This time of the year is busy. However, for families of college-bound students, it can be more stressful. A typical conversation during holiday gatherings concerns college decisions, student loans, or some combination. This article is to help families navigate the most common mistakes parents make in their college funding plan. For most parents, this is the largest financial decision you will make before retirement.

Whether your child is a soon-to-be college student or already enrolled, making informed financial decisions during your college years is crucial. Under current borrowing rules, parents make the most significant financial decisions independently without third-party approval. Unlike a mortgage, the company evaluates your financial strength and determines if you can be approved. That is not the case in college financial decisions.

In this comprehensive article, we will help you develop a strategic plan to optimize your financial decisions and review the most common mistakes. We will provide tips and expert advice to help you make the most of your college education without breaking the bank.

Depending on the Free Advice

A shortcoming of the current process is the lack of financial transparency regarding the financial outcome. Most families incur student debt without any idea of the future monthly payment.

The colleges can only provide one year of financial information. They do not have the resources to offer customized plans or advise families on specific topics related to the increasing complexities, like taxes and 529 plans. They also cannot legally provide these services. Yet most families solely depend on this advice when making this decision.

Families need to realize how expensive and complex this decision is. College advice is limited to only the financial aid process. Students and parents incur thousands of dollars of debt without any vision of repayment or possible forgiveness. PayForEd provides these insights for better decision-making and outcomes. This knowledge is a critical part that is missing from the current process.

Not Completing the FAFSA

We believe every family should complete the FAFSA regardless of their financial strength. Completing the FAFSA will do a few things many parents and students overlook. Many think this process is only for financial aid, but it is more.

Additional Benefits of Completing the FAFSA

• Helps with proper debt structure for both the students and parents
• Improves admission chances for High-Net-Worth families
• Enhances family’s financial resource utilization
• Can help with College Waitlist selection
• Increases repayment and forgiveness options for students who will require post-graduate degrees.
• Helps students establish credit
• Provides a backup position if something changes in parent’s finances
• Reduces some financial exposure of the parents

Some good news is that the FAFSA process has improved significantly from last year. This improvement will allow most colleges to return to the normal admission schedule, which includes acceptance and financial awards being available on 4/1 and commitments being required by 5/1.

Another planning tip is understanding the FAFSA timing process. It uses a timing process called Prior Prior, which means that it will use the tax information that should be available on 10/1 of each year. For example, the 2025-26 FAFSA will use the tax information from 2023 taxes. Understanding your taxes is essential for parents with non-senior high school students.

The number generated by completing the FAFSA is called the Student Aid Index, or SAI. It was formerly called the EFC or Expected Family Contribution. The IRS data is now integrated into the FAFSA, making the submission process much easier.

Retirement Planning Contributions’ Impact on FAFSA

 Another important factor with the FAFSA/IRS integration is how 1040 data is factored into the calculation. Prior to FAFSA Simplification, all deferred retirement contributions were added as income in the FAFSA calculation. Now, only Traditional IRA contributions will be included as income in the FAFSA calculation, and the family’s 401K, 403b, and 457 contributions will not be included since they do not appear on the 1040.

Student Loan Decisions and Structure

The biggest issue is the lack of planning regarding the student loan structure. Under current rules, the traditional dependent undergraduate student can only borrow $27,000 in their name over the first four years. All other debt will require the parents or another person to be involved.

Many parents are taking Parent PLUS loans because they think their child will be able to make the loan payments after graduation. The problem is that education costs are incredibly high, and most people do not investigate the repayment options based on the projected debt. Under current rules, Federal PLUS loans are basically unlimited in terms of the total cost of attendance for that college.

Parent PLUS loans are legally the parent who signs the promissory note. Repayment and forgiveness options are also limited. Selecting the right parent to take on the loans is an important part of the plan.

 Individual Child vs Family Plan

Many parents’ college funding plans focus on one child rather than all their children. As I stated above, one parent will absorb much of the funding shortfall. If we are borrowing for the first child, what will be the debt incurred for the youngest?

As part of your plan, you need to review your family timeline. If you are borrowing for the oldest, how much will you need to borrow for the youngest, and how old will you be?

People over the age of 50 are the fastest-growing group of student loan borrowers. The growth is due to the increased cost of education and people having their children later in life. Making the right decision on which parent takes the loans and when to take them is critical to retirement planning.

Depending on Loan Forgiveness

We hear all these terms and programs to make college affordable but delay investigating them to see if they apply to our situation. You must understand student loan forgiveness rules before taking on the debt.

Two major loan forgiveness programs are Public Service Loan Forgiveness (PSLF) and End-Of-Term Forgiveness. The borrower must use an Income-Driven Repayment (IDR) method in both cases.

The biggest surprise for many borrowers is that loan forgiveness is unavailable for most undergraduate-only degree borrowers unless they make less than 50K a year for the next 10 years.

Let’s understand the rules for the PSLF program. For the borrower to earn a credit month toward forgiveness, all of this must be present. You need 120 PSLF credit months.

• You need to be employed and paid by a government agency or Non-profit (501c3)
• Considered a full-time employee (with some exceptions)
• Use one of the IDR methods
• Make 120 on-time payment

The math does not work based on the calculation and the students’ limited amount they can borrow. You need to remember that the other Loans are Parent PLUS loans; they are legally the parents’ loans, not the students’.

End-of-term forgiveness does not have all of those rules. Depending on the loan and repayment time, the debt can take 20 -25 years to pay off. This type of forgiveness is also taxable under current IRS rules, while PSLF is tax-free.

Administration and Rule Changes Uncertainty

It has been a confusing time on the loan repayment and forgiveness front. We are currently waiting to see the outcome of the SAVE lawsuit, which does not look favorable. Many borrowers are concerned about changes in their plans.

Based on prior rule changes, most of the borrower programs were grandfathered in, so the changes only affected new borrowers. That is likely. We could see a new IDR method introduced with more straightforward rules but not as generous in certain areas.

Understand the College Return on Investment

Understanding college returns is both an emotional and expensive decision. The national average graduation rate after four years is approximately 43%. The best way to save money is to graduate on time.

The cost of not graduating on time is more than the added tuition and associated costs. You need to factor in the opportunity cost of not being employed and having an income, which is often understated.

More careers require postgraduate degrees. The sooner a student decides on a career path, the sooner your college funding plan can be reviewed and adjusted if needed. The good news is that once students complete their first bachelor’s degree, parents are no longer part of the financial aid process.

Common Mistakes Parents Make In Their College Funding Plan Conclusion

Now that loan repayment has restarted, we are seeing more parent borrowers with Parent PLUS loan issues. Most of these parents used the free advice and painted themselves in a corner. The goal of this article was to prevent this from happening.

In the new college funding world, most families will need to borrow some money. You need to find a resource that can help you minimize the cost, find the best value, and structure the debt for the best repayment and forgiveness options. PayForEd and its list of college professionals have the knowledge to help you make better decisions.