Most of us have probably been told by a friend or financial advisor to open a 529 account to help save for college.
Although this is a good start it’s not nearly enough, considering that some four-year colleges now cost over $300,000 to attend.
So, besides saving, how can families address the rising cost of an education? They should develop a college-planning strategy that addresses four key areas: school selection, financial aid, tax aid and wealth management.
Helping your college-bound child choose the right school could be the most important part of your plan. Your goal is to determine where he or she will fit in best, get accepted and graduate on time.
Consider working with an admissions expert, a person who’s familiar with campus life, academics, and admissions and financial aid policies at hundreds of colleges and matches students with the schools that best fit their needs. He or she can help narrow your search.
For a less personalized but more affordable resource, some websites
match your child with appropriate schools.
Regardless of your approach, keep in mind the school’s culture and your child’s personality. Consider the size of the campus, its proximity to home, the relative competitiveness of the student body, class sizes, and social activities, such as fraternities and athletics.
Once you’ve selected the target schools, shift your focus to financial aid:
Types of Applications
There are two applications
that determine eligibility for need-based financial aid: the Free Application for Federal Student Aid and the CSS Profile. They ask similar questions relating to family finances but can produce dramatically different expected family contributions
, or EFCs. Find out which schools use which application to better estimate your out-of-pocket costs.
- Merit Aid - In addition to need-based aid there is merit aid, which is based on your child’s unique abilities, be they academic, athletic, musical or civic. It has nothing to do with your family’s income or assets and generally comes in the form of scholarships, grants or tuition discounts — which means that it doesn’t have to be paid back.
Some colleges will meet 100 percent of your child’s need-based aid eligibility with grants and scholarships, while others will use a combination of grants and student loans.
Use online resources
to determine how desirable a candidate your child is to schools. If your child stands out, he or she will likely receive more merit-based aid. This is an example of how college selection and affordability go hand in hand — picking the right college can lead to more financial aid that doesn’t have to be paid back
Tax aid is an often-overlooked aspect of college planning. For example, the American Opportunity Tax Credit (AOTC)
can provide up to $10,000 toward the cost of college. If you can’t take the credit yourself, find out if your child qualifies. But your tax planning should go beyond the AOTC.
Consider hiring your children in the family business and shifting appreciated assets, such as stocks, to your child. Your child can potentially sell the assets in his or her name and pay taxes at a lower rate. Make sure that the additional income won’t impact need-based aid eligibility and that it properly navigates the “kiddie tax.”
When executing your college plan, it’s crucial to know in advance how your tax strategies will impact your financial aid. Doing so will ensure that you’re optimizing your tax dollars and financial aid awards.
Even after optimizing financial aid and tax aid, parents and children need to determine the best way to pay their share of the cost.
You want the best for your children but using home equity or your retirement assets usually isn’t the best path. A better option would be to help pay your child’s student loans once you have more certainty of achieving your own goals.
Keep in mind that student loans might inhibit your child’s ability to save for his or her own retirement or buy a house after college. Too much emphasis is placed on getting into college and not enough on getting out. He or she needs to understand the impact on cash flow of making loan payments after college.
You might not be able to control the cost of education, but you can sure plan for it. Start savings as early as possible, develop a “late-stage” planning strategy and coordinate with outside professionals as needed. If your current financial advisor isn’t providing coordinated guidance, find someone who can.
College will be one of your greatest investments. The sooner you put a plan together, the better.
At Tushingham Wealth Strategies, our goal is to help you proactively oversee all of your financial affairs by serving as your “Personal CFO” and fiduciary, so that you may live your ideal life worry free. As part of our "Personal CFO" service we help families develop "late stage" college planning strategies so that they can save money on college, protect their retirement assets and help their children graduate with minimal student loans. This is why our “Personal CFO” services will help you integrate college and retirement planning into one strategy.