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How to Pay for College
June 2017

Jun 26, 2017 | Cash Flow | Families

For parents, high school graduations bring bittersweet memories and mixed emotions. As with each transition into a new season of parenting, this transition brings new questions, new uncertainties, and new expenses. In this new season, parents aren’t kept up at night with diaper changes, fear of storms, or classroom drama, but they may be burning the midnight oil worrying about where their newly-“adult” children are and how to cover the costs that come with this next season.

With college on the horizon for many, and financial aid packages generally smaller than you had hoped, parents face daunting tuition bills. Planning how to cover the gap between the (sometimes seemingly arbitrary) “Expected Family Contribution” and what feels to be the “Possible” family contribution may help you get a better night’s sleep – or at least to focus your worries on your fledgling or yourself while you prepare to empty your nest.

In addition to whatever scholarships & grants your child may have received from their school, consider the following sources for funds for your child’s first year:

Tax benefits –

Through 2017, the American Opportunity Tax Credit provides taxpayers with up to $2,500 if you pay $4,000 in Tuition, fees, and required course materials (i.e. text books), per year. This means that if you write a check for $4,000, the cost to you is really “only” $1,500. Note that there are income limitations that may restrict your eligibility for incomes greater than $80,000 ($160,000 married filing jointly).

This credit can be claimed for multiple students by the same taxpayer – as long as they are eligible based on enrollment, number of years in school, and tax return dependency status. Check out the IRS’s website for more information about eligibility.

Savings –

If you do have savings for college, it is likely a good idea to use them for your child’s first couple of years in school. When deciding in what order to use savings from different accounts, financial planners generally consider factors including who owns the assets (you? your child? grandparents?) and the taxability of each account.

If your state provides tax subsidies for contributing to college savings accounts (529 Plans). Even if your child is heading off to college this fall, you may still have time to contribute to your state’s 529 plan to benefit from these tax opportunities. Check with your state’s tax laws to learn more.

Scholarships & Grants –

The US Department of Labor lists over 5,548 awards available to help students cover the costs of attending college. While it may require some work to find and apply for scholarships, each award could help bring the price tag closer to being affordable.

Other organizations, such as The College Board, list grants and scholarships to help students find ways to pay for college. Your child’s institution’s financial aid office may offer resources to help in your scholarship search.

Work Study –

While you may wish for your student to focus strictly on their studies, a 10- to 20-hour per week campus or related job can contribute to their understanding that education is an investment requiring effort and sacrifice while teaching personal responsibility. The Federal Work Study program helps colleges cover the cost of employing students. Perhaps more importantly work study income does not get counted against you in the FAFSA calculations.

Keep Perspective –

Loans are available to pay for college, they are not available to pay for retirement, however! Be cautious about using your own savings, retirement accounts, or home equity to cover the costs of college for your student. You may be helping them get a good start now by covering their college costs, but in hindsight you may wish you hadn’t when you find yourself relying on them for financial support in your retirement years.

None of these sources are going to provide you with the resources to easily write a check that otherwise felt impossible, but, bit by bit, you can make a dent in the total costs. If you approach college financing with intention, before you know it, you and your student may be celebrating another graduation – with a good plan in place for how to pay off whatever loans have been accumulated.