When the college bill comes, what are your next steps?
Congratulations! After 17 or 18 years of raising your son or daughter to one day leave the nest, your child just handed you the letter that will send them on their way. They have officially been accepted into college. Shortly after the high-fives and
happy tears, chances are your thoughts immediately turned to the looming tuition bill. Yes, you knew this day was going to arrive—but that letter made it real.
The average four-year, in-state public school is $23,190 per year, and the average private school now costs $61,437 per year1. Some of the more prestigious schools cost upwards of $60,000 or more per year. With need-based aid phasing out once a household earns around $90,000, many families find they make too much to qualify for need-based aid but are not able to contribute enough to cover the full cost of college. When the college bill comes, what are your next steps?
1. Capitalize on outside funding and determine your costs.
First, determine your actual out-of-pocket college expenses. Most financial aid is based off of the Free Application for Federal Student Aid (FAFSA), which is a complex calculation based on your income and other factors. It does not take into consideration what you need to save for retirement, sending other children to college, or other expenses you have. Some private schools also require the College Scholarship Service Profile (CSS), which takes into consideration your retirement fund balances which the FAFSA excludes from their application. If you’re suffering from sticker shock, see if your child can qualify for merit-based aid or scholarships which are not dependent upon the family’s income. Some colleges offer tuition discounting programs or have tuition exchange programs that allow you to avoid paying the out-of-state expenses. Check with the college’s financial aid department to learn what opportunities are available to you.
2. Complete a financial plan.
Once you know what costs you’re facing, you should complete a financial plan. College may not be the only goal you have for your family— and while you can take loans out for college, you cannot take out a loan for retirement. Many clients
are quick to say they will reduce their retirement savings or pay for college out of cash flow. They also might consider paying down their mortgage more quickly, to use that monthly payment for college. But these approaches may jeopardize your retirement.
Speak with your Financial Advisor about whether or not you are on track to meet your retirement goals. If you’re not, you will need to make a tough choice on whether or not you are comfortable delaying retirement or changing your lifestyle in order to send your children to college. Keep in mind: While you might agree to retiring later, a change in your health or employment could result in retiring earlier than you planned. Our best advice is to make sure you’re on track for retirement before considering footing more of the college bill than you’re able to. You can always contribute to your children’s student loan payments later if you have the cash flow to help.
3. Maximize the tax benefits of your withdrawals.
Maybe you’re in a position where you have already started saving for college in either a 529 plan, UTMA/ UGMA, or investment account. Where should you take from first? If you’re the child’s parent, it is advisable to start with the 529. Not all college-related expenses are considered “qualified.” Expenses that are funded with 529 monies but are “non-qualified” are subject to a 10% penalty at the federal level and may be subject to additional penalties at the state level. For example, if your child is living off-campus, their housing is only considered a “qualified” expense up to the standard amount they would have paid if they were living in student housing. If you’re a grandparent helping your grandchild with their college bills, please be aware that the income your grandchild receives from the 529 plan counts against them two years after the gift is made. If possible, use 529 funds from a grandparent for the junior and senior years of college.
If you have non-qualified expenses, consider using your UTMA/UGMA or investment account funds to cover those expenses to maximize the tax benefits of your 529 plan. You should plan to spend down your children’s UTMA/UGMA and 529 monies before dipping into your investment account. Keep in mind, your child’s UTMA/UGMA account is your child’s money and they take control once they reach the age of majority, which is 18–21 depending on your state. You’re not able to utilize any of those unused funds for your personal goals (i.e., retirement). If you have multiple children, remember you can always change the beneficiary on the 529 plan to another child to cover their qualified college expenses. However, you cannot change the beneficiary on an UTMA/UGMA.
4. Take advantage of loan options.
Loans are another way to fund your child’s college education. Your child may qualify for subsidized and unsubsidized loans by completing the FAFSA. Make sure to take advantage of these loan options each year. Federal student loans have relatively low interest rates, but there are limits on how much you can borrow each year. Parents can borrow additional money through the federal government or private banks through a PLUS loan. These loans will carry higher rates. Some families choose to use home equity loans to fund college because of the favorable interest rates that are currently available. Parents are on the hook for PLUS loans and home equity line of credit payments. You should carefully consider whether you’re comfortable footing the bill, or if your children have the ability to afford the future payment.
In the event you cosign for your children, find out what happens in the unlikely event your children were to pass away prior to the loan being paid off. This is an important planning consideration that is often overlooked. Some loans are not forgiven in the event your child passes—making it vital to have term life insurance on your child for the amount of the loan. Losing a child is hard enough, but being burdened with their college debt makes it even worse.
5. Have a tuition cushion in case of market downturns.
In addition to determining how to fund college, you’ll want to start thinking about preparing to write that first check. It is advisable to have 2–3 semesters in cash or conservative investments as your children approach college age. The average recession lasts 10–18 months. In the event we are in a down market cycle, you’ll want to take the funds from your conservative or cash holdings. If we are experiencing positive market returns, you should take the funds from your investable assets and replenish your conservative funds if you’ve had to use them.
This is an exciting time for you and your child— but it can be overwhelming when you start thinking about the financial decisions you need to make.
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