There's no debating it: college is expensive. The average four-year public school costs more than $9,000 in tuition and fees per year and the average tuition at a four-year private school is more than $31,000 per year. That is understandably overwhelming to many parents and students.
A growing thought is to simply put as much money as possible in a 529 plan. 529 plans are a great tool to save for college needs, but they aren’t the only choice. When it comes to saving for college, there are many other options available. In some cases those options are more flexible and provide greater assistance than a 529.
Here are some options to consider to help clients think through how to best save money on college expenses. (For more, see: How Paying for Higher Education Has Become Riskier.)
Consider Roth IRAs
Roth IRAs are commonly thought of as a retirement planning vehicle. Many don’t realize a Roth IRA can also be used as college savings tool. When you take an early withdrawal from an IRA, the IRS typically hits individuals with a 10% tax penalty. That is not the case with a Roth IRA. The IRS allows parents to take early withdrawals for qualified higher education expenses. This is an option to consider if parents of young children are uncertain if their child will attend college or not.
It is important to point out that this should not be done if it puts retirement at risk. Your clients might also face income phase out limits, as well as a potential income tax hit on distributed funds.
Take a Joint Approach
Planning for college does not need to take an either/or approach. If parents are able to fully pay for a college education, that’s great — but many aren’t able to do so. Fully funding a college education with student loans is not desirable. The solution to this is sharing responsibility for financing college.
This two-pronged approach helps both parents and children. It helps parents balance college expenses with their retirement needs. It helps students take a more active role in the process of saving for their education and therefore helps them think through the financial aspect of their education. (For more, see: College Loans: Private vs. Federal.)
Don’t Start at a Four-Year School
There is a certain prestige that comes with attending a well-known four-year school. But there is a cost for prestige. “Seriously consider a year at a community college. Community College credits come at about a 70% discount,” said Daniel Haitz, ceo of EDUSquared, which specializes in college planning. Haitz points out that many core courses — lab sciences, math and history — can be taken at any community college and be transferred into most four-year institutions.
Given that the average cost of tuition for community college is just over $3,300 per year, this translates into significant savings over the lifetime of the college experience. Tuition is not the only savings opportunity with the community college route. If the student lives at home during his or her time at community college, that will bring additional savings not possible at a four-year school.
We commonly only think of negotiation when buying a large ticket item. College tuition, and financial aid packages are also negotiable in many cases. The key here is to think as a consumer. Colleges need to make money. Attracting new students is a key factor in that equation.
While not every school will negotiate, many will. The circumstances for a better financial aid package or reduced tuition will vary, though if your client’s circumstances change or their student meets certain thresholds, a successful negotiation is possible. (For more, see: Tap Your IRA for Your Kid's College?)
Helping clients consider how they can reduce their adjusted gross income is vital as they think through their college saving goals. Income levels matter because they are directly related to the aid they may qualify for through completion of a FAFSA. There are many ways to reduce income, such as:
- Maxing out retirement contributions
- Contributing to a Health Savings Account
- Taking a capital loss on stock holdings
- Put money into an owned business
As with anything financial in nature, there will be tradeoffs to consider, though in many instances these can help lower the family contribution as reported on the FAFSA, and thus improve chances for a better aid package.
The key here is to fully understand the FAFSA and how it works. According to Haitz, “By understanding how the equation works, you can make financially prudent moves before you attend school.” By understanding the equation, you can help clients position themselves to get the best financial aid package possible.
The Bottom Line
Going to college is an expensive investment. With careful planning and wise moves, such as the ones listed above, there are ways to help clients mitigate that cost. (For more, see: What Happens to Your Student Debt if You Die?)