Key Takeaways:
College tuition has risen dramatically over the last 20 years, making early, proactive planning essential to reduce the risk of heavy student debt.
Families can cut costs by filing the FAFSA as early as possible, targeting local scholarships, and asking for aid reconsideration if finances change.
Saving strategies like 529s, Coverdell ESAs, and custodial accounts can help, but each has different tax and FAFSA impacts that should be coordinated carefully.
Fully funding a college education without debt is no simple task. It’s no secret that the cost of a four-year degree has soared. But do you realize how much it has risen?
According to the Education Data Initiative, the average cost of college tuition and fees at four-year public schools has risen 179% over the last 20 years. It’s an average annual increase of 9.0%.
The average cost of tuition and fees at private four-year schools has risen 124% over the same period for an average annual increase of 6.2%.
That is an increase from an annual cost of $3,349 to $9,349 for a public university and $14,616 to $32,769 for a private school.
The statistics are sobering, and students are piling up unmanageable debts to secure a degree.
How to Reduce Out-of-Pocket College Expenses
But there are ways to reduce out-of-pocket expenses and avoid or at least minimize the need to take on debt.
Be savvy about financial aid
First, let’s review financial aid. This can be an important way to reduce costs, depending on the school.
Complete the Free Application for Federal Student Aid now. Get your FAFSA in as soon as you can. Grants are awarded on a first-come, first-served basis, and there isn’t an unlimited pot of money available. If your child is a senior in high school this year and their first year in college begins next year, try to submit when the starting gate opens in October. One other thing to keep in mind: Many colleges have individual deadlines. As with the federal deadline, earlier is better.
Apply for scholarships and consider focusing on local scholarships, as there is usually less competition than for national scholarships. “The absolute first place to visit for local scholarships is your school counselor’s office or the school’s website,” says Jan Smith, a financial literacy expert at Educational Credit Management Corporation (ECMC), a nonprofit organization that aids student loan borrowers. “Many businesses want to help out students and will approach the school counselor to get the word out about scholarships available in their hometown. Other places where your kids may uncover funds include community organizations, local businesses, your employer or union, city, county, and state governments, and churches and religious organizations.
A family’s financial situation can change. Since FAFSA uses last year’s tax returns, you can request an appeal if your situation has greatly shifted. Speak with the financial aid office and ask them to ‘reconsider’ based on your unique situation.
Don’t rule out so-called ‘no-loan’ schools. A university that is a no-loan school aids students in a way that they can avoid student loans through scholarships, grants, and work-study programs. Some colleges may assist all students, others look at family income and needs, or focus on in-state students. One or more schools on your child’s preferred list may be a no-loan college. Inquire about the type of support they offer. What you don’t know can and will hurt you, financially.
Save for college
As with all saving, the sooner you start saving for your children’s college, the better off you’ll be. And there are several advantageous ways to save for educational purposes. This isn’t an all-encompassing list, but we’ll touch on the high points.
- 529 plans are popular and offer tax benefits when funds are used for qualified education expenses. Earnings and withdrawals are tax-free when you use the money for college. Be aware that withdrawals from accounts owned by someone other than the student or their parent must be added back to the student’s income on the following year’s FAFSA and can reduce aid eligibility by as much as 50% of the amount of the distribution.
- The Coverdell ESA allows for tax-free earnings and withdrawals for qualified educational expenses; however, only married couples earning less than $220,000 or individuals earning less than $110,000 can contribute. The maximum limit to contribute is $2,000 per year. The value of a Coverdell is counted as a parent asset on the FAFSA. The assets of parents are assessed at a lower rate than students, so the reduction in financial aid is reduced.
- Custodial accounts (UGMA/UTMA) are another option. Funds deposited into these accounts are not limited to college and become the property of the child when he or she reaches 18 or 21 (most states), depending on the state. Will your child have the maturity to manage a windfall at a young age? There are additional drawbacks, including the potential for tax liabilities on earnings and capital gains. Also, custodial accounts are counted as student assets on the FAFSA, which may reduce a student’s aid package.
We know that college savings can seem daunting. But develop a plan. Break it into smaller steps. Tackle each step and stay disciplined. If you have any questions or want assistance with resources, we’re here to help.
I trust you’ve found this review to be educational and insightful. If you have any questions or would like to discuss our wealth management services, please feel free to contact us.
As always, thank you for the trust, confidence, and the opportunity to serve as your financial advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
John Gigliello, CFP®
John Gigliello, CFP®, is a fee-based fiduciary financial planner in Albany, NY, serving individuals age 50+ with comprehensive planning and investment management, centered around proactive and advanced tax planning. John earned a Certificate in Financial Planning from Boston University and, more recently, successfully completed the rigorous CFP® Certification examination to become a CERTIFIED FINANCIAL PLANNER™. John earned the Accredited Investment Fiduciary® Designation from the Center for Fiduciary Studies®, the standards-setting body for Fi360. The AIF® designation signifies specialized knowledge of fiduciary responsibility and the ability to implement policies and procedures that meet a defined standard of care. John currently serves on the Albany County Investment Advisory Board, having been appointed by a unanimous vote of the County Legislature in January 2019. In this position, John advises the county on a strategy for making the best use of money available for investment.