Calculating How Much Clients Can Afford for College

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Kathryn Flynn

By Kathryn Flynn

October 2, 2019

Many financial advisors play an active role in helping their clients plan for college. According to a study from Fidelity, nearly two-thirds (64%) of families said their financial advisor helps them stay on track to meet their college savings goals. Once it’s time for college, a financial advisor can help make sure their client gets the best return on their investment when paying for college.

The first step is to help clients determine how much they can afford to pay for college. This involves using all available resources, maximizing savings and keeping student loans to a minimum. Here are some key questions to ask your clients to help them better understand college costs. 

How much can you pay for college out of pocket?

Start by determining your client’s available resources. This includes parent and student savings, current income and help from grandparents or other friends and family. Examples may include:

  • College savings in 529 plans, prepaid tuition plans and Coverdell ESAs
  • Funds saved in the student’s custodial bank and brokerage accounts
  • U.S. Savings Bonds
  • Grandparent-owned 529 plans
  • Available cash flow
  • Income from the student’s part-time job
  • Scholarships

Do you qualify for any education tax benefits?

Your client may qualify for a federal tax incentive that can help offset college costs.

  • American Opportunity Tax Credit (AOTC) – Eligible parents may claim a $2,500 annual tax credit based on $4,000 of a child’s qualified education expenses. Up to 40% of the AOTC is refundable.
  • Lifetime Learning Tax Credit – Eligible parents may claim a $2,000 annual tax credit based on $10,000 of qualified education expenses incurred by the taxpayer, their spouse and their dependent children during the year.

How much can you afford to borrow in student loans?

If your clients are taking out student loans to pay for college, help them determine an amount that is reasonable and affordable. As a general rule of thumb, a student’s total student loans should be less than what they expect to earn during their first year out of college. If total student loan debt is greater than their starting salary, they might not be able to repay the loans within 10 years.

Your clients should try to avoid borrowing from the Federal PLUS loan program and private student loans. Federal student loans are less expensive and have better repayment terms than the other options. For example, the current fixed interest rate on undergraduate federal student loans is 4.529%, compared to 7.079% for Federal Parent PLUS loans. 

Federal student loans are available as subsidized and unsubsidized. Your clients should borrow subsidized loans first, since the federal government pays the interest on subsidized loans while the student is in college, during grace periods and during authorized deferment periods. Subsidized loans are awarded based on financial need and are available to undergraduate students who are enrolled on at least a half-time basis. 

Keep in mind that there are limits on how much a student can borrow in federal student loans. One strategy to consider is to borrow the maximum amount of subsidized federal student loans each year the student is in college and supplement the remaining college costs with savings, education tax benefits and current income. Families who spend their savings first risk not being able to cover the total costs with federal loans and could end up having to borrow more expensive private loans. 

The following table lists the maximum amounts of subsidized federal student loans a dependent or independent undergraduate student can borrow during each year of college. The limits are different for overall federal student loans, unsubsidized federal student loans, and federal student loans for graduate students.






Maximum subsidized loan amounts for undergraduate students






Will you qualify for institutional financial aid?

As your client begins to narrow down college choices, it’s important to look at the net price of each college, which is the annual cost of attendance less grants, scholarships, tuition waivers and other gift aid students receive. Each student pays their own net price, based on their financial aid award from the college. Students may be eligible for need-based financial aid and merit-based financial aid from a college.

Colleges consider a student’s Expected Family Contribution (EFC) to determine their financial need. The EFC represents the amount a student’s family is able to pay for college out of pocket, and is calculated using information reported on the student’s Free Application for Federal Student Aid (FAFSA). However, some colleges only meet a portion of a student’s financial need.

Merit scholarships are available to high achieving students. Some colleges offer merit scholarships as discounts on college tuition. If your client’s child is awarded a merit scholarship, they may be able to cut as much as 50% off the price of attending a private college.

Financial aid award letters are typically sent out mid-February through March. The letter will include the total costs of tuition and fees, room and board and amounts of any grants and scholarships. It may also include the student’s federal financial aid options, but generally it will not include information about private loans or private scholarships. Reviewing your client’s financial aid award letters will help them understand each college’s true cost and determine which college is the best financial fit for their child.

A good place to start:

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