A smart parent's guide to saving for a child's college education

When my daughter was a sophomore in high school, she set her sights on a handful of selective liberal arts colleges around the country. Meanwhile, I furiously read every college finance book I could get my hands on to learn about financial aid. In the end, one of those small colleges worked out: We qualified for need-based aid, and the school offered enough. But financial aid consultants say the biggest mistake families make is engaging in the "pick a college, any college" mindset without understanding how financial aid works or analyzing their own financial profile. So, parents, before your child applies to college, here are a few questions you need to ask yourself.

1. What is your 'expected family contribution' (EFC)?

An EFC is a measure of a family's financial strength, calculated from a variety of variables. Generally, it's the minimum you can expect to pay — unless yours exceeds the cost of college — and many families pay more. When you fill out the Free Application for Federal Student Aid (FAFSA), a dollar amount will be generated for you. This is your EFC. Think of it as being similar to a deductible. The CSS Profile, used for nearly 280 selective colleges, can generate separate institutional EFCs, so you might have more than one. But either way, this is an important number. "What most families don't understand is that even for the most generous of colleges, families are responsible for paying their EFC," says Debbie Schwartz, co-founder of College Money Search, a service matching students to colleges offering them the most money.

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Most EFCs feel uncomfortably high, and many families are upset when they learn theirs, says Stephanie Hancock, financial planner for Hancock Wealth Advisory and financial aid consultant with College Aid Consulting. "What I tell people is the EFC represents three timeframes. It's not how much you can pay from your current cash flow in one year. It's a combination of past (savings), present, and future (borrowing). I call it Expected Family Capacity: How much can you absorb in cost?" It's possible a hefty merit scholarship could mean you don't pay your full EFC (especially if it's high), but many families do end up paying it — and more. Use this EFC calculator for an early prediction. Be aware: It is only as accurate as you are.

2. What's realistic for you to contribute?

Most families don't figure this out until spring of senior year, but Hancock recommends analyzing finances early in high school. According to a 2016 Sallie Mae study, the average family has saved just $16,380 for college. However, colleges do expect us to plan ahead because they're not responsible for our budget woes.

3. Have you discussed finances with your child?

Hancock has seen students get boxed into unhappy outcomes by not applying to the right colleges for their family's financial profile. She recommends discussing finances frankly by sophomore year in high school. It's okay for kids to apply to their dream school, she says, but parents should be crystal clear that if the finances don't work out, their child will attend a different college. Hancock sees too many families turn themselves inside out and take on unrealistic debt for a dream school. But college is a four-year plan.

4. Do you understand the difference between need-based aid and merit aid?

Need aid includes Pell Grants, work-study, federal subsidized loans, state grants, and institutional grants from the college itself. Merit aid is money awarded for grades, sports, music, or other talents, and it's not based on need. Many public universities aren't able to award much of anything, but good students might get lucky with merit scholarships at the right university. Private colleges may award need aid even for incomes north of $100,000, but it depends on the school. Some private colleges "meet need"; many don't. Top scholars should know that brand-name colleges often don't award merit scholarships because every student is a top scholar. But if you think you'll qualify for need aid at these colleges then they're worth a shot.

5. What types of colleges should your child consider?

It's all about that EFC. If your family won't qualify for need-based aid, look for hidden gems that award merit scholarships (it's best to be in the top 25 percent for that college). Kids with outstanding profiles and financial need, as determined by financial aid forms, can try for selective colleges. Geographic diversity is a plus. Some states offer hefty tuition discounts to out-of-state students (look at Alabama). Check out Peterson's How to Get Money For College for comprehensive college profiles. Analyze colleges through the National Center for Education Statistics' College Navigator tool.

6. Do you know about net price calculators?

Colleges are required to post these calculators on their websites. The calculators vary in accuracy, but they're a crucial starting point. Input income, assets, and grades/test scores to predict merit or need aid. Merit money can be trickier, and if a calculator doesn't ask for test scores and grades, the college likely doesn't award merit scholarships.

Most families find affording college difficult. Many colleges don't award enough, or any, financial aid even, if you qualify. But if families do targeted research on college profiles, students have a better chance of landing somewhere that works for the budget.