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A College Financial Plan for the Student and Parent

With back to school, heading off to college and college football season ramping up, many families are having to make important financial decisions on how to pay for tuition, room and board.  

According to the College Board, going to school for four years at a state public school - including tuition, meals and housing - can easily cost north of $80,000. Parents and students alike often find that paying for an education can seem like an almost insurmountable hurdle. That’s why it’s important to explore all available funding options when planning for higher education. 

Students and parents will find that it helps if they understand the lingo, which may require a PhD or master’s degree to fully understand. (For related reading, see: Should Parents Pay for College?)

Federal Student Loans Made Through FAFSA

These are required by almost all public universities. If you plan to receive any student loans, FAFSA will determine your eligibility. Generally, you must have your application for the fall completed by June of the previous year (over a year before actually starting college). It’s important that you work with your parents to review their prior year’s tax return before submitting a college application, including the FAFSA forms. Yes, that’s correct - mom or dad, you’re going to need to pull out your tax return to help your son or daughter qualify for loans to help cover the cost of their education. This can be a frustrating, dragged-out process if you’re not on the same page.

The bad news is that the FAFSA application is income and asset-dependent, so even if your parents make a lot of money and have saved for your college expenses, you still must fill out the application and may not get much in federal assistance. You’ll have to depend on unsubsidized private loans or other savings if you fall into this category.

Sallie Mae

Sallie Mae helps get the money you need to help pay for your undergraduate education through loans when savings, scholarships and federal aid aren’t enough. You have the option to choose the type of interest rate and repayment option that works best for you. But this requires planning, so it’s important to have a good idea of how much you’ll make and how much you’ll need to live on when you graduate and get a job. As a student, you may not have a lot of family support and so you need the money more at this point. Unfortunately, you don’t have a lot of options since going to school is going to be your responsibility and, ultimately, your reward. 

CSS/Financial Aid Profile

By filling out this one form, you can apply online for nonfederal financial aid from almost 400 colleges, universities, professional schools and scholarship programs. You must go online and look at the website to see if your school requires the application, as some schools do not participate. A $25 application fee is required to submit your profile to one college, and additional reports may be made available for $16. This application provides access to direct private loans which are awarded to the student. (For related reading, see: The Dangers of Using Your Retirement to Pay for Your Child's College.)

Parents Lending Money to Students to Pay for School

This is a great option for students whose parents can foot the initial bill and work out a payment arrangement for the student upon graduation. The IRS requires the parents to write a note that shows the loan amount and indicate when it will be paid, the rate of interest and the reason for loan ("student loan”). A reasonable interest rate must be charged so the loan isn’t considered a gift to avoid taxes and the IRS is wise to these tricks. You and your family member must sign the note, and keep it in a safe place. Family members can make “student loans” to their kids by drawing up a contract like any other loan. Upon graduation payments will begin, the lender will pay tax on the interest income and the student can take the student loan interest deduction.

As of August 2017, the minimum interest rates set by the IRS are between 0.96% and 1.90%, so your parents could charge 1% annually. If your mom or dad is going to help you out, the least you can do is help them avoid an audit.  

529 Savings Plans

These plans are a great option for parents who know they want their children to go to college and are prepared to systematically save on a reoccurring basis. You can set up monthly amounts to put into the account (as little as $25 a month with most 529 plan providers) that comes out of your bank account on a scheduled day of the month. If the goal is to pay for 100% of your child’s education, you should probably start saving early on in their lives and treat it like another car payment. If you have a two-year-old and you want to pay for their college, you should save between $250-$500 monthly to ensure you’re covering all the costs of their education. The money is invested after taxes and grows in the account tax free. Earnings are tax free, as long as they’re used to pay for a qualified educational expense which includes housing, tuition and books.   

The Financial Plan Begins With a Conversation

While it should be the student who drives the conversation about paying for school, generally we see that parents like to play a role and “help” the best they can. It’s important to understand how family income and financial assets might impact a student’s financial aid. It’s recommended that the student and parent have a conversation, get information from school counselors, and seek a qualified accountant and financial planner to discuss the financial implications of going to school. An investment that pays dividend starts with good research and being properly educated. (For related reading, see: Pay for College Without Selling a Kidney.)