When advisor Joe Messinger, CFP, speaks about the importance of college funding to financial planning, he mentions his friend Catherine.

Catherine is an educator in a suburban school district outside Columbus, Ohio, not far from Messinger’s firm, Capstone Wealth Partners. “She had an awesome college career, played lacrosse, went to a great private school,” Messinger told advisors at NAPFA’s recent annual conference in Philadelphia. “She got a great job, at a great school district and makes about $48,000 a year.”

The problem is that her student loan balance is $129,000. If she were making loan payments on a typical 10-year payment schedule, he says, she’d be paying about $1,300 a month, but her take-home pay is $2,700. “The math doesn’t work. The student loan crisis for people like this is real,” he comments.

Messinger admits Catherine’s situation is dramatic. She blames her parents for not helping her see how so much student loan debt would impact her financially, and she hasn’t spoken to them in four years. But Messinger describes her case because he wants to impress upon financial planners the importance of talking about college funding early, even if that means having some uncomfortable conversations with clients. Not enough advisors talk about college planning with clients, he adds.

That also means that advisors need to get educated on college funding. “The CFP curriculum has about two pages on how financial aid works. When the curriculum was developed, college costs weren’t such a burden,” says Messinger, whose firm has an arm, Capstone College Partners, that offers resources, training and college funding software for financial advisors.

Yet right now, for Gen Xers, their No. 1 concern is how to pay for college for their kids, Messinger says, and it’s often the trigger for why they come to see a planner. Most advisor clients envision their children going to a four-year traditional university; they look at it as a lifetime investment so their children will have a great career, he adds.

The total costs for a college education at four-year schools now range from about $100,000 to $300,000, Messinger notes. “So if we are talking about three to four kids, we’re taking about a half a million to a million-dollar investment. So as advisors, what other three-, four- or five-hundred thousand dollar investment are we not advising on for our clients?”

Student loans are a huge and growing problem, he says, and reached $1.52 trillion in September, increasing more than 500% in the last 10 years. Seven out of 10 graduates will have student loans, and on average they are graduating with debt of $37,000 each, Messinger says. On a 10-year payment schedule, students pay roughly $100 a month for every $10,000 in loans, he says.

The reality is that more than 44 million people now have student loans and many are having trouble paying them off. The loans are not forgiven in bankruptcies, so lenders make lots of money available for them because they are lower risk compared with other loans, Messinger says.

“I stress the 10-year repayment schedule. Because the idea of going to college and taking out student loans as part of the equation is not to be in debt till you’re 60,” Messinger says. “The only solutions that have made any progress with the government is to stretch your loans out to 25 years or 30 years. Who wins in that scenario? What we know as financial planners, is [lenders] just collected three times the amount of interest.”

The idea is for students to graduate on time with manageable debt that can be paid off by the time they are 32 so they are in a good position to “start their lives,” he adds.

The problem for families is that they don’t understand the total cost of college and what they can afford, Messinger says. “Every day we’re tasking 17-year-olds who maybe never even had a job with making the largest investment of their life—in education.”

Big Mistakes In Shopping For Schools

“We suggest the way we shop for college in this country is all wrong,” Messinger tells advisors.

Most parents take their kids in their junior year of high school, often on spring break, to look at colleges. “Maybe they go to Chapel Hill, Penn, Vanderbilt. … They are beautiful, intoxicating. College admissions officers are really good at their job, and it’s not that hard; they’ve got a great product. The marketing budgets of these schools are out of this world.”

Students apply in the fall of their senior year, and then the acceptance letters start coming in, usually before parents know whether they can afford to send their kids to the schools to which they’ve gotten in.

Instead, Capstone encourages parents to consider what they can afford when their child is a freshman or sophomore in high school. “We suggest instead of taking a 16- or 17-year-old impressionable person to walk foot on these campuses, let’s start this college money conversation first. … Let’s set a budget for colleges before we go look at colleges. Let’s figure out what we have. And No. 2, let’s establish what student loan debt should be at graduation, what is manageable.”

Capstone’s College Money Process

The first thing Capstone does is talk with parents alone to get them on the same page. “Mom might say, ‘I worked through school. I worked part time. It took me six years,’” Messinger says. “Dad says, ‘Mine was all paid for. I didn’t take out any loans and I’d like to do that for our kids.’ That is a very different perspective.”

The next step is to create a budget. Capstone uses a one-page college financial plan to work through how much money will be available for total college costs over four years. The budget looks at 529 savings, other assets, monthly cash flow, parent loans, student savings, student work contribution and more. He encourages his clients to ask their own parents if they will be able to help. If grandparents can financially help, it’s important to consider when that money will come in because the timing can cut financial aid by as much as 50%, he says.

When the student does come in, Messinger often plays the “bad cop” if he needs to, setting expectations better than parents can.

“Never take out more in student loans than what you think you are going to make your first year out of school,” he tells the kids. “What we know is that not all majors are created equal.” He encourages most students not to take out more than $27,000 in loans in their own name, which will likely cost them about $275 a month over the 10 years after they graduate, he says.

Parents often take out federal Parent Plus loans, although he cautions them to think carefully about whether they can afford them. “The current rate is 7.6%. You pay almost 5% up front. The financial aid award says the school costs $50,000 a year, and we are going to give you $20,000 in scholarships, so you’ve got $30,000. If you’d like a Parent Plus loan, click here. Approved in about 48 hours. We know it’s an expensive loan, but it’s an easy way out.”

Capstone also points out to families the cost of a student taking more than four years to graduate. “We show that 44% of kids get done in four years at public schools, and it’s not much better at private schools, 52%,” Messinger says. “The most expensive part of college is the fifth year, mainly because most aid runs out in the fourth. The fifth year is full price. … None of us look at college as a six-year proposition, but that’s the reality for a lot of students.”

Opaque Financial Aid Process

Families, of course, hope to get financial aid to decrease the cost of college. Capstone uses a four-quadrant system: On one side, it looks at whether a student is likely to get a high or low merit award and on the other it considers whether the student will likely have high or low financial need.

“The way you shop is completely different depending on which quadrant you fall into,” Messinger says. “If you are a talented student with low financial resources, you want to find schools that will give you 100% of what you need. There are schools [especially Ivy League schools like Penn, Harvard and Yale] that don’t want money to be a barrier for you. If you have a low family contribution, they will meet 100% of what you need.”

The picture changes for a high-merit, no-financial-need student applying to an elite private school, such as one of the Ivies. “They say you can afford the $75,000 per year. They do not have merit scholarships. Let that resonate. You will pay full price at Penn or Cornell or any of the top universities. And a lot of the families we serve are in [that] quadrant,” he says.

A lot of families think that, given the high college price tags, they will qualify for at least some aid. Think again. Qualifying for need-based financial aid varies from school to school. In general, Messinger says, schools expect parents to pay 20% to 25% of their adjusted gross income for college expenses, he says. A married couple that files a joint tax return and makes more than $110,000 usually will be expected to pay 47 cents of every dollar above that toward the cost of education, and if they earn more than $250,000 they won’t qualify, he says.

Another complication with financial aid is that schools use different requirements on their forms to decide awards. Most schools use the Free Application for Federal Student Aid. Schools using the FAFSA, he says, look at assets the day the form is filed and tax forms from prior years. Sometimes, parents can shift income a couple years before students start school so that they get more aid in the students’ first year. “Freshman year is when you want your families to look as poor as possible, because that’s the base year,” he says.

About 300 top schools also use the CSS Profile form, which includes hundreds more questions than the FAFSA. Another is the 568 Presidents Group “Consensus” form to analyze financial need. Most schools using these two forms are private, have huge endowments and want to give aid to students who need it most.

As a result, one difference is that CSS and 568 President schools look at home equity, while FAFSA schools do not, Messinger says. “Let’s say you have $300,000 in home equity, a Consensus or Profile school, they might say we want $15,000 toward the cost of college next year. Five percent. That’s a big difference.”

Also, Profile and Consensus schools look at the finances of the noncustodial parent. “Regardless who claims them on taxes, financial aid goes to the custodial parent, which is the one [the students] live with 51% of the time,” Messinger says. “So I’m divorced, and my ex-wife is a surgeon making $500,000 a year, and I’m making $50,000 a year. I’m going to have my student live with me one more day that year and I’m going to apply for financial aid. And I’m going to focus on federal schools, because the Profile schools and Consensus schools pull in the noncustodial parent. … In this case, it could be a $75,000 or $80,000 swing [in a financial aid award]. They think you can afford it.”

Messinger stresses the net cost of attendance at any school is what counts; the sticker price is irrelevant and shouldn’t be used as the deciding factor on where a student applies.

One bright spot for families looking for financial aid is that many smaller private schools are competing fervently to fill their freshman classes, Messinger says. They are often more ready to reduce the price for students, and may be willing to do so even if a student’s family is judged able to afford it. Often, Messinger says, the net cost at these private schools can end up being less or about the same as a state school.   

Dorothy Hinchcliff is executive editor of Financial Advisor magazine.