Paying the Bill for Private School

Paying Private School Tuition

The Challenge of Paying for Private School Tuition

As daunting as the ‘paying for college’ conversation is with many of my clients, sometimes we have to talk about how do you best handle paying the bill for school before college? Paying the bill for a private school can be a challenge and can complicate your financing for college later.

Before many parents can even deal with college funding, they’re already paying for or considering private secondary, middle and elementary school for their kids. If you’re a parent who’s chosen to send your student to a private school, you may be wondering about how best to pay for school.

The average cost of a non-religious private school is about $17,000 per year. For more selective schools the price tag can be upwards of $50,000 each year especially in areas like Greater Boston.

Although there is no formal federal financial aid system in place for parents choosing this route, there are a number of ways to handle this including a little helping hand from your Uncle Sam.

Get to Know Your Financial Aid Officer

Each private school has a financial aid office. While the school’s mission may be to educate your child, each school is a business and like any business they need and want customers. If you’re an interested parent, they know you have choices. Like colleges, some schools are willing to negotiate in order to fill a class and diversify their student population.

And like colleges, you shouldn’t choose or pass on a school just because of the sticker price. So it never hurts to ask about need- and merit-based aid available. Many schools will waive tuition for families if their income is below $75,000 per year. More than 20% of private school students receive some sort of nee-based financial aid. For those schools with larger endowments, you’ll find that they are more generous offering more than one-third of their students need-based aid.

If you may have more than one child attending the school, talk with the financial aid officer as most schools – like most daycare providers – offer sibling discounts.

Scholarship Money

The best source of money will likely be the school itself. Like college, there are scholarship funds available for K-12 education. These funds are mostly needs-based and require some sort of ‘need test’ that calculates a family’s ‘expected family contribution’ just like college. To help improve your aid options, you may want to seek professional guidance just as you might with filing your taxes or the college version of financial aid forms.

Free & Alternative Schools

Throughout the country you can find a number of free private schools that began because of wealthy patrons with a vision toward expanding opportunities. The most famous – figuratively built on chocolate – one might be The Milton Hershey School located in Hershey, Pennsylvania which serves more than 1,800 students from K-12.

Locally, the Christo Rey School in Lawrence, part of the Christo Rey Network (, offers an opportunity for work study for students in the community as a way to pay for tuition. Parents are responsible for a nominal tuition charge and the schools also offer additional financial aid.

Use Tuition Payment Plans

Many schools will accept tuition payment plans. I encourage clients to use these plans as a way to manage cash flow. Trying to balance a mortgage, living expenses and tuition can be challenging. Regardless of income level, there will always be competition for your dollars and most folks lack the reserves to simply write one check. So especially if you have income that is variable or made up of bonuses and commission, these arrangements will help smooth out your household cash flow.

But such arrangements are not a substitute for a plan.

Home Sweet Home Equity

You shouldn’t consider your home to be like an ATM. That’s one way we got into our recent real estate troubles. But the fact remains that if you have home equity, it is a source to consider as a way to pay for private school expenses. And given the rates, you may be able to access cash needed at a very low-cost rate. And your Uncle Sam may even allow you to write off some or all of the interest on such loans from a HELOC or cash-out refinance if you itemize deductions on your Schedule A come tax time.

In this case, you shouldn’t count on this as a resource when it comes time to send Johnny off to college. But this may be a good thing. If you’re planning on sending your child to a private college that uses the Institutional Methodology (IM) for financial aid calculations, you won’t have a lot – if any – home equity to be considered in the formulas. So your borrowing may actually help increase future college financial aid eligibility.

In any event, it’s a good idea to have a plan in place to figure out how to repay these loans and any future college expenses before you get the loans in the first place.

Help from Uncle Sam: UTMA, UGMA & ESA

Believe it or not, the government is here to help. And it’s a good idea to know your ABCs when it comes to options to pay for private schools.

Coverdell Education Savings Accounts (ESAs) allow for families to save up to $2,000 each year per child in tax-free accounts that can be used to pay private school tuition. Such accounts can be opened up at any bank, brokerage or investment adviser. As long as the distributions are used to pay for qualified education expenses at an eligible school, you can use the proceeds and not pay any taxes on gains or interest.

The Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) are considered the granddaddy of college savings accounts – but they can be used to pay for private K-12 tuition as well.

The UGMA (Uniform Gift to Minor’s Act) and UTMA (Uniform Transfer to Minor’s Act) are nothing more than custodial accounts. A custodial account is used to hold and protect assets for a minor until they reach the age of majority in their state.

Because the assets are considered the property of the minor, these accounts are often used to take advantage of the “kiddie tax.” The kiddie tax allows a certain amount of a minor’s income to go untaxed, and an equal amount to be taxed at the child’s tax rate (as opposed to mom and dad’s higher rate).

Potential Advantages:

Aside from the requirement to hand over “control” of any remaining money to a child at 18 or 21, these accounts are extremely flexible and unlike a Coverdell you’re not limited by a $2,000 annual max contribution. It’s basically up to the custodian (usually the parent) to determine how to invest the money and when to spend it on the child. You can use the money for any legitimate purpose for the benefit of the child but expenditures on items that are considered your parental-support obligation, such as food, clothing and shelter, would be taxable income to the parents.

So, high school tuition? Yes. Buying dinner? No.

Use of this account can help (but not guarantee) that $1,000 of investment income (2014) will go untaxed each year, with another $1,000 being taxed at the child’s presumably lower tax bracket.

To best mitigate the tax issues, you may want to consider investing in things that appreciate in value over time and don’t throw off a lot of income. Some good options here would be US Savings Bonds, growth stocks or mutual funds, index funds, ‘tax-efficient’ managed funds and Treasury Bills.

Potential Disadvantages:

The same tax benefit that makes custodial accounts attractive can also make them unattractive. After the first $2,000 (2014) in income potentially being sheltered from taxes, excess income is fully taxed at a parent’s marginal tax bracket. This would not occur in a Coverdell ESA.

Additionally, the account requires a custodian to hand over control of the assets to the child generally at age 21 in Massachusetts to do with as they see want. Custodial accounts count heavily against a student’s college financial aid application as it is considered an asset of the child. Solution to both? Spend the money on private K-12 school costs before the child ever has to fill out a college FAFSA.