College Planning - Your Best Strategy To Pay For College
College Is A Big Investment
College is expensive and the price keeps going up. The national average cost of attending a four-year public college is over $24,000 per year, and the average cost of attending a four-year private college is now over $50,000. Elite private colleges are now as high as $75,000 per year. And those are today’s prices. The table to the right projects those costs for future years assuming a 6% annual increase in the total cost of attendance.
With these prices a personalized plan of action is imperative in order to protect and fund your retirement. Your plan needs to be multi-faceted, go beyond just opening a 529 plan and focus on the areas of college selection, financial aid optimization, tax aid and wealth management. Are you working with a fiduciary and receiving coordinated guidance in all of these areas?
There Is A Wealth Of Information On Paying For College, But A Lack Of Professional Advice
Yes, college is a big investment, but fortunately there are strategies to reduce the cost of college and make it more affordable. However, understanding all of the strategies and determining which ones apply to your family’s situation can be quite confusing. In addition to the college admissions process, college funding involves multiple areas of personal finance such as: taxes, investing, financial aid and wealth management.
Consequently, college funding requires knowledge of all of these areas and, more importantly, how they affect one another for education funding purposes. For example, when applying for need-based financial aid, you and your child need your tax information from the prior, prior year. A change in your income, the sale of an investment or contributions you make to qualified retirement plans can all affect your taxes, which in turn can affect your child’s eligibility for need-based financial aid. College funding isn’t merely about financial aid; it’s about your financial life.
Regardless of whether your child qualifies for financial aid or not, your family still needs to figure out how to use your income and assets to come up with your share of the cost of college - an amount that will likely be different from one college to another. So, how are you going to pay for college? Will you rely on your income, assets, student loans and gifts from grandma? If so, how will that all work? Will you be eligible to claim one of the education tax benefits? If so, which one will impact your child’s financial aid eligibility the least?
These kind of big questions and the all important nuances that set each college funding situation apart are why your family may pay tens of thousands of dollars more each year for college than you would if you have a knowledgeable advisor that can cut to the chase and advise you on your best strategy to pay for college.
Be Proactive and Plan Now
The basics of what you need to know about paying for college are summarized in the points below.
- The out-of-pocket cost of college is a function of the sticker price (projected in the table above) of the college, and the total financial aid (need-based and merit) that the student receives to help pay for it.
Need-based financial aid eligibility is based on the income and assets of the parents and the student. However, not all assets are counted against the family.
It’s free to apply for federal student aid, and you should do it. You get a PIN on the federal aid website at www.fafsa.ed.gov, and then your child picks some colleges that she wants the information sent to, you both (parent and child) complete the FAFSA (Free Application for Federal Student Aid) online and the aid processing center will crunch the numbers and arrive at an Expected Family Contribution (EFC) toward the cost of college. A Student Aid Report containing your EFC will be sent to you and to the colleges your child selected. Each school will then compare your EFC to their cost of attendance (COA), and if your EFC is lower than their cost of attendance then the child demonstrates a Need for financial aid. Some colleges also require that applying students complete the CSS Profile aid form as well as the FAFSA.
If your child is eligible for need-based financial aid she may be awarded anything from grants and scholarships to student loans and work-study. Yes, loans and work-study are considered “aid.” If your child doesn’t qualify for need-based aid she might still get merit aid for academic, musical, athletic or other achievements. So there are two types of financial aid: need-based is based on your family’s ability to “pay” and merit is based on your child’s ability to “play.”
Unfortunately, before you can pay the out-of-pocket cost of college you have to pay taxes on your income first. Fortunately there is one more form of aid that we haven’t discussed yet - tax aid. You or your child may be able to claim the American Opportunity Tax Credit which will reduce your federal tax bill if you qualify.
Identify Your Best Strategy To Pay For College and Protect your Retirement
Your family’s best strategy to pay for college must begin by considering your family’s financial resources, the cost of the colleges that your child is considering, your child’s academic profile, your child’s eligibility for financial aid and your (parents) eligibility for the available education tax credits. We use all of this information to identify your best strategy to pay for college, including: