College Planning Video: Facts, Myths and Successful Case StudiesSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on November 16th, 2018
Presented by Stephanie Mauro, November 16, 2018
Part 4 of 4 in Our College Planning Video Series
How to Pay for College Without Going Broke!
"There is no aid for middle class families."
"I make too much money to qualify."
"I own my home, doesn't that hurt me?"
These are commonly held beliefs among parents of college bound students. Sometimes conventional wisdom is true. Other times, our belief systems prevent us from pursuing strategies that may significantly reduce the cost of sending a child to college.
In the video below, Stephanie Mauro deciphers fact from fiction, shares two college planning case studies and answers common questions about the college application and financial aid process.
After watching this video, if you have any questions about how to pay for college without going broke, please do not hesitate to call Reby Advisors for advice: (203) 790-4949
To watch all four videos in this series on How to Pay for College Without Going Broke! follow this link here: www.rebyadvisors.com/category/college-planning
So, belief systems. There is no aid for middle-class families, and that's absolutely false, many factors that need to be considered. Colleges are in competition for students, and that's absolutely true, but they all have their own criteria. So, when my students are doing research on colleges, I say to them, if they're describing you, then that's a good fit, if they're not describing you, you have two choices. Step up to it, or if it's below you then forget it. But, if it's above you, step up to it, or it's not you and move on to the next college.
And, making too much money to qualify, that's not always true, as I was discussing with that hundred and fifty thousand dollars in income, it's kind of a magic number. Having your EFC calculated can confirm what you qualify for. Just be careful of those online softwares, because they're not accurate, and the ... What did I say earlier? The net price calculators may not be accurate as well.
My student's grades are too low. If students were here I would say, it's financially beneficial, some colleges will give merit scholarships based on their grades, like Marist, Western New England, couple of Sooneys in New York, they are test-optional, so you don't have to submit your test scores. Your grades are what will give you your merit money, which I think is what they should be getting merit money on. 'Cause that's what they do everyday, that's truly who that student is.
We talked about owning your home, so the private colleges, approximately 400, that require the CSS profile will count the equity in your car and home and vacation homes. And, colleges that only require the FASFA do not count the equity in your car and home, but will count vacation homes and investment properties held privately. And it is no longer an easy process.
So, merit scholarships are only for the exceptionally gifted, well that depends on the college. So, RPI teaches to an SAT score of 1390. LIU teaches to an SAT score of 990 out of the 1600 scale. So, if you have a 1250 SAT score, you're golden at LIU. They're loving that 1250 student. RPI's like, "Yeah, we'll take you and all your money." And if your GPA is sufficient, then they'll accept you.
But, merit scholarships are truly based on-
Scholarships are truly based on the SATs or ACTs, unless the college is test optional. And I've seen a lot of students go up 100 points and get $20,000. And I say to my students, "Just think of it this way: If you spent 20 hours studying for an SAT ... Over time, I mean, you took multiple SATs. You might spend ten and ten. And you got a $20,000 scholarship. You just made $1,000 an hour." They're like, "Oh, that's interesting." And if you get that scholarship for four years in a row, basically you made $4,000 an hour. And if you only got $10,000, you just made $500 an hour, which is still not a bad deal.
So I always want to empower my students to think of that as money in their pocket. Even though it's not physically in their pocket, it's not coming out of their pocket, nor are they paying interest on that money. So there's great savings in that. They build freshman classes in advance, and it's done by all private schools. It's called enrollment management. And the way enrollment management works is they have a chart. And on the chart they have really strong student, not so strong. Really wealthy family, and a poor family. So this quadrant here, this is the quadrant that gets the free ride. The poor family, really strong student.
This quadrant here is the families that get the discount. So you may be very wealthy, but you're still gonna get your merit scholarships. Then we have the wealthy family over here, but they don't have a strong student, and if the student qualifies academically to get into the college, they'll take your student and all your money. And then here is the college that the student is not a strong student and they're poor, so they'll get the Pell grant, they'll get state grants, and they'll get all that free money, and a subsidized Stafford loan. But the college is not going to give them any money.
And in New York we have the Chamber of Commerce, the Poughkeepsie Regional Chamber of Commerce, the Dutchess County Regional Chamber of Commerce, and there is a youth leadership ... a youth program there. And I went in, and I helped the students understand that if they wanted to go to a very expensive school, that, number one, colleges do not have to meet need. They do not have to. It's not required. And if they did get all the need, but there was still a gap of $10,000, like this one student did have, I said, "Okay, who is gonna cosign the loan for you?" "Wait, I got to a loan?" I said, "Honey, we have a gap of $10,000. Look at the math." And she had a reward letter with her, we went over everything. "Mom?" No.
And I could tell by how much need-based money they got that they weren't. And I said, "Uncle? Aunt?" And she just started to cry. She couldn't ... She goes, "Well, I'm just going to go." I said, "Honey, they're not going to let you on campus unless you pay $5,000 of that $10,000." So we have to think about it futuristically for her. And she ended up going to a community college, and I spoke to her about last year, and she said actually it was the right thing to do. 'Cause she saved a boatload of money, and she didn't pay any money for Dutchess Community College 'cause of all the aid she got.
And in fact, she says, "I feel like I made money because, when you get federal monies, and state monies, whatever's over the cost of attendance gets paid back to the student." But she can use that for her books. She can use that for transportation. So there are other costs associated with going to a college, even a community college, that are out-of-pocket expenses that she wouldn't have had. So it worked out for her, but the enrollment management is the college saying, "Okay, we're going to take so many over in this quadrant that qualify educationally because we have to pay our bills. We'll see how this shakes out. We can give one or two over here, and then this is our discount area. You're going to get a 10% discount, a 15% discount, 20% discount. Last year Pace gave two of my students a 50% discount based on merit alone. So some colleges are more generous than others, and some colleges are more generous year over year. So it's something to be considerate of.
529 plans. You got it covered, great. If you have a 529 Plan for all four years, it's fantastic. But if not, what is your plan to pay for college? And at this, where you're at now, you don't have the timeline to save with a 529. So you want to be utilizing that. You want to be, that 529 should be dialing down into the more conservative investment program. So you have to be cognizant of that. Two case studies, Alex and Jamie, a high and a low. Low EFC, high EFC. So they both planned ahead. They selected colleges with the right academic, social, and financial fit. Social is 50% of their success, by the way. A student must feel like they belong on that campus. So you really want to be cognizant of that. And of course academic and financial. They looked and visited multiple colleges. Sometimes families can't get out of their own way to visit a college. I empower you and implore you to visit colleges. So important. Your student's going to step on campus, be like, "I don't want to go here. I don't like it." And you'll be like, "We didn't even get out of the car yet." They know. Has anybody experienced that? You're laughing, and I can see.
Okay. And that's so important. So your visiting multiple colleges gives students an understanding of what they like and what they don't like. They got their EFC calculated and/or did financial positioning prior, and they waited to choose until all of the evidence was gathered. My students aren't making their final decisions until mid-April, and they're mad at me, but we're utilizing that time to negotiate for more money because now they've gotten enough nos so that they know that they have more merit scholarships to offer. So I asked, actually Yukon, it was, I was like, "So how many kids have said no so far? 'Cause I want to negotiate for more money." And they're like, "No." And the yield we were talking about earlier, there's a yield. They might send out 10,000 acceptances; they only have 7,000 spots. Because they know not all of them are going to say yes, and they want to have more.
And I said, "Well, what if all of them say it?" And they're, "Then we put them in hotels." That's what some colleges have done. But it doesn't happen. They know their system. They've got this fine tuned, right? And of course the student improveD their AT or ACT scores, which positionED them for the merit scholarships. So Alex was a low EFC. When Alex's mom hired me, she's like, "We don't qualify for anything. We own a business." I said, "OH, what do you own?" "Construction." "How's it doing?" "Not good." Okay, so let's look at those numbers, right? So Alex is actually a very unique case because he had very strong GPA, very strong SAT. He did what we call the Bridge Program at Dutchess Community College where you actually spend your senior year of high school doing freshman year of college. It's called the Bridge Program. So after we did all the numbers, $6,500 was their final EFC.
He got accepted to Cornell University as a sophomore, which is unheard of. They don't do it often. But he got $34,300 in need, an $800 TAP award. Remember their income was 60. It's that $60,000 and more that you start to not get a lot in the tuition assistance program, but we got something. The Federal Work-Study, and I'm putting it in here because Alex was already in college for one year and knew how to manage the time of working. So he said, "No, I'm going to take the job. And you know what? We'll put it off the cost of attendance." And then a subsidized Stafford Loan because he was a sophomore, so he got 6,500. Remember freshman year is 55, sophomore year is 65, and then junior and senior's 75. So he got a $6,500 Stafford Loan. 43 six. He went to the land grant Cornell, and they paid nothing out of pocket.
Now he's in debt, and he's got to work for that, but otherwise the mom calls me and says, "Where are you?" I said, "I'm on my way to the bank. I'm going to Poughkeepsie." She worked in ... She met me in the parking lot of my bank and hugged and kissed me and cried and said, "You were right. We, I can't believe it." And he is doing amazing. He just got married and $102,000 in savings, and only 21 five in loans 'cause he took the 75 and then the 75. So his loans were 21,000 for the land grant Cornell. So there's two Cornells. It's still a Cornell education, but one is subsidized and one is not. So there's about $20,000 difference between the two. And he went to the, it's called CALS.
Jamie is a high EFC. So Jamie is my niece. She was the ... That's not her picture. She was a strong student, and her parents have a vacation home, which I love. Final EFC, $93,000. So it just means that they don't qualify for need. But she did get 18,000. As I was explaining earlier, she got the $18,000. She was originally offered 11, and we were able to negotiate for seven more. Unsubsidized Stafford Loan, 'cause that $93,000 expected family contribution was much more than the cost of attendance. And so she got 23, five, and eight, and I'm talking about out of pocket costs. So yeah, she has to pay that $5,500 back. But out of pocket, my sister had to come up with $20,000 less. It's less than the price of a SUNY for out of pocket. And over four years was a $72,000 savings.
And she actually just started at URI as a ... She's teaching, actually, and then getting her master's. So she's doing that program where you teach and then they pay for your master's. That's another way of paying for master's. So what do you do with savings? You pay tuition for another child or help pay for postgraduate. Those graduate costs are very expensive, and some students actually need to do that next level to get to where they want to go.
So let's look at ... We're not done. Let's look at the private loans. And again, I implore you, if you are going to debt up your student on any level, start with the Stafford Loans. They are a low-interest-rate loan, and they have a fantastic payment plan. They have income-based repayment. The minimum that you have to pay is $50 a month. They're very workable, if you will. If you can ... If your student can't afford to pay, there are ultimate, there are different payment options. Income based, pay as you go, there's a graduated payment. So if your initial loan payment is $300 a month, the graduated might knock it down to 150, and then every two years you recertify, and it'll go up slowly. So in the eighth, ninth, and 10th year, you're probably going to be paying $600. But while they weren't making a lot of money, sometimes that works. Graduated payment and standard repayment are the two that I suggest, because when you get into income base repayment and pay as you go, that tends to take the loans out to 25 years. Only if you need to. And there's deferment and forbearance. You guys are laughing. No. Did you do that?
Okay. So anyway, so you just want to be, you want to understand those loan options, but if you are going to debt your student up at all, please start with the Stafford Loans. And then we get to this: Variable rate on one side and fixed rate on the other. So let's start with the variable rate. When I started my business, variable rate was really all that was available. I'm like, wait a minute. What's the interest rate cap? 25% on the variable side. 25%. Wait, what? When we called Ascent on August 26th, they couldn't answer the question. "Well, you don't have an interest rate range or rate cap?" "Well, um ..." "Is there a manager I can talk to." "No, not available." I'm like, "You know what? I'm going to put a question mark there." Discover's not bad at 12.99. Sallie Mae 25%. SunTrust, 36% rate cap.
And unlike your mortgage, when you have a variable rate mortgage, there are rate caps. Do like two percent a month. I mean, they can't even do it. There might be a rate cap of up to 16%, but it's collateralized so it's usually not horribly that high. But my point is that, even regulated, they can't go up more than two percent on the rate increases. This is unsecured debt. So that's why the interest rates are so high. The default rate is astronomical, and there are banks that will stop lending to current students because graduated students are defaulting. It happened to one of my students. She was going to LIM in the city. She got a $15,000 a loan with Discover. Her grandfather said, " Next year I'm going to pay 10 grand. Just to get a $5,000 loan." She went back to Discover and said, "Okay, I only need 5,000."
She applied for $5,000. They were like, "We're not lending to LIM students anymore." "Wait, what? I only want 5,000 this year. I don't even want 15." "Nope, sorry." So sometimes the banks back out of lending to that college. So you really want to be cognizant of the rate cap. The only benefit is that the interest rate ranges are a little lower. You might get a four or five percent initial rate. Interest does start from day one, so be aware of that as well. And I had a mom who, single mom, no mortgage, she owned her condo outright, she was making 60 grand a year, one child. She got a private loan, 10% interest, her credit score was 850 or 840, and they still charged her 10% interest on her student loan for her son. No low debt to income ratio, she didn't have credit cards. She's like, "I don't understand." I said, "It's unsecured debt."
So when you're talking to a bank about how their loans work, these are the questions you want to be asking: interest rate increase monthly, aggregate max borrowing limit, origination fees. Now, CommonBond is actually my favorite because they don't go over 10%. That's their big ... We will not make a loan over 10%. But they have a two percent origination fee.
And then how does it work? So yearly or each semester. So a lot of banks want you to do it yearly. So now you're paying 10% on money you don't even have to give the college. If you owe, if your out of pocket is $20,000, you have to give them 10 in the fall and 10 in the spring. So if you borrow $20,000, you're not getting a discount from the college to pay them in advance, but then you're paying 10% on $10,000 for five, six months that you don't need to be paying. So I prefer my family's actually borrow on a semester basis. And if you do have 529 Plan money or any money earmarked for college, exhaust that money first before you take any loans except for the Stafford Loan. 'Cause if you don't have enough money to pay for college in your 529 or investments of whatever you're saving and you don't have enough, the Stafford Loan will stretch out your savings by $27,000.
Does that make sense to everybody? So I would only recommend taking the Stafford Loan then exhausting your 529 Plan money or any other monies that you have earmarked for college. If you have enough to pay for college in full, then don't take the Stafford Loan, unless you want to put some, your student have some skin in the game. Then that's the way to go to. Does that make sense to everybody? Okay. So when we get to the fixed rate side, again, CommonBond being my favorite because nothing's over 10%, but you can see the interest range rate from 5.3 to 12.07. Discover, 13 99. Sallie Mae almost 12%. And custom choice with SunTrust, 14%. Crazy. Now, that'll be a fixed rate though, and I do recommend that my clients do a fixed rate because on the other side, when you have the interest rate ranges of 36%, 25%, or Ascent not being able to answer the question, you really don't want that. Because we are, interest rates have been increasing, and our students are going to be in these loans for 10, 15, 20 years, these loans especially. So we really want to use this as a last option.
Do the application process on a semester basis. The cosigner release ... Discover does not release the cosigner ever. Where the other colleges will ... College Ave is 24 months. Ascent is 24 months. The only thing I like about Sallie Mae is they have a 12-month cosigner release, so that's nice. 12 months on time payments for that amount of time. You're late one time, the cosigner does not get released. So be very careful of that.
What does that mean? I don't know what that means.
So when ... So you cosign for a loan for your child, and once they graduate, they start making payments six months after graduation. All loans for student loans, federal or private, have a six-month grace period. So then in the fourth month you forgot and it didn't get paid, or your student forgot and it didn't get paid. You no longer will be released as a cosigner, whereas if you make those on time payments for 24 months, 36 months, 12 months on time in complete principle and interest as the payment's defined, you will then be released in that amount of time. And if you have student two, student three, you really have to be cognizant of what you're debting yourself up with with number one.
What do you mean? For life or?
Oh, for the life of the loan. Until the loan's paid off.
Oh, my God. How are you going to follow all of these?
Well, you come to a college planning course like this. And I give you the heads up. Okay? As I said, repayment plans, they defer six months. You can pay interest only. A lot of the banks now are giving you a little bit lower of an interest rate if you do a monthly payment with them, and I always recommend to my clients, if you're going to borrow from private banks, pay $50 a month towards it just to offset some of the interest that you're paying. It's very beneficial, and some banks like Sallie Mae require 36 ... I saw one year, $36 a month they required. But that's okay. It's manageable. And then it covers books, computer, tuition, living expenses. Discover will say whatever the school certifies. And then there are rewards. So if you go into auto pay, they might give you a quarter of a percent reduction.
And if, this one has a two percent principal reduction if the student graduates with a 3.0 GPA. That's cool. Some incentives there. Then if you look at my footnotes at the bottom, the aggregate maximum borrowing amount will include all student loan debt, including the federal student loans. So they're aware of that. And as I've said, in order to have the cosigner released, the payments must be made on time for the consecutive months listed above. A credit score of 760 plus is better. It's how you get the better rates. And if a client has a credit score of 640 or lower, bankruptcies, even two, three years old. Mm- mm (negative). So, and the school you attend could affect your rate. So if the students, as I said, leaving there are defaulting on their loans, then the bank will stop lending to them.
So thank you very much for coming tonight. I appreciate your time. Please fill out the evaluation form, and I am here to answer any questions that did not get answered during the presentation.