Rupa Pereira


By Rupa Pereira

Over the past few decades, college costs have outpaced inflation, at least in the United States. Here are some stats based on research from Federal Reserve and College Board:

There’s $1.75 trillion in total student loan debt (including federal and private loans)
$28,950 is owed per borrower on average
About 92% of all student debt are federal student loans; the remaining are private student loans
55% of students from public four-year institutions had student loans
57% of students from private nonprofit four-year institutions took on education debt

College Expenses can be the second highest expense that families may see outside their home purchase. The sticker price for college education – especially private and out-of-state can easily drain a household budget. Needless to say, it pays to understand the process of paying for your child’s higher education without sacrificing one’s retirement.

While selecting a college depends on academic, social and financial fit, the financial aspect weighs on the family long after the student has graduated from the program as we’re witnessing with the fixation on student loan forgiveness by the Biden administration.

So, what options do families have when determining financial fit for a college of their choice?

The process for applying for financial aid begins with the FAFSA – Free Application for Federal Student Aid. FAFSA application is submitted for each year of enrollment in a higher-education program at an accredited US university.

Typically, the application opens October 1st each year for the following school year, however under FAFSA simplification, the application was delayed until December 31, 2023 and was fully operational only in Mid-Feb 2024. That pushed back the ability of colleges to review aid eligibility and other admission criteria before extending college acceptance letters. Certain elite colleges also receive applications from CSS Profile (College Scholarship applications) to assess eligibility for non-federal aid.

The FAFSA formula (Cost of Attendance (COA) = Student Aid Index (SAI) + Demonstrated Need) has changed the way it looks at overall income and assets for a dependent student and their primary contributors, i.e. parents or those that financially support the student. Income and assets are assessed for the parent and students albeit at different rates to arrive at Demonstrated Need.

As such, Income Tax returns play a direct role in determining the Student Aid Index in the FAFSA simplification process. Under the new FAFSA process, the contributor’s (parents’) tax returns are directly retrieved, and formula uses T-2 tax year to determine financial aid eligibility where T starts for the year the student begins college. For example, a student starting college in Fall 2024, a 2022 tax return is used. Thus, Tax planning plays an important role in securing a higher aid package and lower out-of-pocket college expenses.

The calculation then generates a Student Aid Index (SAI) which prior to 2023 was known as the Effective Family contribution (EFC) after subtracting the Financial Aid package from Cost of Attendance. Cost of Attendance includes Tuition, Transport, Room and Board, Books, and other required on-campus fees. For those considering out-of-state colleges, don’t overlook the cost of travel (airfare, rental car) on breaks and holidays.

Financial Aid package can break down into:

Merit Scholarships
Need based Scholarship (based on Federal Student Aid Estimator from FAFSA Application)
Work Study Program
Loans – Federal Direct Loans

Don’t be fooled by the Student Aid Index or the notion that college is being generous with their aid package. Scholarships and Grants do not have to be repaid. Loans do and they have to be repaid directly to the primary lender – the Federal Government.

Federal Direct Loans can be subsidized or unsubsidized and are primarily issued to the borrower, i.e. your college-bound student. There’s no credit check when applying for these loans which isn’t the case with home loans or car-loans or other personal loans.

Yes, your 18-year-old may be starting college with debt on their hands, so this is not a light decision when making a college list. There’s a cap on how much a student can borrow each year, and it’s a maximum of $27K over 4 years, with the first-year capping at $5500 in 2023-2024. The interest rates are reset July 1st and effective until June 30th. These are fixed for the life of the loan.

In addition, parents are eligible to borrow – through Parent Plus Loans, for their student child. These loans are not capped and they can borrow up to the cost of attendance. Repayment options are limited for these loans and Parents may be dipping into retirement funds to pay back student loans. This is not a light decision either.

The one thing to keep in mind is for Parent Loans and Unsubsidized Loans is that interest starts accruing even while the student is in school. The interest rate on Parent PLUS loans is 1% higher than for their student child. Payment plan/forgiveness options are limited for Parent PLUS loans.

As a student loan professional, while advising families ridden with student loans, I’ve seen parents who’re retired and on social security but still paying off the loans they took for their children.

The Federal Loans can’t be passed on to the child unless parents leave the federal loan system and refinance with a private lender. Only death or total or permanent disability can lead to discharge of these loans.

Private loans are also available but with more restrictive terms and credit checks where a co-signer may be required alongside the student. Private Loans also have fewer forgiveness and payment options and are less likely to be forgiven in bankruptcy or disability.

In summary, with skyrocketing college costs, student loans may most likely have a place in your child’s education, and that may not necessarily be a bad thing. Parents have their retirement to worry about., while students who borrow for their own education will have skin in the game and motivated to graduate on time, hopefully, with a job offer in hand. Part of graduating in life and being accountable for their own career prospects – perhaps?

Rupa Pereira is the owner of FWJ Planning, an advice-only RIA, regulated in NC. As an EA, she specializes in tax matters. As CSLP, she advises on student loans and as AIF, she serves as a fiduciary in investment planning.
Contact: [email protected].