One of the top financial concerns for families is paying for college. Due to increased cost and complexity, making the college decision is one of the most difficult decisions a child and parent will make. In the Gallup article by Jeffrey Jones titled, “U.S. Parents’ College Funding Worries are Top Money Concern”, the author compiled a list of percentages on different financial matters. It was not surprising that 73% of parents with children under 18 worry about paying for college.
Saving for and paying for college can seem like a monumental task for many families. This objective can become more manageable if it is broken down into achievable goals. As the author suggests from the poll, paying for college begins for many families as soon as a child is born. A family may think that they do not have any money to save for college but even starting small and early can make a big difference 18 years later.
Financial Aid Position
When we begin the college funding process for our clients, we review the financial aid position of a family first. This happens whether you have saved for college or were not able to do so. Many people are surprised by the amount of money the government and colleges expect them to pay for college. For people who are new to financial aid, the Expected Family Contribution calculation is used to determine how much need based aid a school can give a student under the federal and most state programs. The formula for this number is a combination of the family’s assets and income.
The EFC number is then subtracted from the total cost of the college. This determines your financial aid need then the college will create an award letter if your child is accepted. Most colleges only meet a portion of the need of which only a certain part of the need met will be free. Having money saved will reduce the amount of money that needs to be borrowed. On our EFC PLUS website, we have a free EFC calculator that can help you understand your position
Family Timeline Importance
Another area that should be reviewed before a family begins the college funding process is a timeline review. When trying to determine how much to contribute toward a college fund, a family should determine the timeline of both college and retirement. Understanding this will help to clarify the amount needed to be saved. Some of the factors in the timeline will be:
- Age of the parents when the last child graduates from college
- Identify the amount that can be saved per month
- Identify retirement saving amount per month and projected time of retirement
- Projected date to set up an account for educational funding gifts
- Determine estimated date by child for saving for college
The timeline should also show:
- Recovery time for retirement saving
- Beneficial financial aid position due to multiple children in college (Lower EFC)
- Amount of time when tuition is payable
- Help prioritize retirement and college saving goals
College Family Timeline Chart
Listed in the timeline above is the amount of time a family will pay for college. We all like to think that this will include only 4 years of college payments. No parent wants to pay for that 5th year of college. Less than 40% of college students will graduate within the normal four years. Your family may need to plan for a college major change or transfer.
Determining the Amount and Options
The amount that can be saved each year for college is one of the hardest tasks for a family to determine. To determine this amount, a family needs to set up a budget. Budgets are hard to commit to due to the unpredictability of life. One year’s savings might not be sustainable the next. When developing a budget, you need to figure out what works best within your family. For some people, this means a weekly budget while others work better having a monthly or annual goal. Remember, saving even a little bit of money for college is better than not at all.
Once the positioning, timeline and the budget have been determined, the family can then review saving options for college. One option is a 529 plan. A 529 plan is a great investment which is operated by a state and grows tax free when used for qualified education expenses. As long as the plan satisfies the requirements, the federal tax law will provide special tax benefits to the plan participant and beneficiary of the plan. Some states offer an income tax deduction for contributions to their plans. Different investment options exist within these plans both on a risk level and age based portfolio basis. These plans can be passed down among family members. All 529 plans are reported as a parent asset for the financial aid calculations when held by the parents and student of the family. Before investing in another states plan, make sure you understand your own states plan in detail.
A saving bond is another saving investment that has the full backing of the US Federal Government and grows with interest that is earned based on the type and month purchased. This investment is often given as a gift to younger children with the expectation of tax-free growth for education. The tax free education advantages have specific rules such as how it is titled and income limits based on tax filing status that many over look.
A Coverdell plan is also called an Educational IRA. This investment option can be used for college and also for tuition expenses of elementary and secondary school. There is a contributor income limit and investment amount limit per child per year from all sources. It is $2,000 per year. These plans offer more investment flexibility than the 529 Plans. These are considered a parent’s asset in the financial aid calculation. It can be converted into a 529 plan to receive in- state tax deduction if offered and continues growing tax-free.
It is never too late to start saving and planning for college. Even if you start late, the amount you place in your budget can be part of your tuition payment plan. In today’s society, we have a tendency to simplify goals, want immediate results, or hear only the highlights. The college funding goal is a marathon. By taking some baby steps, it can lead to a happier outcome with less stress. It may help your child go to the college of their dreams or minimize the burden of student debt.