With some planning, it is possible to pay for a college education without putting yourself behind the eight ball and piling up debt.
Getting a high-quality education for low cost or low debt requires planning ahead. There are lots of tax, cash flow, asset and loan strategies that may lower your potential college funding costs. Since every family’s financial situation is different, you’ll never find a one size fits all solution. A lot depends on your student’s age when you start the planning process as well as your income, assets and the schools you’re choosing. But there are common tips to consider. (For more, see: A Roth IRA or 529 Plan for a Grandchild's College?)
Too often families find themselves in a game that is rigged. They want to do what is right for their kids and the colleges know this. So their recruiting and marketing efforts focus on your emotions. Investing based on emotions is a fool’s game. And let’s face it: you are investing in one of the most expensive purchases your family may ever make.
Many people join retail buying clubs to get good deals. People are happy when they score a discount. But when it comes to shopping for college, too many parents settle on what the school of choice tells them the price tag is. Unless you pay wholesale for a higher education, you’re probably paying too much. So start thinking like a consumer and you’ll save yourself a ton of money. Before you as a parent or a student jump into a pile of student loans, start planning on ways to save on the cost of college.
Be a Smart Investor in a College Education
If you want to be a smart buyer of a college education, you need to integrate your college search with a financial strategy. Get a handle on your expected family contribution (EFC). This is predominantly based on your income during your student’s base year or the year before entering college. There are online calculators available like the FAFSA4Caster tool. Better yet, work with a qualified financial planner who can help navigate you through the process and strategize on ways to lower your EFC that may help you qualify for more aid.
Start researching your target schools to determine what their average aid packages look like. Databases are available to pinpoint the amount and type of aid available on campus. Aim for schools that tend to fill in your gap with a high percentage of free aid instead of loans. This may include scholarships, work study, or discounts off the sticker price. For example, there are many schools that offer a discount if siblings attend the same school. Don’t be shy. Ask. (For more, see: Is It Ever Too Late to Start a 529 Plan for College?)
Lower Your Expected Family Contribution
For instance, if you can show adjusted gross income (AGI) below $50,000 you won’t have any of your assets counted for financial aid formulas. This may be particularly helpful for a single parent who may have gone through a divorce or received an inheritance or insurance proceeds. So even if you have a six-figure balance in your investment account or own an investment property with lots of equity, you may not need to disclose any of this on your FAFSA if your income is below this threshold. A qualified financial planner will be able to determine this by looking at several years of tax returns to see how best to make this happen through tax deductions like an IRA or by increasing payroll deductions for certain employer-sponsored benefits like a Health Savings Account or Flexible Spending Account.
Another way to lower your EFC is to hire your child to work in your business. If you don’t already have a business, you may want to start one especially during the base year. Start up costs may reduce taxable income. And in any event you can pay your student to work in your business which further reduces your taxable income.
If you happen to have taxable accounts holding highly appreciated assets, you may want to shift these low-basis assets to your children who are in lower tax brackets. This will save on capital gains taxes that you would otherwise incur at the higher income tax rate for most parents.
On a similar note, if you have assets that are producing income such as fixed-income mutual funds, you may want to shift your asset allocation before the base year (essentially the year two years before entering college) to replace such assets. One way to reduce your reported income is to hold assets that don’t generate income like individual growth stocks. Unlike mutual funds, you have more control over when to report income or gains on stocks. You can wait until after the college funding years to sell and use proceeds to pay towards student loans or perhaps sell during the college years to incur capital losses that can help reduce reported income. (For more, see: Why Wealthy Families Should Complete the FAFSA.)
If you happen to have grandparents or relatives who have the means and are willing to help, that’s great. But unless you plan ahead, you’ll find a nasty surprise that can hurt your financial aid chances. This is especially true for those with grandparent-owned 529 savings plans, as distributions during the college-funding years will be counted as the student’s ‘income’ and reduce financial aid.
Scholarships are another great resource. But you may find your best odds are winning "tax scholarships" you can create for yourself like the EFC strategies outlined above.
Other Strategies to Consider
College financial planning doesn’t begin or end simply with the college application. With the right guidance you can also work on issues when it comes time to repay loans. You may want to consider post-college service programs. By joining certain community service programs some or all of your student loans may be forgiven.
If you are first-responder, teacher or nurse working in economically disadvantaged areas or for a non-profit, you may be eligible for one of the many income-based repayment programs for student loans that can also lead to having any balances forgiven after 20 years. By joining the National Guard or military you can have many school loans forgiven.
Let’s not forget about free college educations. There are online options as well as study abroad options. For instance, U.S. students can go to college for free in Germany even if they don’t speak the language.
Whatever you choose to do, don’t simply rely on going to the local in-state public university or college. You’re limiting yourself and may be paying more. While private schools have a higher sticker price, they have deeper pockets for need or merit-based aid. And they very often discount the sticker price to attract talented students that round out their student population. (For related reading, see: 5 Ways to Fund a College Education.)