College Crapshoot

Catherine Horiuchi

A LIFE OF FRUGALITY might mean your children graduate college debt-free, which is a major accomplishment. But what about your happy-go-lucky neighbors, who spent every dime they earned and never saved for college?

At issue here is the Free Application for Federal Student Aid (FAFSA), which is the basis for the all-important expected family contribution (EFC). The whole thing can seem like one big crapshoot, as I can now attest.

The EFC may determine that your spendthrift neighbors’ kids also get to graduate debt-free. Alternatively, even though they have no assets to be assessed, the EFC may require a substantial contribution from their income each year. On top of that, even an EFC of zero is no guarantee that a university will offer your child a full ride, plus the aid package may include substantial loans rather than much-coveted grant money.

Retirement accounts are ignored in the FAFSA calculation, as is home equity, though some colleges may look at both when doling out the financial aid they control. Still, prioritizing retirement accounts and building up home equity is crucial if you’d rather not be expected to spend a quarter of your net worth or more on college costs.

Once the FAFSA is filled out, your EFC is instantly displayed onscreen, formulaically derived from investments, income and “prior prior year” tax returns. For a thrifty soul like myself, the EFC is trouble and, indeed, double trouble with twins. Worse, in another three years their younger brother could also start college, leaving me with a trifecta of savings-chomping scholars.

Recently passed by Congress, the 2021 omnibus spending bill includes changes to simplify the FAFSA process and dumps the term EFC, with all its negative baggage, replacing it with a new “student aid index.” We’ll learn more when the index is implemented for next year’s financial aid cycle.

My EFC this year doesn’t reflect the loss of my husband’s income, the fact that I stopped working after my husband died to stay home with the kids, that I have no employment income this year and that my twin daughters will lose their survivor annuities when they graduate high school. The FAFSA cheerily assumes that all sources of income will continue, that you won’t be needing emergency fund dollars and that it’s pretty easy to save for a secure retirement.

Should my girls get accepted to their dream school, I can write the school’s financial aid office and see if the college has anything to offer. This is an inefficient process, but better than nothing. It’s possible that, in the end, they’ll receive only loans.

I have yet to decide how I feel about these very young adults incurring debt. It seems obvious that 18-year-olds, who haven’t worked or saved much, can’t understand the effort required to pay off loans. Nor are they able to weigh the long-term consequences of spending borrowed money to earn a degree with a demonstrated low return on that financial investment.

In December, John Bogle’s Little Book of Common Sense Investing accompanied my holiday letter to my twins, encouraging them foremost to continue their fiscal education. In that note, I made this promise: “If you do well in college, I will help pay till you get your undergraduate degree. If college doesn’t go well, or you find opportunities that you prefer to college, it’s fine to get started in a job and a life and career right away.”

So where does all this leave my daughters and me? Here are five takeaways:

  1. Loss of a spouse is the gift that keeps on taking. In terms of the current FAFSA, a single-parent family receives less than half the income protection that couples receive.
  2. It bites to see a large dollar number spit out of the EFC formula. But look at it instead as a measure of success. I created the potential for a debt-free college education because, as a younger parent, I believed that was an important goal and worth saving for.
  3. The EFC doesn’t necessarily determine what I’ll pay next year for my twins’ college education. I could pay much less if they decide on community college or a state university, or if they attend college near home so they save on room and board. Or I could pay much more, by caving on expensive dream college or falling back on the necessary safety school. If you look to be paying plenty, have a frank talk with your young adults. Maybe you’ll agree to pay for one year only, with all subsequent years dependent upon making a “B” average. Or maybe they should take out loans or work summers to have more skin in the game.
  4. There are nearly 5,000 two- and four-year degree-granting institutions in the U.S. Most are eagerly looking for students who will succeed based on each school’s strengths and attributes. Studies suggest that, for most students, limited advantage is accrued by paying top dollar for an elite degree.
  5. The pragmatic and practical thinking of a tuition-paying parent can be quite distinct from the diffuse interests or starry aspirations of the senior selecting a school and course of study. Be kind to each other. Both are right. Neither is wrong.

Catherine Horiuchi recently retired from the University of San Francisco’s School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine’s earlier articles.

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