How to Pay for College

It is no secret that college costs have been increasing faster than the rate of inflation for several decades. According to College Board’s “Trends in College Pricing 2010,”  the average cost for tuition and fees nationwide in 2010-2011 is:

• $7,605 for an in-state student at a public four-year college
• $27,293 at a private four-year college
• $2,713 for a public two-year college

For students who will live on campus, add an additional $8,000-$9,000 for room and board charges on average. While the prospect of saving for college may seem daunting, planning in advance can help ease the burden.  It is never too late to start planning!

Tips for Those Saving for Future College Costs

A recent study by the Financial Industry Regulation Authority (FINRA) Investor Education Foundation, “Financial Capability in the United States” found that 41 percent of families with children have set aside money for college education. Of those who have saved for college, 33 percent report using a tax-advantaged savings account, such as a 529 Plan or a Coverdell Education Savings Account. For those who wish to save to pay for a college education for children (or grandchildren) it is advisable to:

• Take care of yourself first: Make sure that an emergency fund is in place and that you are on track to save for your own retirement. 
• Share with your child what you can afford: As your child begins to think about college, have a conversation about how much is available from you (the parents) or other sources to fund their education.
• Consider tax-advantaged savings if appropriate: 
  • A Coverdell Education Savings Account: Available to anyone who meets the income limits, you can choose the investments, however contributions are limited to $2,000/year per beneficiary.

  • 529 Plans: Each state has a 529 Plan, which can be in the form of a prepaid tuition plan or an investment plan. While you can choose a 529 from any state, 34 states have a state tax advantage for contributions, most for investing in that state’s plan. Be mindful of costs and investment choices when selecting a 529 plan. Also, you can easily switch beneficiaries down the road.

Tips for Parents of High School Seniors

High school seniors are starting to receive their decisions from the colleges where they applied. While the total financial aid package may not be determined until March or April, there are a few important steps that parents should take as soon as possible.

• Free Application for Federal Student Aid (FAFSA) Form: Some parents overlook filling out the FAFSA form, assuming they will get no need-based aid. However, this form is required for all federal student loans, including Stafford Loans and Plus loans which are not solely need based. The FAFSA form asks for information such as student and parent income and assets, but does not take into consideration retirement assets or the equity in the primary residence. The FAFSA will determine the family’s “Expected Family Contribution,” which is the amount that the family is thought to be able to pay — often a higher number than the parent thinks they can afford! Be sure to check the due date with the schools where your child is applying.
• College Scholarship Service (CSS) Profile Form: Some schools require additional forms for financial aid, including the CSS Profile form. The CSS Profile form asks more detailed questions than the FAFSA, such as the equity in your house. Some schools may also request a copy of a tax return, so if possible, try to get your taxes done early.
• Investigate Grant Opportunities: There are numerous opportunities for scholarship and grants, and many have a separate application process. School guidance offices are often the best place to start the investigation.
• Education Tax Credits: The American Opportunity Credit replaces the Hope Credit through 2012. The American Opportunity Credit is available to a broader range of families and has a maximum benefit of $2,500. Read Internal Revenue Service (IRS) Publication 970, “Tax Benefits for Education” to determine if you are eligible. Other tax benefits may be available to you depending on your circumstances.
• Plan for the Payments: Deposits are usually due in May to secure a place for your student. First semester tuition and housing costs will be due later in the summer, so plan accordingly to tap your savings and secure student loans in time.

The landscape for student loans has changed in the past few years. Most students who fill out a FAFSA form are eligible for unsubsidized Stafford loans. First year students can borrow up to $5,500 in Stafford loans. The interest rate on unsubsidized loans is currently 6.8 percent and is not based on the applicant’s credit score. Need-based subsidized Stafford loans now have an interest rate of 4.5 percent for the present school year, dropping to 3.4 percent in 2011-12 and the interest does not accrue while the student is in school. Parents can also borrow through the Direct PLUS program. Parents can borrow up to the cost of attendance less any other financial aid received. The interest rate is presently 7.9 percent and is charged beginning with the disbursement of the loan. Please note that certain fees apply to these lending programs, so read the details carefully.

FPA Member Jeanne Gibson Sullivan, CFP^®, is a financial planner in Wakefield, MA and a parent of two sons in high school — a senior and a sophomore.