After funding your retirement, underwriting your children’s college educations is the single, largest expense most families face. Nevertheless, it’s important to make sure you’re 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, it’s important to keep a few facts in mind. On average, four-year state colleges charge $21,447 annually for tuition and fees for students who live in state, according to College Board’s website. Private colleges charge $42,224, while two-year public colleges average $15,286 in tuition and fees, with two-private institution charging $28,155. Obviously, that’s not the total bill because you must include room and board. College Board’s 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.
It’s 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, don’t forget to estimate these costs as well. Many so-called “indirect” college costs include: books, supplies, travel, and personal items. These costs can run into thousands of dollars annually. Savvy students can make wise choices to avoid overspending on these items.
It’s 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 $13,200, with more than half coming from grants that don’t need to be repaid. Even students from well off families can receive financial aid. For example, 44% of first year students at Brown University receive financial aid, with the typical package around $55,682. Some of those students come from families with incomes exceeding $200,000. Therefore, don’t assume you don’t qualify for financial aid even 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 student’s 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 some tax credits such as the “earned income tax credit.” FAFSA puts your family’s 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 family’s contribution toward college expenses. Student owned assets are assessed a 35% rate for contribution purposes Therefore, its generally a good idea to keep assets out of the student’s name when applying for financial aid. The FAFSA considers the “base year” the year prior to awarding financial when they examine a family’s assets and income. Therefore, it’s 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 available assets because they are considered “inaccessible” for financial aid. So, you could have a situation where a modest income family with college earmarked assets in its child’s 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.
Experts also agree that you shouldn’t be shy about trying to negotiate with financial aid offices. Some people have even tried 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 2011 Health Care and Education law, students and parents are able to borrow for higher education directly from the federal government. Parent borrowers need a better credit record than students and parents can’t have any missed loan 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 children’s college education. But when planning to pay for the kids’ college: know the rules, plan early, know your options, and be persistent. Your children’s college education could depend on it.