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If you're the parent of a high-schooler, there's a "talk" you should be having with them. No, it's not the one you think.

On Oct. 1, the federal financial aid application process — also known as FAFSA — opened for the 2019-2020 academic year, which could bring to light questions about the economic realities of a college education and more importantly, who's footing the bill and how. 

Personal finance expert Beth Kobliner's latest project "We Need to Talk College," offers tools on how to discuss finances and further education.

In part one of her conversation with Marketplace Morning Report's David Brancaccio, Kobliner outlined the need for parents to be on the same page about paying for college. You can listen to it here

Below is an edited transcript of part two of the interview, about how parents can make FAFSA work for them.

David Brancaccio: All right, so some perfect people have been planning for 20 years on funding their kids' college education. But for some people who may have been procrastinating, are there strategies to increase the chances you might get some money?

Beth Kobliner: Yes, there are actually. First of all, what's important to know is you need to start this pretty early because colleges look at what's called your "base" year. And that base year starts January of 10th grade and goes through December of 11th grade. So the obvious point is the more money you have, the less financial aid you get. And for that reason, you might want to consider a few moves before you get even to that base year.

Brancaccio: So what's the move? Go on a shopping spree?

Kobliner: If you have good reason to spend down your savings — say you owe money on a high-interest rate credit card — then by all means, pay off that debt before the base year, since it's a smart personal finance decision to pay off rate debt. And also at the same time, you're reducing your assets and perhaps will qualify for more financial aid.

Brancaccio: You're sort of gaming the system; there may be ethical issues that are raised by this, some of our listeners are thinking that right now ...

Kobliner: Here's the thing: It might seem like you're gaming the system, but it's a really bad system. Rising college costs have outpaced inflation for decades. Federal loans, federal grants have flatlined. So you really need to do everything you can to get the most financial aid for your kid. And just like when you fill out your taxes, you're hunting around for legal deductions, same thing here;  you're hunting around to make your money look most able for you to get financial aid. For example, under the FAFSA formula, kids contribute 20 percent of their assets to college, whereas parents are asked to contribute just about 5 percent. So it's generally smart to try to put college savings in a parent's name, not a child's. That's not hiding money, it's just a smart way to follow the rules so that you get more aid. 

Brancaccio: A totally legit strategy for parents, but it's one that required a long period of planning, was in some states you can prepay your child's tuition if they go to the state school.

Kobliner: Right. There are these plans which were really popular in the '80s, early '90s and they allowed you to lock in tuition at today's dollars, and when your kid goes 18 years from now, you're set. These are less popular now, because first off there have been some cases of plans not being able to keep that promise completely. But also, your choices are limited. And as we've discussed, kids have choices now and they have opinions about where they want to go. So if you do one of these prepaid plans, you're really locked into a number of schools in your state. A more flexible way to save is these very popular state-sponsored college savings plans known as 529s. And they allow your money to grow tax free if you use it for college costs, and you could use that money at any school you want. 

Brancaccio: So as part of your field work here, you talked to a family, Regla and her daughter Nikole. 

Regla: We had Florida prepaid. 

Nikole: I knew that it would only work for Florida schools. I knew that if I wanted to leave, I would have to find a school that has really good financial aid.

Brancaccio: So you see, it's complicated right there.

Kobliner: Very complicated, and in her story, she wanted to go out of Florida. She wanted to go to school away from home, and that became complicated when her mother had been saving all these years in a plan specifically [for] Florida schools.

Brancaccio: Well, the child could say, "I'm not a box on a spreadsheet,  I'm more than that!" That's the complexity about these prepaid plans.

Kobliner: Very much so. And I think that's why over the last recent years, 529s have gotten very popular. Often, if you put it in your own state's 529 plan you also can maybe get some tax breaks, state breaks, but there's just a lot of ways to look at this. I think flexibility for most parents right now is key. I have people talking to me who have children who aren't even born yet and they're starting to look at these plans because they're so nervous about this. We even know from research that if you tell a kid, a young kid, you're saving for his or her college, that kid is more likely to go to college regardless of how much money is in the account.

Brancaccio: And if you compare it to buying a car. ... People growing up [say], "Someday I'm going to buy a car," you know that a Mercedes AMG is going to cost so much more than a used Honda Civic, if that's the choice, and the whole discussion in your head is connected to the money. Often, that's not the case with college. You're saying, "change that."

Kobliner: I think that's true. And I also think that for parents it's so much more difficult. At least when you're shopping for a car, you basically know what price you'll be paying — for colleges, it's a black hole. You're putting in those applications and you have a vague idea of how much aid you'll get. But it's tricky, and that's why I think looking at this information now, early, talking to each other about it and then talking to your kids, is critical.

Brancaccio: All right, and debt may be part of this, but so many students have crippling loads of debt. We've had people on the program worried about an emerging student debt crisis. Would you just say "don't get into student debt? Don't borrow for your education?" 

Kobliner: I think that when you look at the numbers we know that if you graduate from college and if you take on a reasonable amount of debt say $20,000 even $30,000 at a low interest rate federal loan, that over time that will be a good investment. You will earn on average $1 million more than if you didn't graduate from college at all. But it's true. You have to pick the right school and you have to pay for it in the right way. So low interest rate loans and if you find a school that you feel is worth that $20,0000 in debt as a student, then you can go for it. But just realize you want to stay with these low interest rate loans. And of course the one other big problem that's come up is parent debt. Now the amount that parents are borrowing for college has surpassed the amount students are borrowing for college. And on average for recent graduates, parents took out $30,000 in debt, usually the Parent PLUS loan. So parents now are sacrificing a lot of their futures in order to send their kids to college, and that's another discussion you need to have with your spouse or partner before you have that talk with your kids. 

 

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Follow David Brancaccio at @DavidBrancaccio