Sending a child to college ain’t cheap. According to our friends at Strategies for College, “The average published private college cost last year was $37,390, while public, in-state tuition was $18,326. Last year only 5 schools in the nation had total fees exceeding $50,000. This year, nearly 60 schools charge that much per year! What will the increase look like next year?”
The purpose of college financial planning is to take steps to minimize the total cost of sending a child to college while also implementing a strategy to pay for that child’s education. As your child approaches college age, there are four distinct areas to consider: academic positioning, budgeting and cash flow planning, maximizing available tax breaks, and FAFSA planning.
Academic Positioning:
For starters, choosing the right school for your child can save you a lot of money over your child’s college career. Todd Fothergill, Founder of Strategies For College, told me of a family he had recently helped out with the college application process. The child was quite bright, and had applied to Cornell University. Based on the family’s financial situation, Todd knew that this family would not qualify for financial aid, and therefore, would be looking at paying $50k per year. Todd recommended that the child also apply to Case Western University, knowing that the child would most likely qualify for a substantial merit scholarship. That child is now attending Case Western at an annual cost of $25k – or half of what the family would have spent to send him to Cornell.
Not choosing the correct school or major can also be a huge pitfall for families. With an annual cost of up to $50k for a top private college or university, the cost of your child not earning an undergraduate degree in four years could mean tens of thousand of dollars in additional tuition and fees. Talk about busting your budget!
Remember, there are almost 5,000 colleges and universities competing to attract the best student body possible. By leveraging the database developed by college planners such as Strategies for College, and undertaking some academic positioning as part of the college application process, you can learn what options exist to send your child to college without paying the full listed price.
Budgeting and Cash Flow Planning:
According to Susan Schwartz, CFP, “There are times in life to go through a budget to figure out how you’re spending your money. A few years before sending a child to college is one of those times.”
The current rule of thumb states that the average family pays for college one-third from savings, one-third from current income, and one-third from loans. That being said, it’s important to come up with a plan to carry you through the four years you’ll be paying for one child’s education, or the whole period that you’ll be paying for multiple kids to earn their degrees.
The cash flow plan includes:
- Understanding the cash flow currently available to use towards college each year from your current job and other income sources.
- Determining various options that might be available to increase cash flow during this period.
- Compiling a list of assets that are available to pay for college.
- Figuring out how to best liquidate and utilize these assets over time.
- Evaluating borrowing options available to parents and students .
The end result of this part of the process is a well thought out “cash flow for college” plan to guide you through the years your children are at college and beyond. The results of this report might be downright scary, however, but at least you’ll have a realistic plan in place.
Maximizing Tax-Breaks:
Besides paying discounted prices, a great way to get more for your money is by purchasing goods and services with “pre-tax dollars” versus “after-tax dollars”. Remember, because of income taxes, $100 of pre-tax dollars has the same purchasing power as approximately $166 of post-tax dollars.
Back in the old days, saving for a child’s college education was much simpler. Not only was sending a child to college more affordable, but there were also a lot fewer college savings options available. You either socked away as much money as possible in your savings account, or, during the pre-“kiddie tax” days that ended in 1986, you might have opened an account in your child’s name.
Back in our June 2004 newsletter, we included an article titled College Savings Confusion. We address eight different education tax breaks in this article. Even though the article was written sever years ago, the tax breaks included in the article are still pretty much equivalent to those in place through 2012. While coordinating these tax breaks can be quite a challenge, taking full advantage of these opportunities will help you minimize the after-tax cost of sending a child to college.
FAFSA Planning:
“Every family needs to complete a FAFSA each year to be eligible for either merit aid or student loans, including a Stafford Loan available to every undergraduate college student,” explains Susan Schwartz CFP. Prior to your child’s junior year, there are steps to consider that might impact the results from the FAFSA, including:
- Moving money from UGMA/UTMA accounts into 529 plans.
- Selling appreciated securities that have been held in the child’s name.
- If you are self-employed, deferring income or putting money back into the business to reduce the reportable net income.
Working with a college planning professional who understands the FAFSA form could help your family take steps to minimize its “expected family contribution”, and therefore, qualify for additional aid.