Navigating the many facets of paying for college can be challenging. Over the last 30 years, education costs have soared by more than 500 percent. To complicate matters, college prices are like airline tickets: no one pays the same price. On average, 70 percent of students do not pay full price for the same education. Therefore, it’s important to develop a plan and know the financial tools available to help finance the expense.
To maximize the pool of funds available for you, proper timing and funding strategies (including scholarships, student loans, grants and financial aid) should be considered and utilized. Here are a few steps you can take to help save properly and get the best price for your college education.
Step 1: Start Saving Now
One of the most popular college savings vehicles is the 529 plan because of its flexibility and tax advantages. Plan savings can be used for eligible postsecondary educational institutions both nationwide and internationally which include colleges, universities, and vocational schools. Contributions to these plans often offer tax deductions and, when used to pay for qualified college expenses, earnings are tax-free. Additionally, the named beneficiary on the plan does not have control over the account, so you can be assured that the funds will be used for their intended purposes.
Step 2: Understand What Your College of Choice Will Cost
The true cost of college tuition used to be extremely opaque. However, every school in the country must now include a Net Price Calculator on its website. This tool estimates your individualized cost of attending that school by answering questions about your financial situation. Providing information on your student’s GPA and extra-curricular activities helps estimate how much money in grants and scholarships the school may award.
Step 3: Determine Your Eligibility for Aid
Students and their families are expected to contribute to the cost of college to the extent they can. For families who are unable to pay for the entire cost of a student’s college education, financial aid may be available. In these instances, the Expected Family Contribution (EFC) formula considers your family’s adjusted gross income, taxable investments, and family size when determining how much financial assistance you may be eligible for. The difference between the total cost of college and your EFC is how a student’s financial need is calculated.
The College Board is a great resource to help determine your EFC amount.
Step 4: Enhance Your Eligibility
Maximizing financial aid eligibility can be critical when funding a college education. Repositioning your assets prior to applying for aid can significantly impact how much you are awarded. Here are a few tips to keep in mind as you prepare:
- Don’t overestimate your income. Be sure to use your adjusted gross income from your tax return rather than your gross income from paystubs.
- Family and friends should wait until a student has finished applying for financial aid before giving them money to help with their education. If a student has assets in his or her name to pay for college, those assets should be converted to a 529 plan to lessen the negative impact on financial aid eligibility.
- If grandparents or other non-immediate family members own 529 plans for a student, these plans should be transferred to the student’s parent(s) before applying for financial aid. Distributions from a student- or parent-owned 529 plan are not considered income; they are considered an asset which has much less of a negative impact on eligibility for financial aid.
- Since retirement funds are generally not considered assets when applying for financial aid, you can shelter a considerable portion of your savings by making the maximum contributions to these funds (including, but not limited to, IRAs, 401k/403b plans, and qualified annuities).
Step 5: Consider Applying for Federal Aid—and Don’t be Late!
Many parents incorrectly assume their college-bound students may not qualify for financial aid but that’s rarely the case. According to Finaid.org, fewer than 4 percent of US households are considered “too wealthy” to receive financial assistance of some type. To determine eligibility for financial assistance, the Free Application for Federal Student Aid (FAFSA) form must be completed. Even if you don’t believe you will qualify, it is still important to apply since many colleges use FAFSA information to award merit scholarships to eligible students.
Since aid is distributed on a first-come, first-serve basis, you should submit the FAFSA form as soon as possible after October 1st (annually), using information from your prior year’s tax return. Don’t worry if your income has changed significantly. After filing the FAFSA form, you can contact the financial aid office at the school you plan to attend so they can assess your information and make relevant adjustments.
In the event you don’t qualify for traditional aid packages, there are sources of aid, such as unsubsidized Stafford and PLUS loans, available regardless of need. Applying for financial aid is free, so there is no downside.
Step 6: Don’t Assume Private Schools are More Expensive
You may think that public schools are more affordable than private schools but that’s not necessarily the case. Thanks to private colleges and universities having “merit awards” at their disposal, about 85 percent of students who attend these institutions don’t pay full price. Currently, the average discount for private colleges and university tuition is about 53 percent—an all-time high!
Although funding a college education can be challenging, decades of research has shown it’s one of the best investments you can make. Consulting a financial advisor who is knowledgeable in education planning strategies can help you develop a plan. The Association of Certified College Funding Specialists is a great resource when looking for a college funding expert in your area.
The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.