Educate Yourself on How to Pay for College

Wednesday, September 14, 2016

How are we going to pay for a college education? Parents have a lot to worry about and plan for from birth to adulthood. This question is just one of many faced by parents whether their children are in preschool or filling out college applications.

For many, this daunting question is the cause of much consternation and anxiety. And understandably so, given the high cost of today's college education. For some it can be enough to cause sleepless nights and for others the cause of continually pushing the question of how to pay for college off to another day until finally it is staring you in the face, not as some distant expense, but rather as one that is just around the corner.

As with most things in the financial world, college costs are easier to handle financially if some planning is done well in advance. No one knows for sure what the future holds so some assumptions must be made to arrive at a starting point for planning.

The first step is to try to estimate the future cost. In order to calculate the future cost, you must first consider the current cost (most universities estimate the current cost of attendance on their websites) and then make adjustments for estimated annual inflation between now and when the child will most likely be attending college.

This can seem quite an absurd thing to do when considering the future of a small child. Most kids in high school don't know where they plan on attending college until quite late in the game, so how can a parent know what aspirations will run through their child's mind a decade from now? After all, paying tuition at Notre Dame, Duke, or Stanford is much different than paying for a community college or even a public, in-state, four-year university.

Of course, there is no sure-fire way to predict what path a child will choose many years from now or if they will in fact attend college at all. With that said, a logical assumption must be utilized in order to start the planning process.

For many, by averaging the cost of the few largest in-state, public universities, you will arrive at a good starting point. Others may want to target a specific school or average the higher cost of private or out-of state schools as a starting point for calculating costs. There is no wrong answer here; just keep in mind that costs can escalate more or less quickly based on the type of schools used for estimations.

After arriving at the initial cost estimate for college (you'll probably gasp for air when you see the dollar figure!) the next step is deciding what amount or percentage of that future liability will be yours and what will be the child's responsibility. This is an area which can cause some rather heated discussion.

Some parents believe that they should fund the entire educational process. Others believe that the child should be required to fund some portion of their educational costs themselves either through working, taking on student loans, or some combination of the two. By being required to participate in funding the costs, many parents believe that the child has a better chance of comprehending the value of a college education and also to understand the value of money better than they already might (a good goal to have for your children regardless of educational choice).

Others believe that anything given for free simply is not appreciated and that by having some "skin in the game" the child is more likely to put in the necessary effort to succeed in college. Again, there is no wrong answer here; just many different ways to go about it.

Some parents decide that they will pay a fixed amount towards education and if the child can stay within the budgeted figure, then all will be paid for by the parent, but any costs over budget will be paid by the child. Other parents have decided to pay a certain percentage of the costs. The more expensive the college, the higher the child's share of the costs. Some parents pay for 100 percent of the tuition and book expenses, but leave the child to pay for room, board, and miscellaneous expenses.

There are countless other ways that I've seen parents decide on how to share the burden of college costs. A discussion between parents well ahead of the college event is important so that parents can make sure they will utilize the best approach for what they believe will be the best result for their child.

This decision may also be very much shaped by simple economic reality, if the parents have very limited means and can save little or no money, then much of the financial burden will be forced upon the child out of necessity. If this is the case that does not mean that college is out of reach for your child. There are many need-based federal and state programs for tuition assistance such as grants as well as work study and loan programs.

After calculating the future cost of college and then subtracting the perceived amount that the child should be responsible for, the next step is funding for the future college costs. When calculating how much you need to save in order to have a certain amount available for when college begins, an assumption on the anticipated rate of return the money will receive must be used.

There is no way to be exact here; this is only an assumption. Recently I've been recommending 6 percent as an assumed growth percentage for college savings assets. The odds of ever hitting exactly 6 percent are remote, but it is a starting point for coming up with a meaningful number of dollars that must be saved in order to meet the future liability.

After calculating how much to save, the next step is picking the appropriate vehicle in which to save. One method to save for college costs is the 529 Plan, which gets its name from the Section number of the Internal Revenue Code which allows the existence of such plans.1

The 529 Plan allows monies to be saved into investments that are tax deferred and later tax-free if used for post-secondary education (i.e. college). Many states even allow for a deduction or credit for amounts saved into their State's 529 Plan that adds further to the potential of the 529 Plan. Dollar cost averaging into the 529 Plans over time is generally the most effective way to save for most, although intermittent contributions or investing a lump sum up-front can be wise depending on the situation.2

The various 529 Plans all have various different investment options with various risks and return potential. A Certified Financial Planner can be very helpful in assisting you with an appropriate investment mix given your exact situation.

Planning successfully for college is no small chore. It takes time, thought and persistence over numerous years to fully prepare. If you feel uncertain as to how to get started or just need some direction, do not be afraid to ask. There are many professionals who spend a substantial portion of the year helping families to adequately plan for college. The expertise is out there for those who need it.

The most ideal course of action is to start planning early. For those who no longer feel they are early in the process, just start planning. Even if fully funding a college education is not within your reach, educating yourself on the process and getting started is still the best path to take.

1 Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also risk that the investments may lose money or not perform well enough to cover college costs as anticipated.

2 Dollar cost averaging does not assure a profit and does not protect against a loss in declining markets. This strategy involves continuous investing; you should consider your financial ability to continue purchases no matter how prices fluctuate.

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