But you have to do some homework—and make sure you involve your children in the planning process, as they will likely be responsible for at least some of the costs down the road. Before your child starts touring college campuses, make sure you research the financial-aid system and the costs of college and that you understand your loan options. Also, it's important to make sure you save adequately and invest properly during the remaining years between now and when your child sets off for college.
Here are four steps you can take before your child starts college.
1. Finesse financial aid. With the cost of a college education increasing at a rate of 4.8% for the 2012–13 school year, it's more important than ever to understand the financial-aid process and how to potentially improve your eligibility.
In particular, the federal government program Free Application for Federal Student Aid (FAFSA), which is used by many families to apply for aid, has some factors that you may use to your advantage a few years before your child enters college.
FAFSA calculates your expected family contribution, or EFC, as the amount of money that the parents and student together should pay toward college expenses, based on the cost of attending a particular school. The higher the EFC, the less financial aid you can expect to receive, and vice versa. But keep in mind that it is up to the school to distribute financial aid for each student as it sees fit. Just because you receive a low EFC doesn’t mean that you will have to pay only that amount toward college.
Understand college costs. It's important for families to understand the true college costs that they will face. The average annual total for tuition, fees, and room and board for an in-state public four-year college was $17,860 for the 2012–13 tuition year. The average total for tuition, fees, and room and board for a private four-year college was $39,518 for the 2012–13 tuition year.
2. Get familiar with grants, scholarships, and loans. Your financial-aid award may consist of a combination of grants and scholarships (money you don't have to pay back) and loans (which must be paid back). The largest piece of undergraduate aid (44%) comes from federal loans, consisting mainly of two loan types—Stafford loans (subsidized and unsubsidized) and PLUS loans. The average undergraduate aid per full-time equivalent student totaled $13,218 in the 2011–12 school, including $6,932 in grant aid from all sources, and $5,056 in federal loans.
Grants. Federal Pell grants—up to a maximum of $5,645 for the 2013–14 academic year—are awarded based on financial need, as determined through the FAFSA. Colleges and universities award grants based on financial need, merit, or both. State grants vary in amount and are usually need-based awards. Private grants are based on a variety of factors, including background, associations, achievements, interests, and need.
Scholarships. Awarded by the federal government, institutions, states, and private sources, scholarships may be based on different factors such as merit, need, diversity, interests, or cultural background, to name a few. It is a good idea to research the different types of grants and scholarships available to your child or loved one, to make sure you're utilizing any source of funds you don't have to pay back.
Student loans. While your student may or may not qualify for grants or scholarships, there are a variety of loans available to help foot looming tuition bills.
Probably the most attractive loans are subsidized Stafford loans. These are federal government loans available to any student who meets the FAFSA eligibility requirement and who typically has an unmet financial need after Pell grants and other financial aid are factored in. Typically, they are offered at set amounts for each school year—from $3,500 for the first year up to $5,500 in the third year and beyond—with a lifetime limit of $23,000.
Also to be considered are unsubsidized Stafford loans and private education loans, which you may apply for regardless of financial need. With unsubsidized Stafford loans, the interest on the loan begins accruing immediately. However, the student may defer payments until six months after he or she leaves school.
Parent loans. Parents may borrow for college through PLUS loans, which allow you to defer repayment until six months after the student leaves school, although the interest begins to accrue as soon as the loan is dispersed. Borrowing limits are high, so parents with good credit histories may borrow up to the full cost of the student's education, less any aid the student has received.
3. Revisit how you've invested your child's college savings. As you prepare for college, take a good look at the investment portfolio within your college savings, and make sure it still makes sense. Given that you'll need to pay the tuition bill, your savings goals may have changed over time, especially as you have narrowed your choice of colleges. In fact, many people don't understand the need to reduce the proportion of their equity investments—and thus their risk—in their college savings portfolio as college approaches.
"As college gets closer, it’s important to review your investments and consider shifting to a less aggressive mix than perhaps seemed reasonable 10 years before college," says Keith Bernhardt, vice president of college planning at Fidelity Investments. "Big swings in savings due to market volatility can be disruptive to your plans, while going too conservative may not give you the opportunity to keep pace with tuition inflation."
The federal income-tax-free advantage granted to 529 college savings plans for qualified distributions can be significant. Distributions from 529 college savings plans can be used to pay for qualified higher education expenses (tuition, fees, books, supplies, and equipment required for enrollment at accredited institutions). In addition, the distribution may also be used toward room and board, so long as the beneficiary of the plan is attending the school at least half-time.
Also, it’s important to keep in mind that your education savings plan is just that—a savings plan. No matter how much you tweak the investments within your 529 plan, it all comes down to how much savings go into your plan. You may want to revisit your goals as your situation evolves. Look at the schools you and your child are considering, and make sure you’re saving enough to pay for them.
4. Research colleges together. Some of the greatest missed opportunities begin by not having the right conversations between you and your child when you start planning for college. The Fidelity College Savings Indicator study found that 69% of families with older children (age 15+) who had these conversations took action to address how those issues would affect earning potential, job prospects, and future student loan debt.
Having conversations with your child about which school he or she would like to attend, the child’s interests, and what you are willing to contribute, are good starting points. Colleges and universities may be pretty strategic about awarding financial aid, so if it is determined that you do qualify for financial aid, you may be eligible for a better package if your child has a background or interests that match a particular school's criteria. Here's where doing college research several years out may be beneficial. If you know what studies, sports, arts groups, or extracurricular activities your college of choice deems attractive, your child may want to start engaging in those same studies and activities in high school in order to potentially garner a better financial-aid package.
Source: Fidelity Investments
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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