We all know that a college education is expensive these days — but if you expect to have two or even more children in college at the same time, “expensive” is an understatement.
Below are some tips to help reduce the stress that undoubtedly comes with thinking about how you’ll foot the bill.
First, start planning early to reduce your monthly or annual savings burden!
I can’t stress this tip enough, and here’s why: imagine that you have a 10-year-old child today, with no existing savings accrued for his or her education. You’ll need to save about $800 per month starting now until he or she graduates from college, in order to pay for tuition that currently costs $25,000 per year over four years (assuming 5-percent inflation and 6.5-percent total return on investment). However, if you started saving when your child was a newborn, the savings required would be closer to $500 per month. It’s easier said than done, of course, as having a baby is already costly, between medical bills, diapers, day care and other necessities.
Use the most optimal college savings vehicles to maximize your children’s financial-aid eligibility.
When calculating eligibility for financial aid, the government counts 20 percent of a student’s assets (cash, investments, business interests and real estate) as available resources to pay for college expenses; however, only 2.6-5.6 percent of a parent’s assets (cash, investments, certain business interests and real estate, based on a sliding income scale and after certain allowances) are included.1 This makes UGMA and UTMA accounts (custodial accounts for children) less attractive, since the government considers these vehicles to be part of a child’s assets.
Coverdell Education Savings Accounts (ESAs) and 529 plans are two of the most popular college savings vehicles. If a parent owns a 529 account or an ESA account, then up to 5.6 percent of the account’s value is counted toward his or her assets for financial-aid eligibility. On the other hand, if a grandparent or another third party owns the account, none of the value is included as an asset. However, withdrawals from 529 plans owned by someone other than the student or their parents are included as untaxed income for financial-aid eligibility in the year following the distribution. Either way, any withdrawals from 529 plans and ESAs that are used to pay for qualified education expenses are tax-free for federal income tax purposes, which makes these accounts attractive from a strategic savings perspective.
Don’t feel pressured to pay for 100 percent of your children’s college education.
Today’s news headlines are filled with stories about mounting student loan debt; however, this type of debt isn’t all bad. Sure, you don’t want your children to be set back financially for years after graduation, but having a modest amount of student loan debt has a few positives, too. While in college, your children have some “skin in the game” — for instance, if they decide to party more than study or drop out before earning a degree, part of it is on their dime. Your children might avoid engaging in potentially risky activities from the get-go, knowing that they’re responsible for their own debt. Also, student loan debt can help your children build their credit histories. When they graduate and start making payments, the debt will also help them learn a bit about budgeting, too.
Take the time to really explore all of the financial-aid options offered by your children’s top colleges or universities, and find out if they are eligible.
Many parents are shocked to find out that some private schools are actually more affordable than public schools when they factor in financial aid. According to the latest annual tuition-discounting study conducted by the National Association of College and University Business Officers (NACUBO), nearly 89 percent of students receive scholarships and/or grants from private colleges and universities.2
Most colleges and universities have net price calculators on their websites, which can help you determine the approximate amount of financial aid your children may qualify for, based on their situation. Some colleges’ online tools are better than others, but they are definitely worth checking out when selecting which school is right for your children.
In addition to schools’ net price calculators, you should also check out FAFSA4caster, which is a free calculator on the Federal Student Aid website. This tool can give you an early estimate of your children’s eligibility for student aid, which can be invaluable in helping you plan in advance for the cost of education. When the time comes to apply for aid for your children, be sure to fill out the Free Application for Federal Student Aid, commonly referred to as the “FAFSA form.” Last year, President Obama announced that starting with the 2017-2018 application cycle, students would be able to submit FAFSA forms as early as October 1, 2016 (rather than January 1, 2017).
The forms will also use income information from tax returns from a year earlier than what had been required in the past.3
Another provision you should keep in mind is the Expected Family Contribution (EFC), which represents the minimum amount that a college expects a family to pay for one year of college for one child. The good news is that your EFC will be greatly reduced if you have two or more children in college at the same time. Consider using The College Board’s EFC Calculator to explore more.
Finally, remember that you can only do so much — don’t jeopardize your own retirement to pay for your children’s college education.
Be sure to check out my article on this topic if you’d like more information. After all of the hard work you put into raising your children and putting them through college, you’ll be ready to enjoy your retirement!