For many, college is part of the American dream; but paying for it can be a nightmare. Despite headline-grabbing reports of debt-burdened grads, there are ways to come up with money for college without amassing huge college loans or jeopardizing your retirement. Just follow the expert advice below and your child can get a B.A. without a huge I.O.U.
MAKE SACRIFICES SO YOU CAN SAVE
“If college is in your child’s future, you should start making choices now to enable you to save enough,” says Money magazine’s senior writer, Kim Clark, who specializes in higher education. This may mean buying a used car over a new one, plugging “money leaks” by switching to a no-fee, no-interest credit card or price shopping for lower car insurance rates.
START PLANNING EARLY
“The sooner you start saving, the greater the snowball effect of growing interest,” advises Jared Reilly, a certified financial planner who specializes in education at Mercadien Asset Management in Hamilton Township. “Start when your child is born and your money has 18 years of growth and compounding.”
Paying for college should never endanger your credit. “Before starting a college savings plan, pay off credit cards and your own school loans,” Clark recommends, “and take full advantage of any 401(k)-match offered by your employer.”
STAY FOCUSED ON THEIR ACADEMICS
Encourage your child to take as many Advanced Placement (AP) courses as possible during sophomore and junior years of high school if she’s up to it. Strong scores on AP tests demonstrate to admissions officers she’ll likely succeed in college-level courses, says Clark. In some cases, taking AP courses can also reduce the number of classes you have to pay for once your kid goes to college if the credits for those courses transfer.
High GPA and SAT/ACT scores will give your child a better chance to get the most generous financial aid packages. Even less generous schools typically have some scholarships based on grades and test scores, Clark says. Show your student the real financial payoff of good grades by visiting college websites to see their merit-based scholarships way before it’s time to apply.
DON’T GET DISCOURAGED BY A COLLEGE’S “STICKER” PRICE
Most students get scholarships and grants based on merit or financial need, so they pay less than a college’s published “sticker” price, says Clark. About 80 percent of students at private colleges aren’t paying full tuition for that reason, she adds.
To illustrate this point, Clark cites that in New Jersey, Princeton University awards grants to many students from families earning as much as $200,000 a year. In fact, about 60 percent of Princeton students get grants from the college, the average grant being $40,000 a year, according to Clark. This means a typical Princeton student is paying about $20,000 a year, she says. Compare that with Rutgers
University, which currently costs around $25,700 for in-state students, including tuition, books, fees, a typical double occupancy room and basic board. This figure can vary depending on the school or college selected, as well as personal choices like room and board. About half of Rutgers students pay that full price, says Clark. The other half get aid and pay a reduced price of, on average, about $16,000 to $17,000 per year, she adds.
CHOOSE THE RIGHT SAVINGS PLAN
Reilly and Clark both recommend educational savings plans which are tax-exempt or tax-deferred, such as a 529 Plan, NJ’s 529 College Savings Plan or the Coverdell Education Savings Account.
This can be used by residents in all 50 states for any college or university.
• Taxes are deferred on any gains and income in this plan. And withdrawals are tax-free if they’re used for qualifying expenses.
• Children can be “gifted” up to $70,000 from an individual parent or $140,000 from both parents without owing federal gift tax. This amount can be given all at once, as long as parents make no other gifts to the same child over the five years they’re allotted for college.
• If money is withdrawn for non-college purposes, you have to pay taxes plus a 10 percent penalty on any earnings.
• You can roll over the fund to a different child, or even yourself, if the first kid doesn’t go to college.
• Most 529 “target date” or “age-based” funds will move into less risky investments as a child gets older. This doesn’t always happen automatically, says Reilly, so pay attention to this after you invest.
• Parents can determine how the money is invested based on a very limited selection made available to them.
• The Franklin Templeton 529 Plan has the same advantages as the 529 Plan but it must be purchased through one of the private firm’s advisors. If you opt for the Franklin Templeton plan, you’ll get professional help managing your assets.
New Jersey’s 529 College Savings Plan
Exclusively for New Jersey residents, the NJ Best plan may be used for any accredited college or university.
Anyone who opens a NJ Best plan can get up to an extra $1,500 one-time credit towards college tuition, depending on the time and amount invested.
• NJ Best has no earning restrictions for parents.
• The first $25,000 in savings is excluded from the criteria used to determine eligibility for financial aid awarded by New Jersey.
• You can open a NJ Best plan with as little as $25 and contribute a maximum of $305,000 per child over a lifetime.
• New Jersey also has an advisor-sold 529 that’s offered through Franklin Templeton.
Coverdell Education Savings Account
Coverdell is an investment account designed to encourage savings for future education expenses (elementary, secondary or college). These expenses include tuition, books and uniforms.
Like a 529 plan, Coverdell allows money to grow tax-deferred and proceeds to be withdrawn tax-free for qualified education expenses such as primary and secondary school and, of course, college.
• The earnings, gains and income are tax-deferred but not the contribution itself. Contributions are limited to $2,000 per year per child. Savings can be rolled over to another kid if the first one doesn’t attend college.
• Unlike 529 Plans, parents have more control over where contributions are invested.
• At age 30, money saved goes to the child, regardless of college attendance.
WHAT IF YOU HAVEN’T STARTED SAVING?
Even if your kid is in middle or high school, it’s never too late to start saving whatever you can. The more you save now, the fewer high interest loans you’ll have to take out later. “Students should be expected to contribute toward their college expenses,” says Clark. “Most high school kids can work 12 hours a week without their grades suffering, plus they can work during summers and holiday breaks.”
OTHER WAYS TO PAY FOR COLLEGE
• Apply for a Federal PLUS loan or co-sign on private educational loans. These loans cannot be forgiven if you declare bankruptcy.
• Take out home equity loans or a second mortgage. But be warned, you risk losing your home if you can’t pay them back.
• Borrow from a 401(k), but if you leave your job or are fired, you must immediately repay the loan, or it’s treated as a taxable distribution. Bottom line: Be vigilant about saving and do your homework on scholarships, grants and aid.
•To determine eligibility for aid at most colleges, fill out a Federal Aid for Students Application (FAFSA) at fafsa.gov.
• College Abacus (collegeabacus.org) is a free site that compares the net price estimates of more than 5,000 colleges before students apply and any financial aid determinations are made.
• The Find Your Best Value College tool by Money magazine (new.time.com/money/best-colleges/) allows you to screen colleges that meet your child’s needs and preferences.
You can re-rank them according to your financial preferences, such as schools more likely to award need-based aid or schools that don’t load students with debt.
• Saving for College (savingforcollege.com) is a free site that provides information about 529 plans.