By: David K. Carboni, Ph.D.,CFPⓇ
After funding your retirement, underwriting your childrens college educations is the single, largest expense most families face. Never the less, its important to make sure youre on track for a financially secure retirement before looking to fund the kids college. That said, there are a number of ways to approach the daunting task of college funding. Before you get intimidated about the high price of college, its important to keep a few facts in mind. On average, four-year state colleges charge $7,020 annually for tuition and fees for students who live in state, according to College Boards website. Private colleges charge $26,273, while two-colleges average $2,544 in tuition and fees. Obviously, thats not the total bill because you must include room and board. College Boards website, www.collegeboard.com offers some helpful ways to estimate these additional costs. So your first step is to estimate the total cost of college.
Its important to break down costs between direct billable costs, such as: tuition, fees, and room and board. Tuition and fees can vary by academic program and whether you child attends full or part-time. Also, room and board charges usually vary by the meal plan and room your child selects. If your child lives off-campus or at home, dont forget to estimate these costs as well. Many so-called “indirect” college costs include: books, supplies, travel, and personal items. To get an idea of these costs, national figures indicate that the average four-year undergraduate student in 2009-10 spent $1,122 on course materials and $1,974 on personal expenses such as laundry, cell phones, etc., and $1,079 on transportation expenses. Savvy students can make wise choices to avoid over spending on these items.
Its also encouraging to realize that most students receive financial aid. College Board reminds us that the average amount of aid for a full-time undergraduate student is approximately $10,000, with more than half coming from grants that dont need to be repaid. Even students from well off families can receive financial aid. For example, 40% of students at Brown University receive financial aid, with the typical package around $31,000. Some of those students come from families with incomes exceeding $200,000. Therefore, dont assume you dont qualify for financial aid if your family income is relatively high.
The first step in applying for financial aid is for parents to complete the Free Application for Federal Student Aid (or FAFSA) which determines the students eligibility for financial aid (i.e., Pell Grants, Stafford Loans and Perkins Loans). The process considers the applicants “available income” which generally includes most taxed and untaxed income, but excludes sometax credits such as the “earned incometax credit.” FAFSA puts your familys financial information into a central data base for federal, state, and university-provided aid. You can find a FAFSA form at fafsa.ed.gov.
Generally, as part of applying for financial aid, FAFSA assesses parent owned assets at a rate of 5.64% in determining a familys expected family contribution (EFC) toward college expenses. Student owned assets are assessedata 35% rate for EFC. Therefore, its generally a good idea to keep assets out of the students name when applying for financial aid. The FAFSA considers the “base year” the year prior to awarding financial when they examine a familys assets and income. Therefore, its also wise to defer income and “load up on” tax deductions during your “base year”, as both income and assets play a significant role in determining your eligibility for financial aid. Assets in 403b and IRA accounts are generally not counted in determining your EFC because they are considered “inaccessible.” So you could have a situation where a modest income family with college earmarked assets in its childs name could qualify for less financial aid than a higher income family with most of its assets in retirement plans. Know these rules and plan accordingly. Also, be aware that competition for financial aid is intense, with FAFSA applications up more than 20% this year.
Experts also agree that you shouldnt be shy about trying to negotiate with financial aid offices. Some people have even try to play one schools financial aid office against another, by letting their preferred choice school know what others are offering. But be careful not to alienate financial aid officials by being too aggressive.
Under the financial aid provisions of the recently passed Health Care and Education law, beginning in 2011 students and parents will be able to borrow for higher education directly from the federal government. Parents borrowing interest rates will fall from 8.5% to 7.9% (PLUS loans) under the new program. Parent borrowers need a better credit record than students and parents cant have any missed payments in the last 90 days or declared bankruptcy or had a foreclosure in the last five years. The law also provides more funding for Pell grants, available for students from families making less than $50,000. Publishers of finaid.org suggest that total education debt should not exceed what students expect to earn in their first year out of college.
As another option, parents should compare the rates for a home equity loan before taking out a private education loan. While a home equity loan can put the borrowers house at risk, interest rates on these loans can be low and the interest may be tax deductible.
In summary, fund your own retirement before funding your childrens college education. But when planning to pay for the kids college: know the rules, plan early, know your options, and be persistent. Your childrens college education could depend on it.