Paying for college is one of the most complicated financial decisions you’ll ever make. It’s also a very emotional process, so it’s not surprising that many parents feel overwhelmed and lost as they prepare to send their child to college.
Fortunately, there are financial strategies you can take that will make things easier. Here are some steps to take.
Plan Ahead – VERY Ahead!
At this point, the FAFSA is based on taxes from two years prior to when your student starts college. That means that if you’re going to take advantage of any asset allocation strategies, you need to do so in your student’s sophomore year of high school or before!
Think about how your assets will figure into the FAFSA calculation. If your student is planning to go to a more selective school, you may have to contend with the CSS Profile or another financial calculation. However, you can choose to avoid those schools if it’s more advantageous.
Know What Goes Into Your EFC
The Expected Family Contribution (EFC) catches many families by surprise. It’s built from four parts:
- parent income,
- student’s income
- parent assets
- and student’s assets.
If you expect to qualify for need-based aid, keeping assets out of your child’s name is important because those are assessed at a higher rate. If you don’t qualify for need-based aid the asset distribution is less important.
The FAFSA is available on October 1st, so you can fill it out early to find out what EFC to expect, which can help you plan for the upcoming year. Of you can choose to use the FAFSA Forecaster, a tool from the government to estimate your EFC.
Determine What Affordable Means For Your Family
Every family has a different financial picture, but it pays to set limits up front. Have a conversation with your student about paying for college, and about what debt can mean to their future. Work with your child to determine what’s a reasonable cost for a school, and then stay in that price range
Consider options like summer school, community college, and other non-traditional paths that can help you save money.
Sometimes, our kids need to hear from someone other than us. It’s helpful to share stories of how other families approached paying for college and the different roads they took. Here are some stories from families in our Paying For College 101 Facebook group:
See if you can arrange for your child to talk to another college student or someone who recently graduated. That first-hand experience can open your child’s eyes.
Have a Four Year Plan
Create a plan that shows what years your student will be in college and what tax years will impact the FAFSA each year. It’s important to look at what the total cost of ALL 4 years of college will be and how you can use your savings, current income and loans to minimize the total cost.
Be sure to note any years that you will have multiple kids in college, because that will reduce your EFC per child. This can help you in those years, but may lead to your last child having much less need-based aid in the final year(s) of school.
Part of your plan can be strategically selling assets. You can sell part of an asset in December and another part in January and impact two different tax years.
Too many families focus only on one year at a time, treating each year as its own race to get as much aid and other money as possible. Instead, look at the whole picture up front. Be aware of what steps you can take to even out the pressure on each school year and plan ahead as much as possible.
Learn About Different Sources of Funding
Paying for college can take a lot of different forms. A 529 plan can be helpful both to pay for college and to give you tax advantages while your student is in college.
You can take advantage of financing options that include the following:
- Federal student and parent loans
- Private student and parent loans
- Home equity loans
- Home equity lines of credit
- A Unison Homeowner partnership
You can also borrow from your IRA or 401(k). Some parents will take the principal from a Roth IRA because, since it’s post-tax money, it doesn’t count as income.
As you look over your options, don’t gamble with your own financial future. Make sure you know how long you have to recover after your last child graduates so that you can be prepared for retirement.
Find a School That’s Generous to Help Pay For College
Remember, you’re not in this on your own. You can focus your student’s college search on schools that are known to be more generous with families in your situation.
Whether you need a school that comes close to meeting 100% of need, or you want to focus on getting as much merit aid as possible, you can identify the best schools for your family. We’d love to help. Download our Scholarship Toolkit today!
Disclaimer: We are not financial advisors. Please consult with a financial professional or tax expert before making investment or financial decisions.
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