A Practical Approach to Paying for College
For more than 20 years, the cost of college has far outpaced inflation, and many families — even those who planned and saved for their children to attend four-year residential colleges — find themselves falling short of the total cost of attendance, which includes tuition, room and board, books and fees, travel and personal expenses.
The numbers can be staggering.
According to US News & World Reports, the average tuition for in-state colleges is just under $10,00. Out-of-state tuition averages twice that, at $20,000/year, while average tuition rates at private colleges top $35,000. Anticipated expenses like on-campus housing and a meal plan will add another $10,000 to $20,000 to the bottom line. Lacking a sufficient plan, many families turn to loans to make college affordable. Seven in 10 students now graduate college with student debt, and the total owed nationally is estimated to be $1.7 trillion.
I have met a number of parents who are certain they have a plan to pay for college because they have a 529 Plan, but I ask these families: Do you have a product or a plan?
A 529 Plan is a product that allows anyone (a parent, a grandparent, students themselves) to set aside a certain amount of earnings tax-free to be used for qualifying educational expenses like college tuition. The financial services industry has done a great job of convincing us that a product like a 529 Plan alone is the solution — or better yet, the ‘plan’ — to pay for college. As with anything, there is no one-size-fits-all solution to paying for the high cost of college.
As someone who has witnessed the evolution of the 529 account, I cannot recommend using it 100 percent of the time. Like any financial product, there are benefits and limitations to its use. I’ve seen the firsthand impacts of said limitations in the form of higher costs for tuition, tax penalties for incorrect use, and the loss of one of the biggest college tax credits – The American Opportunity Tax Credit (AOTC). A 529 Plan can play a part in a family’s college funding strategy, but it is not a perfect tool for everyone and is rarely the only approach a family should employ when building a college affordability plan.
Rather than focus on a financial product, I encourage families to consider five core components before implementing specific financial tools. I believe it is critical to understand how these components can help you lower costs, build a plan that fits your family, and give you peace of mind as you face the daunting task of paying for college.
The five core components of a great college funding plan – and the questions families should be considering around those components – are:
- What funds do we have available to pay the college bill, from both savings and income?
- Are there additional funds we can access – like loans, scholarships, and tax credits – to make college more affordable?
- How would funds from these resources impact our student’s financial aid award or eligibility for merit money (aka tuition discounting)?
- Do we have a four-year funding plan that accounts for the total cost of attendance – not just tuition?
- Are the resources we are planning to use keeping up with college inflation?
- Bearing in mind restrictions on certain accounts, scholarships and loans, when is the best time to use the funds we can access?
- How do our plans impact our student’s ability to receive merit money and/or financial aid in the future?
- Does our student understand the true cost of attending college or university?
- What are our expectations as a family? Are parents expecting to fully fund the cost of college, or is the student expected to put some ‘skin in the game’ through savings, earnings, or loans?
- Does the family contribution come with any ‘strings attached’ like a say in the student’s choice of school or major?
- Do we understand the four year cost of attendance at each of the schools on our student’s list?
- Have we mapped out an actual four-year blueprint, noting which funds, tax scholarships, and resources we will use and when?
- Have we stressed tested our current plans?
- Are we eligible for the American Opportunity Tax Credit? If yes, how do we maximize it?
- Are we getting tax planning advice or really just help preparing our taxes? Are there opportunities we might be missing there?
- If one or both parents owns a business, how can we create more opportunities for tax savings to apply towards college costs?
Maybe it is the information overload, the emotional feelings tied to paying such a large expense pre-retirement, or the feeling that this is the last chance to set your student up for future success…or maybe it is a combination of all of these things that makes so many families miss the opportunities to build a rational plan to fund their children’s college educations. By focusing on these five core components, families can develop a practical plan to pay for college.
Stuart Canzeri, the Founder of Peachtree College Planning, has worked in the financial and college planning arena for more than 15 years. He received a Bachelor of Arts in Communications from Tulane University, a MBA from Mercer University, and Financial Planner Certification from the University of Georgia’s Terry School of Business. You can Schedule a Free 20-Minute Strategy Call with Stuart or download Peachtree College Planning’s complimentary guide: A New Approach to Paying for College.