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22 Aug 2013

Parents: How to Pay for College without Going Bankrupt

Nothing is timelier than an article about college costs that coincides with freshman "move-in" week. Just as Colorado Springs' parents are settling up with the college billing office and heading back home, most are wondering how this will affect their financial future. Rising interest rates on college loans will have a ripple effect on the next generation of graduates, as well as their parents. With easy access to Parent Plus loans, it's not uncommon for parents to take on too much debt at a time when they should be focused on retirement.


Consult the "experts"

Knowing how easily college costs can get out of control, it always makes sense to consult with a trusted financial advisor before making decisions about school. Ask a few recent grads how they would do things differently, now that they are struggling to pay off education loans. Would they have chosen a less expensive school, perhaps closer to home? Would they have worked more and borrowed less?

Ask other parents

Parents of other college students may not feel comfortable discussing their personal financial information, but it never hurts to ask for advice. For example, does it make sense to refinance your home at a lower interest rate to get cash out for college? How about borrowing from a 401K? There are pros and cons to every option, but unless they've managed to save $100,000+ per student, most parents will need to borrow something.

The tax benefits of paying for college

A Colorado Springs financial advisor will also be able to show you which tax deductions you would qualify for as the parent of a college student. For example, contributions to 529s offer immediate tax savings, and a portion of tuition paid out of pocket is deductible. Parents and students can also get a tax break for the interest paid on student loans. It may be sound tricky, but when your student starts college it makes sense to continue contributing to a 529, while also paying tuition from your own funds and making interest payments on loans. This way, you can take advantage of all the available deductions in the same tax year.

The truth about financial aid

Before you let the cost of college intimidate you, it's important to learn the truth about financial aid. There is plenty of misinformation circulating around about this subject.

Here are some of the fallacies:

  • Financial aid is for people who have very little money.
  • Private/expensive colleges are financially unattainable compared to less expensive or public colleges.
  • Parents with large incomes can't qualify for financial aid.529 plans are the best way to save money for your child for school.
  • Scholarships can pay for the bulk of tuition.
  • The financial aid package you receive is etched in stone and has no room for negotiation.
  • Your entire net worth is used in determining your estimated family contribution
  • Here is the truth about college financial aid
  • Financial aid is given to all levels of income and all levels of net worth.

Here is the good news:

  • Federal financial aid is based on the household size, the parent's and the student's income, assets, the number of children in college and/or private school, as well as some other factors but there are no income level caps that limit a family's eligibility.
  • Every school's aid formula is different and the amount of available aid is extremely different. A private school with high tuition may have more money to give away in grants and scholarships than a larger and less expensive public university. The sticker price of a school is not what determines the net cost of that school. When comparing financial aid packages, you might find the bottom line more attractive at the private school.
  • 529 plans are a great way to save money for your future college students but the approach and the ownership should be considered. If the child owns the 529 the percentage of the asset is much higher than if the parents own it; and if the 529 is owned by the grandparents it is not considered an asset when calculating EFC.
  • Oftentimes, college award packages do not meet the parents' expectations so the desired school is not financially reachable. Appeals to the financial aid office are totally acceptable and they can be written from many angles. For example, the federal government has changed some of the rules to determine income. Due to the high rate of layoffs and cutbacks, parents can use a 12 month future earnings estimate vs. the previous tax year earnings. Sometimes there are family unit changes, a death in the family, high medical or dependent care costs or a divorce. All of these and more are legitimate reasons for an appeal. Furthermore, this appeal can be done anytime during the student's time at the college if a major change happens.
  • The assets you hold are looked at based on a variety of factors. Simply put, the typical family receives an asset protection allowance of $45,000 and 12% of the remainder is used to determine the EFC. Other less known facts are that qualified retirement investment monies and life insurance policies are not considered part of your assets.

Before you decide on a financing option for your student's college expenses, consider that you will need to pay it back during a time leading up to retirement. With too much debt, a job loss or illness could push your family into bankruptcy.

Photo Courtesy of Sippakorn / FreeDigitalPhotos.net

Stephen H. Swift

Managing Attorney
Law Office of Stephen H. Swift, P.C.

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