When it comes to your child’s education, you feel like you’re on the ball. You’ve budgeted for the local university, and set aside some money in a 529. Your kids are stellar students, so the scholarships are sure to roll in. Given the cost of food, extracurriculars, and gas money, you might even come out ahead!
One day, your oldest presents you a short list of dream colleges. Not a local state school to be found. The one’s you have heard of are notoriously expensive. Your initial response is to laugh it off. You went to a state school and turned out just fine. But they’ve done their research. Smaller class sizes, specialized programs, high starting salaries out of college...
They make a compelling case.
Fortunately, by planning ahead, you can help keep your child’s educational dream from turning into your financial nightmare.
The sticker price might not stick
The best way to afford a college education is to pay less for it. While state colleges might have a lower sticker price (the cost of tuition before factoring in aid and grants), private colleges tend to be more generous with assistance.
When many parents think of scholarships, they think of merit-based aid, which is available at most schools. However, keep in mind that many students attending private schools will have an impressive academic resume. You may find yourself relying on financial aid to make your child’s education become a reality.
Financial aid? With my income?
You might be tempted to write off the idea of need-based aid on account of your income. But the truth is, many private schools offer such aid to more than half of incoming freshmen. Many colleges even offer a financial aid calculators to determine what you can expect to pay after financial aid.
Colleges will take into account your entire financial picture. Perhaps you will be retiring soon, which will result in a substantial drop in income. If you have multiple children who plan on attending college, most schools will factor that into their offer of aid. Expenses, such as your mortgage and medical bills also weigh heavily.
Long story short, get ready to fill out the FAFSA. But you want to be ready before it ever gets to that point.
Make your investments work for you
You may have heard that colleges will take your investments and assets into account when deciding how much financial aid to offer. This is true, but overstated, and highly situational.
For starters, the FAFSA treats different investments differently. One of the primary benefits of a 529 College Savings Plan is the Asset Protection Allowance, which is around $20,000, depending on the owner’s age. If the value of the 529 plan exceeds $20,000 then your student’s financial aid will be reduced by 5.64%, or less than 6 cents for every dollar.
Grandparent-owned 529 plans suffer a larger penalty. If you are lucky enough to have a parent who has set aside money in a 529 plan for your child, however, you can transfer the funds into your own 529 plan. For example, if you exceed the allowance by $10,000 you could expect an aid reduction of $564. Just as you plan your investments to avoid taxes, you should work to minimize the bite college will take out of your savings.
Shop around… A lot.
The fact is, aside from a small handful of very selective schools, most colleges need your child more than your child needs them. This is particularly true of private schools, who lack taxpayer support needed to maintain class size in order to continue to function.
Having a “dream school” is great, but it’s important to work with your child to create a list of 5-10 schools that they would consider attending.
Not only does this help to insure your student is admitted into a college without having to scramble at the last minute, it will also help identify a set of schools that meet their criteria. As important, once the admissions offers roll in, it gives you the opportunity to negotiate financial aid.
Plan far in advance
At many schools, the first year of financial aid dictates what the other years will look like. This is not something you want to contend with on the fly. If your child is in high school, or even middle school, the planning you do now can save you money, and save them having to take out exorbitant loans.
Talk with your student about their goals. Monitor their academic progress and interests. When they get closer to decision time, consider having them meet with you to talk to your financial advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Brian has almost 20 years of experience in the financial services industry, focusing on retirement planning, investments and insurance protection for individuals of all asset levels. He also has a special interest in assisting individuals who work in the public sector.