Fall 2017 is less than a year away. Are you armed with strategies to pay less for college?
If you want to know how to pay less for college, there are some little known secrets you should pay attention to.
It’s easy to get caught up in your child’s senior year whirlwind. But if she plans to attend college in the fall of 2017, you may already be behind schedule when it comes to certain key filings.
Missing these filing windows could cost you thousands. The good news is it’s not too late to learn how to pay less for college.
The first and most important document you want to complete is the Free Application for Federal Student Aid (FAFSA).
Many parents neglect to complete a FAFSA filing because their child is getting a scholarship or grant. Or they may think their household income is too high to qualify for Student Aid.
You might be surprised to learn there is still plenty of reason to file. Here are a few things to keep in mind as your child transitions from high-school to college.
Decide Your “Paying for College” Philosophy
The question of how to pay less for college is a lot more complicated than it might seem at first.
Lots of things come into play. For instance, consider the value of a specific major at a specific college. Your child's interests and talents should be given considerable weight, too.
One important question that often goes unasked is, “How does paying for my child’s college education affect my retirement?”
As parents, you may place a high value on self-sufficiency. It may not occur to you to seek out sources of aid to help defray the expense of a secondary education.
Also consider we are among the first generation who can reasonably expect to live into our nineties without any real safety net.
Financing your retirement isn’t really an option. If you choose to pay more than you can afford for college, you are likely setting up yourself and your children for real hardship down the road.
Financing a $250,000 education may seem smart. But do you want to have your children in their thirties worrying about how long mom and dad can last before their retirement runs out?
College Choice Doesn't Guarantee Success
Sure, there are some “no-brainers” when it comes to where you go to school. There’s no doubt that a Master’s degree in engineering from M.I.T. or Georgia Tech will boost your child’s access to top jobs. It could also dramatically increase her earning potential.
But as a recent book — “Where You Go Is Not Who You'll Be” — by New York Times columnist Frank Bruni points out, only 30% of American-born CEOs of the top 100 companies in the Fortune 500 attended an elite college.
Of course, some kids are naturally driven. They want to go to the elite colleges. And they’re willing to do what it takes to increase their odds of doing so. But pressuring and cajoling a student who isn’t motivated that way just doesn’t make sense. It makes no sense from a return on investment perspective, either.
Instead, it pays to sit down and have some honest conversations with your child about their goals and inclinations.
If your child wants to be a world-class engineer and has the work ethic to attend M.I.T., and you can afford it, then by all means send them there!
But if your child isn’t sure about what career they want to pursue, they can figure that out at a state school or even (gasp!) a community college first. Then, once they have a good sense of themselves and what interests them, they can look at their options and make informed choices.
Make a Plan & Start Early
Visit colleges. Find schools that match with your student’s geographical preferences, academic strengths and social habits.
Talk with your child about how much you expect to pay, and what you expect them to contribute. Don’t wait: normalize whatever your family’s plan is by starting early and repeating it often.
Don’t make the mistake of only looking at total tuition cost, either.
The number that matters to you is Total Cost of Attendance. Some private universities and colleges have thriving endowment funds and often help buffer student costs with grants, etc.
Ask early and often when you’re visiting prospective colleges or looking through the mailings you get from the colleges your child is interested in.
Spend plenty of time on the college’s websites. They have tools to help you estimate costs in the year your student will matriculate. This is important since college tuition has been increasing so much faster than inflation.
Be Strategic about Financial Aid
File early to put yourself in a position to receive aid that is offered on a first-come, first-served basis.
Most colleges want to see the FAFSA before they offer merit-based aid.
The FAFSA is now based on “prior-prior-year” financial information.
So if you are applying for 2017 matriculation, you’ll submit 2015 tax returns. Remember, optimizing your income tax return for the FAFSA should begin in your student’s sophomore year!
And don’t let the fact that you’re late to the party keep you from jumping in. There’s absolutely nothing to lose and potentially thousands of dollars to be gained by getting started today.
If you are getting an early start, planning tactics for the base year include deferring income, timing retirement account distributions, and strategizing about the ownership of tax-advantaged accounts such as 529’s.
Because distributions from 529s count on the FAFSA as income, one smart strategy is to have Grandma and Grandpa own the 529 account that will pay for your child’s senior year.
As soon as distributions are used to pay for accredited college costs, the distributions are considered student income, regardless of who owned the account originally. Since you’re no longer filing the FAFSA after the student’s senior year, those distributions won’t count as income on any tax return.
This may seem complicated, but remember, this is real money we’re talking about. It could make a difference of tens of thousands of dollars over the lifetime of your child’s college career.
Maximize Options if You Are a Business Owner
Many small businesses use S Corps, which are “pass through” entities. But it may make sense for college planning to consider a C Corp, which maximizes your ability to defer income.
Small businesses that are owned and controlled by the family are excluded as assets on the FAFSA.
Business owners can limit personal income from business entities in some cases. This can create opportunities to maximize grants and scholarships.
As always, consult your tax preparer to make sure this fits your specific situation.
Don’t Underestimate Student Loan Debt
Six figures of student loan debt can hamstring your student financially for a decade or more. It can also be very emotionally debilitating.
Please, create a family plan to have your student complete his or her chosen educational path with as little debt as possible.
One rule of thumb is that the student’s total debt amount shouldn’t exceed their expected annual salary upon graduation.
If your child expects to earn $50,000 per year at her first job after graduation, then you as a family should plan to have her graduate with no more than $50,000 of debt.
Here are some numbers for you as a reality check:
At $50,000 per year, your child’s monthly income will be $4,166.67. Assuming 20% income tax, net income will be $3,333.33. Most student loans are expected to be paid off in 10 years, so $50,000 of student debt at a 6% interest rate will come with a monthly bill of $566.12.
If that debt gets up to $100,000, which isn’t hard to imagine considering the price of tuition at most schools, the monthly loan repayment bill will be $1,110.21—nearly a third of monthly income!
Those kinds of repayment schedules dramatically impact quality of life and make saving for the future nearly impossible. In other words, taking on too much student loan debt is like setting your child back a decade or more.
If You Want to Pay Less for College, Start Planning Early
Remember, in the final analysis, planning for financial aid is financial planning.
If you set up a 529 account 15 years ago, congratulations! You still should file a FAFSA.
You also might benefit from speaking to a financial advisor who can help you get the best bang for your college buck.
And if you’re suffering from college sticker shock, and aren’t at all sure how to pay for your child’s education, don’t despair. File that FAFSA and start looking into options for low-cost colleges, grants and scholarships. Remember—necessity is the mother of invention!
You’re likely to find you have many options you didn’t know about. Clarity is always better than uncertainty, no matter how well or ill prepared you might think you are.