If your children are destined for college, one thing is certain–you can expect to write some large checks to pay tuition, room, board, and other expenses. Although inflation is relatively dormant in most areas of the economy, it’s running wild on university campuses. According to the College Board, the cost of higher education is up roughly 5% from a year ago. In the 2009-2010 academic year, the average cost of a year at a private university was over $35,000.
In an ideal world, you’ll start saving for college while your little one is still in diapers, and simply tap your education fund to pay the tuition bills as they come due. The reality, though, is that even the most diligent savers may find it hard to amass six-figure amounts for higher education, especially if they’re also socking money away for retirement. In that case, financial aid–grants, low-interest loans, and work opportunities–may need to fill the gap. Families in this situation are in good company. Nearly two-thirds of all college students receive some form of financial assistance, according to the National Center for Education Statistics.
Saving the most money for your youngster’s higher education, while also remaining eligible for the best financial aid package is a tricky balancing act. To maximize financial aid, you’ll need to minimize what’s known as your “expected family contribution†or EFC. Suppose you fill out the Free Application for Federal Student Aid (FAFSA), which determines that your EFC is $20,000 in your child’s freshman year. If you’re sending your child to a state school where the total cost is $18,000, you won’t qualify for any need-based aid. However, if your child is
accepted at a school where the total cost is $42,000 and your EFC is $20,000, you may get as much as $22,000 worth of financial aid. “The lower your EFC, the more financial aid your student might receive,†says Joe Hurley, founder of SavingforCollege.com.Lowering your family’s EFC is a matter of putting college savings in the right place. “One way to reduce your EFC is
to save in the parent’s name rather than the child’s name,†says Hurley. That’s because the Department Education assesses a student’s assets at 20% for college costs, versus no more than 5.64% for a parent’s asset. How does that work, exactly? Let’s say you opened up an investment account for your daughter when she was born.(Continued on page 2)
Over the years, you have contributed to the account, watching it grow to $25,000. When your daughter applies for college aid, that $25,000 in her name will add $5,000 (20% of $25,000) to your family’s EFC. On the other hand, if you had kept that $25,000 in your own name, it would add only $1,410 (or 5.64% of $25,000) to the family’s “expected contributionâ€. In this example, your EFC is $3,590 lower, by investing in your own name, and your daughter might begin her freshman year with $3,590 more in financial aid.
Saving and investing in your own name makes sense if you have young children who are many years from college. But what can you do if you have teens or pre-teens who already have substantial assets in their own name? One tactic is to take cash from savings and investment accounts and put it into a 529 college
savings plan, Hurley advises. These plans, offered by every state, allow you to earn investment income, tax-free. Withdrawals are also tax-free, as long as the money is spent on college bills. “Assets in a 529 plan are assessed for financial aid at the parent’s rate, up to 5.64%†says Hurley, “not the student’s 20% rate.†You’ll wind up with fewer student assets, more parent assets, and a greater chance for increased financial aid.The Costs of College (Tuition, Fees, Room & Board)
2009-2010 Academic Year
Private College
Total: $35,636
Increase from ’08 to ’09: 4.3%
Public College (In-State Student)
Total: $15,213
Increase from ’08 to ’09: 5.9%
Public College (Out-of-state student)
Total: $26,741
Increase from ’08 to ’09: 6.0%
Source: College Board
This article will appear in the June 2010 issue of Black Enterprise.