by Melissa Sotudeh, CFP ®
I’m a planner. It’s who I am, and it’s what I do—and it’s what my daughter does too. She’s the type to assign herself homework to make sure she is on track to finish her summer reading, which is a great thing because during her senior year of high school she also had college applications on her plate. So we teamed up to create a plan—not just how for how to apply, but how to pay for college.
Choosing how to save for college
College saving is on the rise—nearly 75% of parents are now saving for college, compared to just half in 2007, according to Fidelity’s College Savings Indicator Study. This is a positive trend, but it is important to save in an efficient way and to look for true value when assembling a list of potential college choices. Increasing your savings and lowering the cost of college itself are key to finding your "financial safety school."
Use 529 Plans to Grow College Funds
According to the Bureau of Labor Statistics, from 2006-2016, the cost of college has increased an average of 5% per year. If that rate continues, the cost of college for a child born in 2017 will double by the time she is 15! Even families with high incomes who are saving diligently can struggle to keep pace with the ever-increasing cost of higher education.
We recommend our clients use 529 Plans to meet this cost, and this is what I have done for my own family. These accounts offer tax-advantaged investment growth, potential state income tax deductions, and tax-free withdrawals for qualified higher education expenses.
You have a lot of choice when it comes to 529 Plans, but I recommend always looking at your state plan first. You may receive a state tax deduction for 529 Plan contributions. But be cognizant of the cost versus benefit of any plan. If you are paying steep fees or commissions to invest in your state 529 Plans, the tax benefit may not outweigh that cost, so it would be better to find a lower-cost plan in another state.
Lower College Cost by Being a Smart Shopper
If you have children starting the college search, you know that there are endless choices. It can be overwhelming, especially with the exorbitant cost of Ivy League and other elite schools.
How can you sift through all of these choices in a financially savvy way? Well, for my daughter and me, we did what came naturally: we made an Excel sheet to prioritize the important factors.
- Names of schools
- Tests required
- Admission deadlines
- Common App or not
- Supplemental essays
- Merit aid availability and deadlines
- COST! (tuition, books, fees, room and board)
- Safety, target, or reach academically
- Safety, target, or reach financially
You might be wondering about that last item. Just like when she and her school college counselor discussed her college list with the reach, target, and safety schools academically, we talked about reach, target, and safety schools financially. They’re not always the same schools. We talked about the cost of the school compared to the potential value (various programs or opportunities available at different schools), and for “financial reach schools,” what amount of merit aid would be needed to make up the difference between what my family has saved versus what the school costs. Whatever scholarships are offered when admissions letters start rolling in will have a major role in her decision to attend one school over another.
It’s a Teachable Moment!
Too often, the discussion of cost is left until the end of the admissions process rather than at the beginning. It can be so tempting to want to reward your children’s hard work with the opportunity to attend whatever college they want, regardless of cost. Remember: you can borrow for college, but you can’t borrow for your retirement. Don’t let your dreams for your children limit your own financial security.
Instead, take the teachable moment to discuss the value of various schools and budgetary limits. The reality is that there are ways to manage the costs. There can be very good merit aid awarded with just the admission application, particularly if your child applies Early Action.
Learning to live within a budget is a valuable skill your children will appreciate once they leave the nest for college—and particularly after college when student loans have to be repaid!
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