Too many people are financially unprepared for retirement. Are you one of them? Don't worry . . . it's never too late to start saving. Use the checklist to the left to plot your strategy.
Determining how much Money you will need
Twice per year, the federal government calculates the cost of attendance for each college (over 3,000 of them), adjusts the figure for inflation, and, if your child is applying for financial aid, uses this number to determine your child's financial need.
Five categories of expenses are used to determine the cost of attendance at a particular college:
Tuition and fees: Usually the same for all students
Books and supplies: Can vary by student, depending on your child's courses and his or her requirements
Room and board: Can vary by student, depending on the meal plan your child selects and whether he or she lives on or off campus
Transportation: Can vary greatly by student, depending on where your child lives in relation to the school
Personal expenses: Can vary by student (e.g., health insurance, pizzas, telephone bills)
In the last four categories, the federal government sets a monetary figure even though the exact expenses incurred will depend on the individual student. Thus, depending on these variables, your child's actual cost may be slightly higher or lower than the cost used for official purposes such as financial aid determinations.
If you're interested in obtaining the monetary amount allotted to each category for a particular college, contact that college directly.
Take care of your wallet
It's likely that you'll be more interested in financial factors than your child will be. In fact, your own financial constraints may limit your child's ultimate choice of colleges. It's important to evaluate colleges from a financial standpoint during the research process so there won't be any surprises down the road.
First, ask yourself whether the college provides an overall good education for the price. Remember, tuition is not the only cost. Your child will need money for room and board, books and supplies, transportation, and other miscellaneous fees. This combined cost is known as the cost of attendance. Compare the cost of attendance at colleges that interest your child.
Next, see whether the college offers any special cost-cutting measures. For example, is there a flexible tuition payment plan that lets you spread costs over 10 or 12 months? A three-year degree program? A five-year joint graduate/undergraduate degree program? A tuition discount for siblings or alumni? An opportunity to take courses online?
You'll also want to examine the college's record on financial aid. What percentage of students receive need-based financial aid? Of these, what percentage of students have 100 percent of their need met? If costs are a main concern, you'll want to target those colleges that consistently meet a high percentage of their students' financial needs. This statistic is readily available from college guidebooks.
You might also ask what percentage of students take advantage of work-study programs. Does every student who requests a work-study assignment get one? Also, does the college offer merit aid (not based on financial need) for academic, athletic, musical, or other abilities? If so, whom should be contacted?
While you're in the financial arena, now may be a good time to discuss any related concerns with your child. For example, will you expect your child to contribute to his or her education? With savings? With student loans? And how much? It's important for your child to have an awareness of the financial implications (for you and for him or her) of choosing a college.
One final note: Even if a college's sticker price is daunting, your child should consider applying if the college is otherwise a good fit. Remember, the college may award your child a generous financial aid package that may translate into a lower actual out-of-pocket cost for you over four years, compared with a less expensive school on your child's list that didn't offer as generous an aid package. However, you'll need to set a financial limit on what you can afford to pay before the acceptance letters start arriving—it's hard to resist the lure of having your child accept a slot at a prestigious university, even if it means overextending yourself financially.
© 2003 by Forefield Inc.
Save for College
In the college savings game, all strategies aren't created equal. Should you choose a 529 plan, a Coverdell education savings account, or a custodial account in your child's name? Or would you rather put your money into a mutual fund in your own name? Ideally, you'll want to choose a savings vehicle that offers you the best combination of tax advantages, financial aid benefits, and flexibility while meeting your overall investment needs.
529 plans: college savings plans
There are two types of 529 plans—college savings plans and prepaid tuition plans. Though each is governed under Section 529 of the Internal Revenue Code (hence the name "529" plans), college savings plans and prepaid tuition plans are very different college savings vehicles.
A college savings plan is a tax-advantaged college savings vehicle that lets you save money for college in an individual investment account. Some plans let you enroll directly, while others require that you go through a financial professional. The details of college savings plans vary by state, but the basics are the same:
529 plans: prepaid tuition plans
Prepaid tuition plans are distant cousins to college savings plans—their federal tax treatment is the same, but just about everything else is different. A prepaid tuition plan is a tax-advantaged college savings vehicle that lets you prepay tuition expenses now for use in the future.
Prepaid tuition plans can be run either by states or colleges. For state-run plans, you prepay tuition at one or more state colleges; for college-run plans, you prepay tuition at the participating college(s). Although the details of prepaid tuition plans vary by state, the basics are the same:
Coverdell education savings accounts
A Coverdell education savings account (Coverdell ESA) is a tax-advantaged education savings vehicle that lets you save money for college, as well as for elementary and secondary school (K-12) at public, private, or religious schools. Here's how it works:
Before 529 plans and Coverdell ESAs, there were custodial accounts. A custodial account allows your child to hold assets that he or she ordinarily wouldn't be allowed to hold in his or her own name. The assets can then be used to pay for college or anything else that benefits your child (e.g., summer camp, braces, hockey lessons, a computer). Here's how a custodial account works:
Financial aid impact
Your college saving decisions impact the financial aid process. Come financial aid time, your family's income and assets are run through a formula at both the federal level and the college (institutional) level to determine how much money your family should be expected to contribute to college costs before you receive any financial aid. This number is referred to as the expected family contribution, or EFC.
In the federal calculation, your child's assets are treated differently than your assets. Your child must contribute 35 percent of his or her assets each year, while you must contribute 5.6 percent of your assets. (Note: The 35 percent contribution figure for student assets will be reduced to 20 percent beginning July 1, 2007.)
For example, $10,000 in your child's bank account would equal an expected contribution of $3,500 from your child ($10,000 x .35), but the same $10,000 in your bank account would equal an expected $560 contribution from you ($10,000 x .056).
Under the federal rules, an UGMA/UTMA custodial account is classified as a student asset. By contrast, Coverdell ESAs and 529 college savings plans are considered parental assets if the parent is the account owner. (So accounts owned by grandparents or other relatives or friends don't count at all.) And distributions (withdrawals) from Coverdell ESAs and college savings plans that are used to pay the beneficiary's qualified education expenses are not classified as parent or student income on the federal government's aid form, which means that some or all of the money is not counted again when it's withdrawn. Other investments you may own in your name, such as mutual funds, stocks, U.S. savings bonds (e.g., Series EE and Series I), certificates of deposit, and real estate, are also classified as parental assets.
And, effective as of July 1, 2006, the federal government treats prepaid tuition plans the same as college savings plans for financial aid purposes. Prior to July 1, 2006, prepaid tuition plans were treated more harshly than college savings plans under the federal financial aid formula. Specifically, a prepaid tuition plan wasn't counted as either an asset of parent or student, but any distributions (withdrawals) from a prepaid plan were considered a "resource" that reduced the cost of attendance at any given college, resulting in a corresponding dollar-for-dollar reduction in financial aid.
Regarding institutional aid, colleges are generally a bit stricter than the federal government in assessing a family's assets and their ability to pay college costs. Most use a standard financial aid application that considers assets the federal government does not, for example, home equity. Typically, though, colleges treat 529 plans, Coverdell accounts, and UGMA/UTMA custodial accounts the same as the federal government, with the caveat that distributions from 529 plans and Coverdell accounts are often counted again as available income.
A word of caution
The provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 that increased the annual contribution limit for Coverdell ESAs to $2,000 is scheduled to expire on December 31, 2010. Unless Congress acts, after this date, the annual contribution limit for Coverdell ESAs will revert to $500, its status prior to January 1, 2002.
Also, please note that with respect to 529 plans, investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. More information about 529 plans is available in the issuer's official statement, which should be read carefully before investing.
It seems like only yesterday you were bandaging scraped knees and waving at the school bus, and now it's time for your child to choose a college. You may think a hands-off approach is best to avoid interfering, but it's important to help your child research schools. Not only will you be able to offer guidance and suggestions, but you'll likely have your own issues to consider (cost, for one). Although your child will also have his or her own agenda, you can make sure that the final wish list is something you both agree on by collaborating.
When should your child start researching colleges?
Most students start investigating colleges in their junior year of high school, though you can certainly start earlier if you want to. Beginning the search a full year before your child needs to apply to college should allow plenty of time to compare schools and help you feel in control of the process. Remember, your child will be spending the next several years at this college—you'll want to take the time to find a good match. You don't want your child picking a school solely because his or her best friend is applying there!
Where can you find this information?
Years ago, college guidebooks were the only source of information about schools. Now, there's the Internet, too. Both are valuable research tools. College guidebooks are available at all major bookstores and your local library. The best ones describe and compare colleges down to the smallest details. Ask your local reference librarian or your child's high school guidance counselor to recommend a resource.
As for the Internet, most colleges have websites where you can conduct research and even take a virtual tour of the campus. In addition, other education-related websites provide general information on selecting a college and college life. To get started, type your search query in one of the many search engines on the Internet. Keep in mind, though, that some websites may not be as reliable as others.
The goal of your research is to create a list of colleges that match up well with your and your child's, interests and abilities (and your pocketbook).
Look at the big picture
The logical place to begin a college search is with general criteria such as size, geographic region, and location (i.e., rural, suburb, city). These are all factors that most students have a keen opinion on. Talk to your child about the type of college environment that he or she prefers.
Make the grade
Next, consider academic factors. Make sure to note your or your child’s chosen program's availability and strength. This criterion alone may supersede any general criteria in importance. You'll also want to look at the median grade point average and SAT scores to give you an idea of the chances for admission. Keep in mind that highly selective colleges usually accept only those students at the very top of the applicant pool. College guidebooks can verify the competitiveness of any particular college. It's important to be realistic about your child's admission chances.
Other academic factors to consider include:
Think about quality of life
Beyond the general, academic, and financial factors, you and your child will want to consider factors that relate to quality of life. Here are some questions to think about:
A campus visit can be very helpful when comparing colleges. During such a visit, you and your child should feel free to seek out the opinions of students, teachers, and other employees.
What should the final list look like?
Ideally, you and your child should end up with a manageable list of colleges to apply to. On the list should be a couple of "stretch" schools (it's a stretch your child will be accepted), a core group of schools where your child fits in well academically (it's likely your child will be accepted), and a couple of "safety" schools (it's very likely that your child will be accepted). If possible, your child should apply to schools that directly compete with one another for students (e.g., two small, highly competitive liberal arts colleges in the same geographic region). The reason is that most colleges don't mind losing students to a more competitive or less competitive school, but they generally don't like losing students to a direct competitor. As a result, they may compete to offer your child the best financial aid package.
Complete College Applications
Filling out college applications properly is crucial. After all, you and your child put a lot of time and effort into choosing schools—now it's time to complete that process. You should allow plenty of time to work on the applications, and you'll want to make sure that you're available to help your child. Here are some things to keep in mind.
What's required in the application?
Most college applications have standard requirements such as:
The key is to present all of this information in the best possible light. Though there is little flexibility in the presentation of personal information, grades, or SAT scores, there is opportunity to stand out from the pack with reference letters and the personal essay. Not surprisingly, then, these two items are very important.
Spend some time thinking about the teachers, volunteer coordinators, bosses, and others who should write the recommendation letters. Also, your allow plenty of time for your chosen people to write the references, and tell the person what to do when finished (i.e., send the letter directly to the college—in which case a prestamped, preaddressed envelope should be provided—or give it back for inclusion with the rest of the application).
The personal essay is often the heart and soul of the application. It helps the admissions team distinguish one person from many other applicants and, in some cases, may be the deciding factor. To write a thoughtful, coherent essay, choose a topic that is especially meaningful to you or your child. Refrain actually writing the essay for him or her. (It's also unethical to hire a professional ghostwriter.) However, you can certainly brainstorm for ideas, ask for and offer editing suggestions, and proofread the final product for spelling and grammatical mistakes.
If you or your child need help getting started, most college guidebooks devote chapters to writing good college essays. Ideally, a child should browse through this material early in senior year to get familiar with the process, before he or she faces the terror of writer's block the weekend before the application is due.
The total package—what colleges look for in prospective applicants
Beyond grades and SAT scores, it's no secret that colleges will be looking at extracurricular and volunteer activities to see what interests and abilities a person can bring to the campus. And as colleges have become more competitive, the quest to find the "right" mix of activities has intensified.
Many parents have spent countless hours (and dollars) driving their children to every extracurricular activity imaginable in an effort to ensure their entry into a prestigious university. Yet this isn't necessarily the magic elixir. Instead, admissions officers generally say that they favor applicants who have demonstrated a real passion in one or a few areas, as opposed to those who participate in a long list of activities just for the sake of putting it on their applications. So instead of forcing your child to dabble in everything (e.g., music, art, theater, sports, community work, religious work, business internships), it's better to let your child focus on those pursuits that he or she truly enjoys. And if your child doesn't get accepted at a particular college, don't take it personally—your child's path to success doesn't depend on just one college.
Timeline for applying
Generally, college applications are submitted in the fall or winter of the child's senior year of high school, with acceptance or rejection letters arriving in the spring. However, if your child applies for early admission, the application deadline is earlier—the spring of your child's junior year, with an acceptance or rejection coming in the fall of senior year. It's important to note that the college application timeline isn't the same as the financial aid timeline, which is usually later.
Each college has its own application deadline, as well as its own application requirements. To stay organized, write each deadline on a central calendar, and then create an individual folder for each college to keep track of applications, correspondence, reference letters, essay requirements, and other items. If the paperwork is too overwhelming, many colleges now allow applications to be submitted on-line; check with the college to see if this is an option.
Early admission vs. regular admission
Some students favor early admission because it lets them relax and enjoy their senior year. There are actually several ways to apply for early admission:
If your child's heart is set on a particular college and the match is a good one, it might be worthwhile for your child to apply for early admission. However, a note of caution—it's easy for your child to wind up with less financial aid than a regular applicant. This is because colleges know that your child is already committed to attending; thus, they figure they can offer a less attractive financial aid package. And although your child can rescind an early decision acceptance if the college doesn't offer adequate financial aid, he or she may be rushed in applying to other colleges.
© 2003 Forefield, Inc.
Understand Financial Aid
Let's face it. Financial aid information is probably not on anyone's top 10 list of bedtime reading material. It can be an intimidating and confusing topic. There are different types, different sources, and different formulas for evaluating your child's eligibility. Here are some of the basics to help you get started.
What is financial aid?
Financial aid is money given to students to help pay for college. Financial aid can take the form of loans, grants, scholarships, and work-study jobs.
Grants and scholarships are more favorable than loans because they don't have to be repaid—they're free money. In a work-study program, your child works for a certain number of hours per week (either on or off campus) to earn money for college expenses. Obviously, an ideal financial aid package will contain more grants and scholarships than loans.
Need-based financial aid vs. merit aid
Financial aid can be further broken down into two categories—need-based aid, which is based on your child's financial need; and merit aid, which is based on merit only. The majority of financial aid is need-based aid. However, in recent years, merit aid has been making a comeback as colleges (particularly private colleges) use favorable merit aid packages to lure the best and brightest students to their campuses, regardless of their financial need.
Who provides merit aid?
The best place to look for merit aid is at the college your child is applying to. Does the college offer any grants or scholarships for academic, athletic, musical, or other abilities? If so, what is the application procedure? Keep in mind that the availability of college-sponsored merit aid is likely to fluctuate from year to year as colleges decide how much of their endowments they want to use, as well as the specific programs they want to target.
Besides colleges, a wide variety of private and public companies, associations, and foundations offer merit scholarships and grants. Many have specific eligibility criteria. In the past, sifting through the possibilities could be a daunting task. Now, with the Internet, there are websites where your child can input his or her background, abilities, and interests and receive (free of charge) a matching list of potential scholarships. However, though this avenue is certainly worth exploring, such research (and subsequent work to complete any applications) shouldn't come at the expense of researching and applying for the more common need-based financial aid.
Who provides need-based financial aid?
The main provider of need-based financial aid is the federal government, followed by colleges. States come in a distant third. The amount of federal aid available in any given year depends on the amount that the federal budget appropriates, and this aid is spread over several different financial aid programs. For colleges, need-based aid comes from a college's endowment, and policies may differ from year to year, resulting in an uneven availability of funds. States, like the federal government, must appropriate the money in their budgets.
The federal government's aid application is known as the FAFSA, which stands for Free Application for Federal Student Aid. The federal government and colleges use the FAFSA when federal funds are being distributed. (C olleges are responsible for administering certain federal financial aid programs.) When colleges distribute their own financial aid, they use one of two forms. The majority of colleges use the PROFILE application, created by the College Scholarship Service of Princeton, New Jersey. A minority of colleges use their own institutional applications. The states may use the FAFSA or may require their own applications. Contact your state's higher education authority to learn about the state aid programs available and the applications that you'll need to complete.
The FAFSA is filed as soon after January 1 as possible in the year your child will be attending college. You must wait until after January 1 because the FAFSA relies on your tax information from the previous year. The PROFILE (or individual college application) can usually be filed earlier than the FAFSA. The specific deadline is left up to the individual college, and you'll need to keep track of it.
How is my child's financial need determined?
The way your child's financial need is determined depends on which aid application you're filling out. The FAFSA uses a formula known as the federal methodology; the PROFILE (or a college's own application) uses a formula known as the institutional methodology.
Under the FAFSA, your current income and assets and your child's current income and assets are run through a formula. You're allowed certain deductions and allowances against your income, and you're able to exclude certain assets from consideration. The result is a figure known as the expected family contribution, or EFC. It's the amount of money that you'll be expected to contribute to college costs before any federal aid is forthcoming. Your EFC remains constant, no matter which college your child applies to.
An important point: Your EFC is not the same as your child's financial need. To calculate your child's financial need, subtract your EFC from the cost of attendance at your child's college. Because colleges aren't all the same price, your child's financial need will fluctuate with the cost of a particular college.
For example, you fill out the FAFSA, and your EFC is calculated to be $5,000. Assuming that the cost of attendance at College A is $18,000 per year and the cost at College B is $25,000, your child's financial need is $13,000 at College A and $20,000 at College B.
The PROFILE application (or the college's own application) basically works the same way. However, the PROFILE generally takes a more thorough look at your income and assets to determine what you can really afford to pay. (For example, the PROFILE looks at your home equity and retirement assets.) In this way, colleges attempt to target those students with the greatest financial need.
Are there any assets that are not counted for financial aid purposes?
Yes, assuming you are talking about federal financial aid. Under the federal government's financial aid formula, four main types of assets are excluded from consideration when determining your child's financial need:
These assets are known as nonassessable assets. All other assets that belong to you and your child are known as assessable assets and include items like checking and savings accounts, stocks, bonds, mutual funds, custodial accounts, trusts, and investment property. The more assessable assets you have, the more money you will be expected to contribute to college costs before any financial aid is forthcoming.
For example, Mr. and Mrs. Green have a Roth IRA worth $50,000, home equity of $25,000, cash value life insurance of $100,000, and a mutual fund worth $25,000. Their total assets are $200,000. However, under the federal financial aid formula, the Greens are considered to have only $25,000 worth of assets (i.e., the mutual fund).
By contrast, Mr. and Mrs. White have stock holdings worth $50,000, a mutual fund worth $25,000, a custodial account in their child's name worth $25,000, and home equity of $100,000. Their total assets are $200,000. However, under the federal financial aid formula, the Whites are deemed to have $100,000 worth of assets (i.e., stock holdings, mutual fund, and custodial account).
Keep in mind that financial aid programs that are funded by individual colleges may use a formula that differs from the one used by the federal government to determine financial need. Specifically, the formula may take into account the value of your retirement accounts and/or home equity, and may even expect you to borrow against these assets.
How does my child's financial need relate to his or her financial aid award?
When your child is accepted at a particular college, the college's financial aid administrator will attempt to create a financial aid package to meet your child's financial need. (Colleges aren't obligated to meet all of it.) Again, you would like your child's need met with the highest percentage of grants, scholarships, and work-study jobs and the least amount of loans. When comparing the financial aid packages that your child receives, make sure to compare your actual out-of-pocket costs among colleges, not necessarily the ratio of loans to grants in one particular package.
Find Cash for College Bills
If you can afford it, applying part of your paycheck to college bills is probably the easiest route. You won't have any paperwork to fill out or messy calculations at tax time, and you can leave your retirement accounts and life insurance intact.
Most colleges bill once each semester. To have enough money saved to meet each semester's bill, you'll need to set aside an amount from each paycheck as soon as you get it, rather than save whatever is left at the end of the month.
As you accumulate money, you should put it somewhere safe (e.g., a savings account, money market account, or certificate of deposit) because of your short time frame. Some colleges, however, offer quarterly or monthly bills in an effort to make payment easier for you.
Colleges may even offer you tuition discounts if you allow them to debit your account directly. In addition, some private companies now offer 10-month payment plans coordinated with individual colleges.
The main drawback to using your paycheck as a source of cash for college bills is that this consistent outflow of cash over a period of months or years may leave you financially strapped to invest for other goals. To determine how much of a contribution you can manage (if any), you'll need to prepare a detailed budget of your household income and expenses.
Your savings and investments
The next logical place to look for spare funds is your savings and investments. This category encompasses everything from savings accounts and money market accounts to stocks, mutual funds, and real estate holdings. Not surprisingly, it can be difficult to figure out which source to use.
Generally speaking, withdrawing from your savings accounts is the easier route. Again, no applications or independent approvals are necessary (except perhaps from your spouse!). Also, no tax penalties are associated with such withdrawals. And the fact that savings accounts generally earn the lowest rates of return means that you don't have to worry about missing out on high returns. However, try to keep at least three to six months' worth of savings on hand for emergencies.
The process is a bit more complicated with investments. Though most investments are easily liquidated (i.e., converted to cash), it's not always easy to know which ones to liquidate.
The answer depends in part on each investment's rate of return, future prospects, and potential capital gain (or loss) if sold and the tax consequences. If you're unsure which investments to liquidate, a professional financial planner can help you sort through the possibilities.
If you have a 529 college savings plan or a 529 prepaid tuition plan, you'll need to notify the plan administrator before you make a withdrawal. Check the specific rules of your plan for more information.
If you have a Coverdell education savings account (formerly known as an education IRA), keep in mind that all withdrawals must be made before the beneficiary reaches age 30 (unless the beneficiary has special needs).
If you're one of the lucky ones whose home has increased in value over the years, you can usually tap this equity for college bills by taking out a home equity loan. The loan can be structured as either a revolving line of credit (you're approved for a certain amount and you tap the funds periodically as you need them) or a second mortgage (you receive one lump sum).
The main advantage of a home equity loan is that interest payments are usually tax deductible. And because your home serves as collateral for the loan, the interest rate is likely to be lower than on an unsecured loan. However, because the loan is now tied to your house, your lender can foreclose on your home if you default.
Your life insurance
If you have a cash value life insurance policy, you might decide to use part of the cash value that has built up inside the policy by making a withdrawal or taking out a loan, or using some combination of the two. For withdrawals, the amount that you withdraw is generally limited to a percentage of your cash value and varies by policy and company.
The main drawback is that such withdrawals decrease your death benefit (i.e., the sum of cash that the insurance company pays at your death). For policy loans, you are likewise allowed to borrow up to a specified percentage of your cash value.
However, if you die with an outstanding loan against your policy, your death benefit is reduced by the amount of the outstanding loan and interest. For more information, contact your insurance agent.
Private loan/PLUS loan
If the idea of putting your home at risk with a home equity loan scares you, then you might consider obtaining a personal (unsecured) loan from a private financial institution. To get approved, you'll likely need a good credit history.
If you're looking for a loan that's college-specific, the federal government's PLUS loan may be just the thing. Under this program (which stands for Parental Loans to Undergraduate Students), you can borrow up to the full cost of your child's college education, minus any financial aid that your child receives.
The loan can be obtained either directly from the federal government or from participating private lenders. Importantly, PLUS loans aren't based on your child's financial need. However, you'll need to pass a credit check.
Your retirement plans
By the time your child's in college, it's likely that you'll have at least some money saved in one or more retirement accounts, such as an IRA or an employer-sponsored plan like a 401(k).
Should you tap these funds? As a general rule, most planners don't recommend using your retirement funds to pay college bills. You'll need the money in retirement, and you'll miss out on the growth that would have occurred had you not withdrawn the money.
However, there may be instances where you need (or want) to use your retirement funds. With IRAs (traditional IRAs and Roth IRAs), you can withdraw funds at any age, penalty free, to pay your child's college bills ("qualified higher education expenses," as the IRS likes to call them).
However, you may owe income tax on your withdrawals; consult the appropriate IRS publication on your type of IRA, or speak with a tax professional. Be aware that once you withdraw the money, it can't be paid back, like a loan.
Unfortunately, if you withdraw funds from an employer-sponsored retirement plan, such as 401(k) or 403(b), and you're under age 59½, you'll pay a 10 percent early withdrawal penalty. Keep in mind, too, that all withdrawals will be added to your taxable income for the year.
Instead of withdrawing funds, another option is to borrow the money, assuming your company's plan allows it. (Check with your human resources manager.) By borrowing instead of withdrawing, you avoid taxes and penalties.
However, most plans require you to pay back the entire loan within five years (you can start to repay right away through a payroll deduction), or immediately if you leave the company.
Your child's piggy bank
In finding spare change for your child’s college bills, leave no stone unturned. Does your child have any income or assets that could be used?
What about that vintage lunch box collection collecting dust in your child's closet, or those $100 savings bonds that your child received from Aunt Agnes every year? In addition, your child could get a summer job or part-time job during the school year to help pay the bills.
© 2003, Forefield, Inc.
Take Advantage of Education Tax Credits
If you or your child is in college, you might qualify for one of two education tax credits--the Hope credit and the Lifetime Learning credit. And because a tax credit is a dollar-for-dollar reduction against taxes owed, it's more favorable than a tax deduction, which simply reduces the total income on which your tax is based.
Education tax credits depend on the amount of qualified tuition and related expenses that you pay in a given year, as well as your modified adjusted gross income (MAGI). In 2007, to qualify for a full credit, your MAGI must be below $47,000 if you're a single filer and $94,000 if you're a joint filer. A partial credit is available for single filers with an MAGI between $47,000 and $57,000 and joint filers with an MAGI between $94,000 and $114,000.
Hope credit can help with college expenses
The Hope credit is a tax credit that covers the first two years of undergraduate education. Graduate and professional-level courses aren't eligible. The Hope credit is generally worth a maximum of $1,650. It's calculated as 100 percent of the first $1,100 of tuition and related expenses that you've paid for the year, plus 50 percent of the next $1,100 of such expenses.
To take the credit, you must clear some hurdles:
The college student must attend an eligible educational institution as defined by the IRS (generally, any post-secondary school that offers a degree program and is eligible to participate in federal aid programs qualifies).
The college student must attend college on at least a half-time basis.
The college student can't have a felony conviction.
You must claim your child as a dependent on your tax return if you are claiming credit for your child’s tuition bills. If your child has paid the tuition expenses, you can still take the credit as long as you claim your child as a dependent on your return. But if your child has paid the tuition expenses and isn't claimed as a dependent on your return, your child can take the credit on his or her own return.
The Hope credit can be taken for more than one student in the same year, provided each student qualifies independently. So, if you have twins who are in their freshman year of college (and you otherwise meet the requirements), your Hope credit would be worth $3,300. However, there are other restrictions. You can't take both the Hope credit and the Lifetime Learning credit in the same year for the same student. And whatever education expenses you cover with your tax-free distribution from a Coverdell education savings account (formerly known as an education IRA) cannot be the same expenses you use to qualify for the Hope credit.
Lifetime Learning credit can help with college, graduate school, and individual course expenses
The Lifetime Learning credit is a tax credit for the qualified education expenses that you, your spouse, or your child incur for courses taken to improve or acquire job skills (even courses related to sports, games, or hobbies qualify if they meet this requirement!). The Lifetime Learning credit is much less restrictive than the Hope credit. In addition to college expenses, the Lifetime Learning credit covers the tuition expenses of graduate students and students enrolled less than half-time.
The Lifetime Learning credit is generally worth a maximum of $2,000. It's calculated as 20 percent of the first $10,000 of tuition and related expenses that you've paid for the year.
One major difference between the Hope credit and the Lifetime Learning credit is that the Lifetime Learning credit is generally limited to a total of $2,000 per tax return, regardless of the number of students in a family who may qualify in a given year. So if you have twins who are in their senior year of college, your Lifetime Learning credit would be worth $2,000, not $4,000.
As with the Hope credit, if you withdraw money from a Coverdell ESA in the same year that you claim the Lifetime Learning credit, your Coverdell ESA withdrawal cannot cover the same expenses that you use to qualify for the Lifetime Learning credit.
My child is in college--how do I know which credit to take?
The Hope credit and the Lifetime Learning credit cannot be claimed in the same year for the same student, so you'll need to pick one. If the student is in the third or fourth years of college, you have to take the Lifetime Learning credit--you don't qualify for the Hope credit. And even when a student is in the first or second year of college, it's still best to take the Lifetime Learning credit because it's generally worth $2,000, compared to $1,650 for the Hope credit. The exception to this is if you have another family member who would qualify for the Lifetime Learning credit in that same year. In this case, in the same year you can take the $1,650 Hope credit for the student who is in the first two years of college and the $2,000 Lifetime Learning credit for the other qualifying student.
How do I claim either credit on my tax return?
You should receive Form 1098-T from the college, showing the tuition expenses you've paid for the year. Then, at tax time, you must file Form 8863 to take either credit. If you are married, you must file a joint return to take either credit. For more information, see IRS Publication 970 or consult a tax professional.
Lower the Cost of College
Although some of these ideas deviate from the typical four-year college experience, they just might be the ticket to college—and your ticket to financial sanity.
Ask about tuition discounts and flexible repayment programs
Before you rule out a college completely, ask whether it offers any tuition discounts or flexible repayment programs. For example, the school may offer a discount if you pay the entire semester's bill up front, or if you allow the money to be directly debited from your bank account. The college may also allow you to spread your payments over 12 months or extend them for a period after graduation. And if it's your alma mater, don't forget to inquire about any discounts for the children of alumni. Finally, ask if some charges are optional (e.g., full meal plan versus limited meal plan).
Graduate in three years instead of four
Some colleges offer accelerated programs that allow graduation in three or fewer years instead of four. This can save you a whole year's worth of tuition and related expenses. Some colleges offer similar programs that combine an undergraduate/graduate degree in five years. The main drawback is a heavier course load each semester, and summer breaks may have to be used to meet academic obligations. Also, some educators believe that students who attend college right out of high school need four years to develop to their fullest potential—intellectually, emotionally, and occupationally.
Earn college credit while still in high school
By taking advanced placement courses or special academic exams, your child may be able to earn college credits while still in high school. This means that your child may be able to take fewer classes in college, saving you money.
Think about cooperative education
Cooperative (co-op) education is a type of education where semesters of course work alternate with semesters of paid work at internships that your child helps select. Although a co-op degree usually takes five years to obtain, your child will be earning money during these years that can be used for tuition costs. In addition, your child gains valuable job experience.
Enroll in a community college, then transfer to a four-year college
One surefire way to cut college costs is to enroll in a local community college for a couple of years, where costs are often substantially less than four-year institutions. Then, after two years, transfer to a four-year institution. The diploma will be from the four-year institution, but your expenses won't. Before choosing this route, though, make sure that any credits earned at the community college will be transferable to another institution.
Defer enrollment for a year
Your child might be aching to get to college, but taking a year off can give you both some financial breathing room and allow your child to work and save money for a full year before starting college. Your child will apply under the college's normal application deadline with the rest of his or her classmates and, once accepted, can ask for a one-year deferment. But make sure the college offers deferred enrollment before your child goes through the time and expense of applying.
Live at home
It's not every child's dream, but attending a nearby college and living at home, even for a year or two, can substantially reduce costs by eliminating room-and-board expenses. (Though your child will incur commuting costs.) This arrangement may work out best at a college that has a student commuter population, because the college is likely to try to meet these students' needs. If your child does live at home, you'll both need to sit down beforehand and discuss mutual expectations. For example, now that your child's in college, it's not realistic to expect him or her to adhere to a rigid weekend curfew.
Consider distance learning
Taking courses online is a trend that's here to stay, and many colleges are in the process of creating or expanding their opportunities for distance learning. You or your child might be able to take a year's worth of classes from home and then attend the same school in person for the remaining years.
Work part-time throughout the college years
Part-time work during college can help defray some costs, though working during school can be both a physical and emotional strain. To make sure that your child's academic work doesn't suffer, one option might be for your child to focus on school for the first two years and then obtain a part-time job in the remaining years.
Join the military
There are several options here. Under the Reserve Officers' Training Corps (ROTC) scholarship program, your child can receive a free college education in exchange for a required period of active duty following graduation. Your child can apply for an ROTC scholarship at a military recruiting office during his or her junior or senior year of high school. Your child can also attend a service academy, like the U.S. Military Academy at West Point, for free. Be aware, though, that these schools are among the most competitive in the country, and your child must serve a minimum number of years of active duty upon graduation.
Or, you or your child can serve in the military and then attend college under the GI Bill. For more information, visit your local military recruiting office, or speak to your child's high school guidance counselor.
Go to school in Canada
Canadian schools generally offer excellent education at a price comparable to that of an average four-year public college in the United States. And in the global economy, many employers tend to look favorably on studying abroad. Your child will even be eligible for need-based federal student loans (but not grants), as well as the American Opportunity Tax Credit.
Check to see if your employer offers any educational assistance
Have grandparents pay tuition directly to the college
Payments that grandparents (or others) make directly to a college aren't considered gifts for purposes of the federal gift tax rules. So, grandparents can be as generous as they want without having to worry about the tax implications for themselves. Keep in mind, though, that any payments must go directly to the college. They can't be delivered to your child with instructions to apply them to the college bills.
Help Transition from High School to College
You can start by talking with your child about certain subjects before he or she leaves for college and familiarizing yourself with the emotions that he or she will likely face in the first few weeks and months. Then, you can provide a comforting shoulder to lean on. In doing so, you'll need to walk a fine line between offering support and encouragement, and actually telling your child what to do.
Things to do before your child leaves for college
Here are some things that you and your child can do before the first day of college:
Your child's college may have provided him or her with the name, address, and telephone number of his or her prospective roommate. If so, your child may want to contact this person simply to say hello and/or to coordinate the common items that they'll want to bring.
Until your child sees the size of the dorm room and meets his or her roommate (and sees what he or she has brought), your child should avoid buying large or hard-to-store items such as a big-screen television, floor speakers for the stereo, skis, three winter parkas, and so on. These items can always be picked up on a return visit home, or they can be shipped by you.
Talk with your child about money management. Does your child have an account set up with a bank that has an ATM on campus? Will you be providing a certain amount of spending money to your child each month? Have you set up a budget? Does your child have a credit card? If so, is it to be used only for emergencies (preferable) or for everyday expenses? Have you agreed on a reasonable monthly spending amount? It's important to discuss these matters now, because once at college, your child may be tempted to overspend or may be too distracted to pay close attention.
Talk with your child about alcohol and drugs. Though you may have had this conversation already with your child during high school, the stakes are higher now because you won't be around every day to see what's going on. Make sure that your child knows the dangers of certain drugs and the potentially volatile mix of drugs and strangers.
Make sure that your child knows that he or she can call you at any time if something comes up.
The day before your child leaves for college, spend time together doing something fun!
Settling in--the first week
During the first week of college, your child will probably attend a lot of orientation meetings. The welcoming committee, as well as your child's dorm leader, academic advisor, and upper-class mentor, will likely all have meetings to introduce your child to a particular aspect of the college and answer questions. During this time, your child will also be trying to find his or her way around the campus—the dorms, the classrooms, the dining halls, the recreation center, the office that handles course registration, the student center, the bookstore.
Not surprisingly, the first week can be overwhelming. It's common for students of all backgrounds to feel a range of emotions from exhilaration and happiness to anxiety, confusion, nervousness, and exhaustion as they take everything in (and try to appear cool in the process). It can help your child to know that everyone else is probably feeling the same way.
Now the hard part--the first eight weeks
Once the adrenaline rush of the first week wears off, reality sets in, and it can hit hard. There are so many things for your child to get used to. Perhaps he or she's not hitting it off with his or her roommate. Or perhaps everyone likes to hang out in your child's room night after night until 2 A.M. Maybe your child misses your chicken pot pie and lasagna. Or maybe he or she feels lost academically because every professor assigns hundreds of pages of reading each week with no additional guidance. Whatever it is (and there's bound to be something), your child will need to adapt.
The first eight weeks of college are often regarded as the hardest, a time when your child must adjust to many new people and situations in every facet of his or her life. Yet this time is also the most important, because the academic, social, and personal skills that your child develops during this period will help lay the groundwork for a successful college experience. During this time, your child will develop lasting habits, attitudes, and ideas. Here are some of the issues that your child may be struggling with during the first eight weeks:
Encourage your child to use campus resources for help when necessary—for example, resident advisors for dorm issues, counselors for anxiety and/or depression issues, tutors for academic help.
As a parent, you'll want to be as supportive as you can during this period. And keep those care packages coming! Your child will probably make daily trips to the mailroom, and he or she will be glad every time a letter or package arrives from you.
The importance of good study habits
Sure, college is about late-night snowball fights and pizza parties. But it's also about academics, and unless your child develops good study habits, making the grade will be tough. Unlike high school teachers, college professors tend to be more sweeping in their assignments and provide less individual attention. So your child will need to take the initiative and stay on top of the work. Here are some study tips for your child:
Protect Your Possessions
College students and their parents are expected to spend $47.3 billion gearing up for college, according to the National Retail Federation, with an average purchase of $956.93 on back-to-college merchandise, up from last year’s $880.52.
Theft is a major concern on college campuses. In fact, the U.S. Department of Education reports that there were about 40,000 thefts last year alone. Unfortunately, this is not the only potential disaster facing college students; fires are on the rise on college campuses nationwide with a dramatic increase from a low of 1,800 fires in 1998 to 3,300 fires in 2005, according to the Consumer Product Safety Commission (CPSC). Most of the fires are cooking related so students should be careful about the types of hot plates or microwaves they plan to bring to school.
“With electronics and expensive sports equipment showing up on campuses around the country, many college students may be bringing thousands of dollars worth of personal possessions with them to college,” pointed out Jeanne M. Salvatore, senior vice president and consumer spokesperson for the Insurance Information Institute (I.I.I.). “And with the cost of tuition rising, the last thing students or their parents want to do is to have to pay to replace costly items due to theft, fire or another disaster.”
For students who live in dorms, most personal possessions are covered under their parents' homeowners or renters insurance policies. However, some home insurance policies may limit the amount of insurance for off-premises belongings to 10 percent of the total amount of coverage for personal possessions. This means that if the parents have $70,000 worth of insurance for their belongings, only $7,000 would be applicable to possessions in the dorm. Not all insurers impose this type of limit, so you should check with your individual insurance company, suggests Salvatore.
Expensive computer and electronic equipment and items such as jewelry may also be subject to coverage limits under a standard homeowners policy. If the limits are too low, parents may consider buying a special personal property floater or an endorsement for these items. There are also stand-alone insurance policies for computers and cell phones.
Students and/or their parents may also want to consider purchasing a stand-alone policy specifically designed for students living away at college. This can be an economical way to provide additional insurance coverage for a variety of disasters.
Students who live off campus are likely not covered by their parents’ homeowners policy and may need to purchase their own renters insurance policy. Parents should consult their insurance agent or company representative to see if their homeowners or renters policy extends to off-campus living situations.
For students going off to college, the I.I.I. recommends the following:
The I.I.I. offers the following advice to guard against theft of your personal belongings on campus:
In the event a student is planning to have a car on campus, choose a safe, reliable vehicle and do some comparison shopping to find the best auto insurance rate. You should also check with your own insurance company as it may offer a multi-policy discount. If you decide to keep the student’s car at home, be sure to contact your auto insurance company, as many insurers will give discounts for students who are living away at school at least 100 miles away from home.
Source: Insurance Information Institute
Attend College as an Adult
Where will you find the money?
Returning to school often involves financial sacrifices, but there are ways to lessen the bite. Personal savings, financial aid, private loans, and employer-funded tuition may be available to you, and education tax credits and deductions can help you out at tax time.
The first thing to do is calculate how much your education will cost. Make sure to add in collateral expenses that won't show up on the college bill (e.g., daycare and commuting expenses). And if you're giving up your job, factor in the time you'll be without a paycheck, and the time it might take you to find a job in your new profession. Then, if you can't afford to pay your education expenses out-of-pocket, go look for the money.
Ask your employer
Unless you're leaving your job to attend school, ask your employer about tuition reimbursement. There may be strings attached, though (e.g., you may need to certify that you're not retraining for a new career, or promise to work at the company for a number of years after you graduate). The good news is that up to $5,250 of employer-provided educational assistance is tax free, even if it's for classes that are unrelated to your current position. For more information, see IRS Publication 508, Tax Benefits for Work-Related Education.
Learn about financial aid—your first academic experience
The maze of student financial aid programs can seem like another obstacle in your quest to return to school, but the process is understandable if you do some research and ask questions. Start at your school's financial aid office.
To qualify for federal aid, you'll need to submit the federal government's application, the FAFSA, as soon as possible after January 1 in the year you plan to start school. The FAFSA calculates your expected family contribution (EFC), and lets you know if you're eligible for financial aid. You'll be classified as an independent student, which means that if you're married, both your income and assets and your spouse's will count in this calculation.
There are different types of federal financial aid:
Loans—The two main federal student loans are the Stafford Loan and the Perkins Loan. Both are made to undergraduate and graduate students attending college at least half-time, and both have annual and cumulative borrowing limits. (E.G., undergraduate students can borrow up to $46,000 in Stafford Loans, and graduate and professional students can borrow up to $138,500, including undergraduate loans). The drawback of student loans is that you'll need to repay them at a later date. And graduate and professional students are eligible to borrow the full cost of their education (minus any financial aid received) under the federal PLUS Loan program.
Grants—The two main federal grants are the Pell Grant and the Supplemental Educational Opportunity Grant (SEOG). They're available only to undergraduate students, and they don't need to be repaid. Two other federal grant programs are also available to full-time undergraduate students—the Academic Competitiveness Grant for first- and second-year students and the National Science and Mathematics Access to Retain Talent (SMART) Grant for third- and fourth- year students.
Work-study—The federal work-study program subsidizes jobs for both undergraduate and graduate students.
Military aid—The federal government offers educational benefits for veterans and their dependents. Contact your local veteran's office or your school's financial aid office.
If you don't qualify for federal financial aid (and you should always apply, even if you don't think you'll qualify), you may still be eligible for institutional aid from your school—specifically grants, scholarships, and work-study programs. Inquire at the financial aid office and do your best to meet all application deadlines, because institutional aid is typically administered on a first-come, first-served basis. Finally, don't forget to search for outside scholarships. Thousands of private organizations offer them, and some are based solely on achievement. An easy way to search for scholarships is on the Internet, but don't pay anyone to do it for you—searching is free.
Keep in mind that the federal government and colleges base your aid eligibility on last year's tax records. If you plan to reduce your hours or stop working to attend school, your income will obviously be less when school starts. Make sure to bring this to the attention of your school's financial aid director, who's authorized to take special circumstances into account, and where appropriate, rebalance aid awards.
Take a trip to the bank
If you don't qualify for financial aid or you need to borrow more than the federal student loan limits, private loans from commercial lenders are an option. However, the rates on private loans are typically one or two percentage points higher than on federal student loans.
Use personal assets (or cash under the mattress)
Do you have savings that could cover a portion of your expenses? Or maybe you could sell some assets. Just remember that tapping your retirement funds should be a last resort—money you withdraw will reduce your nest egg and miss out on the potential for tax-deferred growth. And, depending on the type of retirement account you tap, you may also face tax consequences and penalties for withdrawing money before age 59½.
Investigate education tax credits and deductions
In addition to the tax break noted above for employer-provided educational assistance, there are several other tax incentives that can help ease the financial burden of returning to school:
Hope credit—This credit is generally worth up to $1,650 per year for tuition and fees for the first two years of undergraduate education, provided you're enrolled at least half-time. In 2007, to take the full credit, your income must be below $47,000 (single) or $94,000 (married filing jointly).
Lifetime Learning credit—This credit is generally worth up to $2,000 per year to cover the tuition and fees for higher education courses taken throughout your lifetime, whether to acquire or improve job skills. Income limits are the same as for the Hope credit. Unfortunately, the Hope credit and Lifetime Learning credit can't be claimed in the same year—it's one or the other.
Student loan interest deduction—If you graduate with student loans, you can deduct up to $2,500 of the interest you pay on student loans each year. To take the full deduction (in 2007), your income must be below $55,000 (single) or $110,000 (married filing jointly).
Deduction for qualified higher education expenses—For tax years through 2007, you may be able to deduct up to $4,000 of qualified higher education expenses if your income doesn't exceed $65,000 ($130,000 if you're married filing jointly). If your income exceeds this limit but doesn't exceed $80,000 ($160,000 if you're married filing jointly), you may be able to claim a deduction for up to $2,000 of qualified higher education expenses. You can't claim the deduction, however, if you're married and file a separate return or if you claim either the Hope or Lifetime Learning credit for your own education expenses that year.
For assistance or more information, consult a tax professional or IRS Publication 970, Tax Benefits for Education.
Finally, how will you balance school, career, and life?
You've found the money—now you need to find the time. Balancing school demands with the rest of your adult responsibilities will be challenging, though not impossible. Here are some tips: