Paying for college is a complicated calculus. Do your homework and be careful

Over the next couple of months, many high school seniors will anxiously await financial aid award letters from colleges and then try to reconcile what they mean in relation to the net price of attendance from one school to the next.

As Ron Lieber writes in his new book “The Price You Pay for College”: “This is the most complex and emotionally fraught financial decision that many families will ever make. … I have never come across a consumer decision that inspires more confusion and emotion than this one.”

Not many important financial decisions require you to invest significant time and research and don’t reveal the cost until the last stage of the selection process. After taking months to evaluate schools, visit campuses, complete applications and entrance essays, the cost is finally unveiled well after emotional preferences have been established.

Many families, let alone 18-year-olds, could use help comparing offers, net costs, personal preferences and perceived value. Some people hire college planning consultants to determine best-fit schools to apply to, get help with essays and evaluate financial aid packages.

Most of these consultants provide a much-needed service. Beware, however, of transparency.

Last month, I received a flyer in an email from my child’s high school. It promoted a free college planning webinar for parents presented by a nonprofit foundation. The flyer listed several topics that would be covered in the presentation. One bullet point tipped me off to undisclosed conflicts of interest.

In bold, one of the listed topics was, “Why you need to avoid college savings plans like the plague!”

Making an absolute statement like this, without knowing the financial situation of the parents, is absurd. This statement led me to do some digging and discover that the nonprofit foundation offering the webinar is run by an individual who also owns a for-profit college planning business. Using the banner of a nonprofit to promote a for-profit business was the first lack of transparency. The next lack of disclosure was more irritating. This college planning consultant is also a licensed insurance agent.

An insurance agent, paid by commission on newly placed policies, might suggest that someone “avoid college savings plans like the plague” because they encourage parents to instead put their money into cash value life insurance policies. These policies are not included as an asset in the math that determines need-based financial aid eligibility.

The recorded version of the webinar on the college planner’s website vaguely references the strategy to shift money to “non-assessable assets.” The presentation doesn’t explain that could be done with a life insurance policy and that the presenter is an insurance agent ready to sell you such a policy. Nowhere that I could find on college planner’s website does it indicate that this individual is also a licensed insurance agent.

A strategy using life insurance may be appropriate for a small segment of parents trying to position for an optimal financial aid offer. It is far from a universal solution that merits the suggestion to “avoid college savings plans like the plague!”

College savings plans (Education Savings Accounts or Section 529 plans) have minimal impact on financial aid eligibility. The student’s eligibility for federal financial aid is decreased by no more than 5.64 percent of the college savings account balance each year. Given that investment gains in these college savings accounts are tax free if used for qualified higher education expenses, they are generally helpful in preparing for uncertain college costs. The earlier and more you can afford to save in these accounts, without sacrificing your own retirement savings, the better off your experience funding college is likely to be.

Of course, college savings accounts are no more of a one-size-fits-all solution than any other way to fund education, much of which is done through a growing amount of student-loan debt. The weight of debt might be the key figure to understand when evaluating financial aid offers. Unfortunately, determining the amount of student loans required can be vague and different from one college to the next.

“What we do know is that families submit the same financial information to every college and get a bunch of different need-based aid offers in return,” Lieber wrote.

Particularly in the COVID era, when circumstances might have changed significantly between when the prior-year details were entered on the financial aid application (FAFSA) and the current situation, be proactive about reaching out to the college to reassess the aid offer. This is especially true if you think there is evidence that more need-based or merit aid is deserved, and possibly being offered by other colleges.

It is a competitive process. Some colleges may be more flexible when encouraged to be in order to attract your student.