Planning for College Expenses

Paying College for Graduating High School Senior Aside from buying a home, paying for a child’s college education can be one of the most expensive things a family will do.  Planning for college expenses requires a lot of thought and families can benefit from professional guidance.

So how will you pay for their college education and not risk funding your other goals like retirement? Here are four main ways for planning for college expenses:

  1. Save and invest it all while the student is young so that all costs are covered;
  2. Pay for all expenses out of cash flow during the student’s college years;
  3. Count on scholarships;
  4. Take out loans.

Families will usually use a combination of these. Each of these options offer merits. But rarely will any one option cover 100% of college expenses.

To prepare for college expenses, a college financial planner will work with clients to see how feasible each of these really is for their particular situation.

Planning starts with a conversation – first about values and expectations.  Then a detailed look at finances.

Step 1: Cash Flow Planning

Figure out the expected average cost of the type of school your child may attend and determine the amount you are comfortable covering.  Then start saving while your child is young so you have enough time to accumulate funds before they enroll.  How much you set aside will depend on your cash flow and expectations.

Are you planning on covering the whole cost, maybe half or maybe limit it to the amount of in-state tuition leaving rest to be the student’s responsibility?  This is where it helps to have a conversation on  values and expectations before your student steps onto campus for the first time.

Create a cash flow plan with the help of a financial planner so that you can figure out how likely it is that you can pay all expenses while the student is enrolled in college.  Most families typically pay under twenty percent of their cash flow toward college costs during the student’s enrollment.  They will likely supplement this with cash from savings or other loan sources as well.

Some investment vehicles have certain advantages than others so you should know the ins and outs of each to see what fits best for your situation.

But before you start tapping savings and investments, you should have an idea of what amount you’re really willing and able to invest.

Step 2: Getting Aid

Use all forms of aid whether merit- or needs-based and include student loans in the mix.  To qualify for the most amount of aid, you’ll need to actually file student financial aid forms. Do this regardless of how much money you earn or have saved because schools will not provide aid unless this form is on file.

To maximize your ability to get aid, you should be planning ahead on steps to take before your student enters the all-important Base Year for financial aid calculations (January of the junior year of high school through December of the senior year of high school).

You may be able to position yourself for more aid by shifting assets into trusts or annuities.  You may be able to prepay expenses to lower reportable cash.  You may be able to change the ownership of certain assets to minimize their impact on the aid formulas.

For those who are self-employed or own rental property, you may be able to shift income to other family members who are in lower tax brackets.  You may be able to put in place an education benefit plan for your business that doubles as a tax deduction.

Even those who are W2 wage earners can benefit from from planning that may lower tax liability and improve financial aid.

Step 3:  Scholarship Search

Many families fall back on this as the centerpiece of their college financial plan.  In reality, scholarships typically fund less than 5% of college expenses.  Sure, there are some who earn ‘full boat’ scholarships for academics or athletics but the vast majority of families will not be fortunate for such a gift.  While an important piece of the funding plan for any family, you shouldn’t rely on it exclusively.

You can increase your chances for this type of aid by targeting school-specific scholarships.  If your student has some special talent or offers the school a way of rounding out their need to create a diverse student body, you’ll have a better chance of garnering a scholarship.  In one case, a client’s daughter qualified for a $5,000 per year scholarship for four years which covered nearly 10% of costs just because she was a talented singer who promised to join the college’s chorus.

Step 4:  Loans

The reality for most families remains that loans will be the main source of funds for paying for college. In fact, loans from all sources cover more than fifty percent of all college costs.  There are a number of options for parents as well as students.

Parents may use home equity proceeds from a mortgage refinance or home equity line of credit.  Parents may also consider the Parent Loans for Undergraduate Students (PLUS).  There are even alternatives to these PLUS loans that offer other attractive features.

Regardless of income, the federal government authorizes the receipt of up to $23,000 in subsidized loans and $31,000 in unsubsidized loans for a dependent undergraduate students.

Your student may need to fill in the gap with private loans.  Terms for these vary and the devil is in the fine print.  Generally, you’ll save on interest if you agree to make automatic payments of some nominal amount during the college funding years.
After your student graduates, he or she can consider ways to refinance or consolidate these loans for lower interest rates or longer repayment terms in order to bring the monthly debt payments down.

Step 5: College for Free

Nothing beats free.  So parents and students should not overlook other ways to lower college costs.

  1. Study abroad.  US students can attend colleges in Germany for free.
  2. Take advanced placement credit.  Through AP credit tests, students can reduce the amount of time and cost on campus.
  3. Study online. There are an increasing number of options for online courses and degrees for low- or no-cost.
  4. Give back.  If you become employed in certain professions as a first-responder or teacher or work for a non-profit, you may qualify for debt forgiveness.

For more on these options, you can check out this previous post.

For more on how Americans pay for college expenses, you can check out a previous post on the topic here.

Looking for more ways to plan for college expenses?  Check this article from Financial Safety Net or contact a qualified college financial planner.