31 May Saving and Paying for Education

I recently received a call from a client – she had just learned her college alma mater had increased its tuition to over $53,000 per year. “How will we ever afford to send our son to my school?” she asked, adding anxiously “should I up the 529 contribution?” I reassured her that her college funding plan anticipated and accounted for increased tuition costs – and that the plan is still on track. But It’s a common worry; parents know how important a good education is, but are also overwhelmed by the price and rate of inflation.

The 2017-2018 undergraduate tuition for Gonzaga University is $40,540. Add in fees, room and board, books and supplies, and other miscellaneous expenses and the cost of attendance is over $57,000! The University of Washington charges $10,753 for tuition for Washington state residents for the 2017-2018 academic year. However, Seattle itself isn’t cheap – and room and board and other assorted expenses can put the estimated cost of attendance at over $26,000.

Thankfully, not many students pay full price. If shopped correctly, students and parents can get a good discount through financial aid and scholarships. Yet, the out-of-pocket cost can still be a major drain on a family’s resources and a continuous headache for parents as they look to facilitate a good start in life for their children.

The key to a good college funding solution is to not overburden a young adult with too much student loan debt. An excessive loan payment early in a career will delay early milestones, like a home purchase or starting a family. Students typically have never had any exposure to personal finance; they’ve never held full-time jobs, paid income taxes, or incurred significant debt. Yet, as high school students, they choose to attend a university that can cost tens of thousands of dollars per year – for four or five or six or perhaps even more years. Planning, then, becomes a worthwhile endeavor.

When I meet with clients about college planning, I break the process into two stages: Early and Late –

Early-Stage:  Child age 0 to 14:  When you save for college –

The primary focus in early years is to save for college. We want to get an idea of what the future cost of attendance might be, then determine how much cash we can realistically allocate to education funding given other goals and priorities. Trade-offs might be made, and cash flows adjusted, but starting early will make the process much easier and provide more options during the Late-Stage.

Some of the most common vehicles for education savings include a 529 plan, a Coverdell Education Savings Account, a UTMA custodial account, or a checking or taxable savings account. Roth IRAs can also be part of an overall plan. Savingforcollege.com has a good comparison of savings options that summarizes the benefits and drawbacks of each vehicle.

Setting up an account early, even if budgeted monthly or annual contributions are small, is a smart idea because you can always adjust and add. For instance, it’s a lot easier to allocate a portion of bonuses, birthday money, or inheritances to a dedicated college savings account if the account is already established and ready for funding – just deposit the money!

Late-Stage: Child age 15 to 22: when you determine how to pay for college –

Once the child reaches freshman or sophomore year of high school, the emphasis shifts to how to pay for college. This is where available resources are determined. Savings, current cash flow, tax credits, scholarships and student aid, and student loans are all considered and analyzed. Many families may qualify for financial aid even though they believe they earn too much or have too many assets. Something like 80% of students attending private colleges receive financial aid.

Grandparents are also a good resource for late-stage college planning as direct payments of tuition can be made without using an annual exclusion or the lifetime limit on gifts – as long as payments are made directly to the school. It’s a good estate planning technique, especially if an estate is expected to owe either federal or state (or both!) estate taxes. Plus, a college education is a legacy that grandparents want to leave their loved ones.

Like shopping for a home, a maximum acceptable student loan amount is established. The desired degree, and related earnings potential, should be considered and evaluated when considering the loan. Then, shop for a school within the budget, keeping an eye out for need-based and merit-based financial aid.

Even though the cost of secondary education can seem discouraging, and the financial aid process is, at times, puzzling, the simple exercise of developing a plan can help alleviate a lot of concern and increase confidence in achieving one’s goals. Be sure to monitor the plan, and, like my client, keep asking questions. My client did, by the way, decide to make an extra 529 plan contribution this month; I think it just felt good!