz: I wanted to follow up on that, Ann, because this has come up with several of my friends’ kids where they have this conundrum about whether to reach for the higher-cost prestigious school versus going to the somewhat less-prestigious school that is much less costly because it’s awarding a lot more merit-based aid. So, how should students and their families approach that issue?

Garcia: It’s such a good question and it’s such a tough area for parents to navigate. I would say that as a society we have a tendency to equate cost and exclusivity with quality. And yet, you look at college and it’s a very subjective experience. When I look at my own two kids who are twins, each of them is thriving in the environment that they’re in, and each of them is thriving in an environment that’s very different from where their twin is. And I don’t think that either one of them would be successful if they were to change places.

I think it’s really important for parents to focus on what environments—academically and socially and financially—what types of environments is there student likely to succeed in? One of the things that my daughter loved about her college when we went to visit it, is they said, every dorm is divided into houses, so you have a small group of around 100 students who are in your house, and every house has its own table in the dining commons where they sit to each. And she said, oh my gosh, not having lunch table drama would be so amazing. My son wanted the big college, football Saturdays’ experience. He craved the anonymity of a big school after toiling in the shadows of his far more academically successful sister for the previous 18 years. I think success is so subjective. Going back to that Purdue-Gallup study, where is your student going to engage, where are they going to find mentors, where are they going to find projects that fit for them? Those are the things that lead to success, not the name on your diploma. College makes you a more educated version of yourself. It’s not what creates yourself.

Ptak: We asked you about hacks before. We’re going to try again. Maybe you can share some hacks that high school students and their families should consider to improve their eligibility for merit scholarships.

Garcia: I think, the best thing for students to do is to look close to home. Have that be your starting point. Every college and career center has a big list of scholarships that are available to you. So, this is looking at the outside scholarships for merit scholarships. So, look at those, talk to teachers, talk to coaches, ask them what scholarships you should be looking at. On the institutional side, a really great starting point is looking at your in-state colleges and seeing what their merit awards are and what criteria they’re granted on. So, we always think of merit scholarships as being part of the private school landscape. They’re also a big part of the public school landscape. Look at what scholarships are offered and who gets them. Typically, at public schools, there are a range of scholarships that you will automatically get as long as your GPA is above a certain threshold. So, look at that. Look at that early in your high school career so that you are tracking toward that GPA, so that you are choosing your courses on that basis. It was a big learning to us that a lot of schools use unweighted GPA in awarding scholarships. And had we looked into that a little earlier, we would have gotten a lot more scholarship dollars.

The other thing to look at is many colleges have additional scholarships above and beyond that. So, the good news is, simply submitting your college application and your FAFSA and CSS Profile if you’re applying to a school that needs them is going to put you in the running for a lot of the scholarships that the college offers. Many colleges have additional scholarships above and beyond that. So, for example, when my daughter was looking at colleges, she had a budget. We did the net price calculators for all the schools that she looked at to see what our likely cost would be. And one of the colleges she was interested in was above our cost. She went back to their website and found out there was another scholarship she could apply for that would bring her cost down to where it would fit in our budget. So, that one made our list.

Speaking of which, the best hack for families getting started is the net price calculator at the college. So, every college is required to have one of these. It’s a tool where you input your financial, and sometimes your academic, information, and it will tell you what students like you received financial aid on average in the current academic year. They’re not foolproof, and they’re not a guarantee of what you’re going to get. I will say that, in our case, every actual award that my daughter got was within $2,000 of what the net price calculator had told us it would be. So, those are a great indication of what a college is likely to cost you.

Above and beyond that, lots and lots of departments within the college have their own sets of scholarships that they offer. We have a friend whose son is studying meteorology and that being a small major, lots and lots of colleges had dollars available for meteorology students, and I was like, well, that’s nice for Myles, but what about for Alex and Gabby, my kids, who did not have such specific interests? And we found the business school has scholarships for students. A lot of private colleges offer scholarships to students who live within a small radius of where they attend, or students whose parents are police officers or firefighters. So, do your homework on the schools to find out what they offer, because oftentimes the most expensive schools on paper are not the most expensive schools in reality. My daughter goes to, as I said, the most expensive school on Earth, but it was her second-cheapest choice once she got her aid package, and that’s not at all atypical. So, do the net price calculators, look at the scholarship page on the school, and then look for outside scholarships. And for those, look close to home. Ask teachers, ask your employer about any scholarships that they have. My daughter’s computer science teacher in high school had recommended that she apply for a scholarship, which she ended up getting and it’s been $5,000 a year, plus she got a computer one year and then every year since then she’s gotten $1,000 to spend on technology. She also got a professional mentor who helped her land an internship that has led to a full-time job offer when she graduates, and that all came from a high school teacher.

Benz: Sounds like a good scholarship. I wanted to ask about applying because you go into some detail about figuring out where to apply. It’s stunning how many schools kids seem to be applying to. But how many schools should students apply to? And also, what sort of diversity should students and their families look for in terms of the types of college that they apply to? You have some guidance in the book on that.

Garcia: It’s so easy with the Common App to just add more colleges to your list. Because in many cases, it’s just checking a box and sending your application. It costs about $100 for every school that you apply to, particularly if they are private schools, because you’re sending the CSS Profile and probably some test scores in addition to paying an application fee. So, first and foremost, you should give your student an application budget and make sure that all the colleges fit within that budget. In my book, I have a worksheet for students to track the colleges that they’re interested in and thinking of applying to.

One of the things with private colleges is they typically require three essays each. One of them is the Common App standard essay. But then, they will typically have two additional essays that you will have to write a specific essay for that school. So, as you add colleges to your list, not only are you adding cost and check boxes on the Common App, but you’re also adding work for your student, work in writing essays, work in figuring out what letters of rec you need because some colleges also require the letters of rec to be from specific types of teachers versus the general population. There may be scholarships that the student is applying for that have additional applications. And much as you want your child to have this unlimited universe of choices, you also want them to be present for their senior year of high school. And if all they’re doing is writing college application essays, they will not be present in other aspects of their life.

So, my recommendation for families is always, number one, find a financial safety school that belongs on your list. That’s probably some flavor of in-state public school. It may be alternate pathways like free community college. So, once you’ve identified at least one safety school, you want to make sure that you have a good body of schools that your student is going to be accepted to. And then, include some reach schools if you want. With my family, we used a couple of tools to narrow down our list. One was the net price calculators. So, every college that my daughter was interested in, we did the net price calculator. If it came out to above a certain number, that college was automatically off of our list unless she could find a pathway through other scholarships that weren’t included there that would get you there. And then, we did the exercise of why would you go there. And so, we went through every college she was looking at and said, why would you go there? So, if you got accepted to all of these colleges, to every college you applied to, which one would you choose? And she had two colleges that she said she’d have a hard time choosing between. And then, we went through this exercise of, OK, if you didn’t get into those two, what would be the next one that you’d want to go to? Which one from this group that we’re pretty sure that you’re going to get into would you choose? So, we went through that exercise and got her down to a list of about eight schools that she applied to. Even applying to eight colleges, she still had to write 24 essays, and not all of them were specific for the schools; some were for scholarships, some were for other things. So, you definitely want to manage your student’s workload. If you can’t figure out a reason why you would actually attend that college, then just don’t apply. But do make sure that you have financial safety schools as well as admission safety schools on your list.

I would think students shouldn’t apply to more than 10 schools. I think I said my son applied to two and he was fine with that and had all the choices that he wanted. So, you also shouldn’t feel like you have to apply to a lot of schools. In terms of diversity of schools, I would say the criteria for diversity to me—you should apply to some big schools and some small schools. You might be a student who’s a better fit for a big school. You might be a student who’s a better fit for a small school. You don’t need to arbitrarily apply to a lot of different types of schools. But you should apply to several schools that you’re very confident that you’ll get into where you’re in that top quartile academically, schools that accept more than 10% of applicants, you should apply to some schools that you absolutely know that you can afford, and you apply to some schools that you love if there’s a path to making them work for your family financially.

Ptak: Last question we wanted to ask you is, reflecting on all that you’ve learned personally and in your research about the college funding and application process, what are the key things you’d like to see changed to make it work better for students and their families?

Garcia: It’s such a good question and it’s hard to narrow it down to a few things. One of the challenges about the college process is just how opaque it is, and so transparency would be a big thing. But I think the bigger issue beyond transparency is the complexity of all the pieces. The FAFSA is really complex and even despite simplification it will still be complex. And it’s especially complex for first-generation students and low-income students, the people who need the resources that the FAFSA provides the most. So, I would like to see that truly simplified. To me, truly simplifying the FAFSA is things like if you’re eligible for free and reduced lunch in high school, you should be eligible for a Pell Grant without filing the FAFSA and your expected family contribution should be a certain number that’s somewhere within the range of Pell eligibility.

I’d also like to see as parents focus more on what’s best for our children instead of what’s best in the eyes of U.S. News & World Report. College is like youth sports on steroids. When you hear parents talking about where their child is applying, where they’ve been accepted, where they’re going—I have a kid who’s going to a very unselective school, and he’s had a great experience and he has a great job coming out of it. Not only that, but he’s succeeded in ways that have surprised me and I’m just thrilled with the person that he’s become at this college. I have another child who’s done really well at a different school. But if we as parents focus more on what makes our children successful academically and socially and what works for us financially and use that as a guide to our college choices, I think that will decomplexify the system a whole lot.

I think one of the areas where we really fall short is our lack of public policy support for education, and by that I mean not just dollars for education, but actual support for education. As a society, we need more nurses and engineers and yet getting into nursing school is like getting into Harvard. Our educational system should be supporting our societal needs much better than it has and not just by making loans and small grants available for students. So, it shouldn’t be as difficult as it is to get into a degree path for a field that we have massive shortages around. But that’s a function of having a higher level of public policy support than we have and having colleges focused on serving the larger community, the larger society, as opposed to primarily the students who are enrolled at their institution.

Benz: Well, Ann, you shared so many great insights and helpful, practical tips with us today. Thank you so much for taking time out of your schedule to be with us.

Garcia: Thank you so much for having me. It’s been a pleasure.

Ptak: Thank you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)