The No-Panic Guide to Paying for College
If you’re worried that the cost of a college education may look more like a line-item in the Pentagon’s annual budget, your fears might be a bit exaggerated, but not unwarranted.
Most four-year private colleges cost upwards of $150,000 per year in tuition and fees, and well-regarded public institutions, once considered the best “deals” in education, are similarly keeping pace. Factor in books, room and board, and all the other bells and whistles that accompany erstwhile kids en route to worldly independence and it’s enough to give even the most moneyed parents and conscientious students a panic attack.
If you’ve recently been hit with one such reality check, take a deep breath. The first 30 days of navigating the tides ahead need not be as turbulent or murky as you might fear. All it takes is a little perspective and some solid financial planning.
From Cradle to Cap ‘n’ Gown: Starting College Savings Early
Guess who’s getting a gold star? That would be you if you’re among the 24% of Americans (according to a survey from Country Financial) fortunate enough to start saving for college at birth.
“I tell my clients, start saving for college when your child is an infant or, better yet, the day they come out of the womb,” says Howard Gartenhaus, certified fund specialist and president of Gartenhaus Financial.
The best way to do this is with a 529 plan, a tax-advantaged investment plan specifically designed to help parents save for higher education. They come in two categories: prepaid and savings, the latter being the most common and flexible. Whereas a prepaid plan lets buyers purchase tuition credits through a university at today’s costs, a savings plan is based entirely on market performance. Opening an account requires no minimum and some programs allow contributions of over $330,000 per beneficiary. These plans also carry a number of tremendous tax benefits.
“Right now I’m paying for everything out of my daughter’s 529,” says Sam Stobal, a chief investment strategist at S&P Equity Research in New York. His daughter Sarah is now an art major at SUNY New Paltz, but when she was still in diapers he invested in a 529 plan through Vanguard. Since she chose to attend a state school instead of a comparably expensive liberal arts school, Stobal is encouraging his daughter to use any leftover funds for graduate school.
Another option to explore is a Coverdell Education Savings Account (ESA), which is more flexible and can be used to save for any level of education, including private school. The Coverdell is also tax-advantaged and might be particularly attractive for middle-income families. The main drawback, however, is contributions are capped at $2,000 per year and any balance will have to be distributed once the beneficiary reaches the age of 30—with tax penalties.
The Five-Year Plan: Saving for Teens (and everyone ‘tween)
Okay, you’re not as prepared as you’d like to be. Keep in mind that compound interest is still your friend, and you also have the added benefit of being in a better position to assess your actual financial outlook and necessities.
Investing in a 529 plan at this point will reap some benefits, but it’s really designed for long-term growth. Besides, “you don’t want to be chasing yields when college is a few years off,” says Kalman A. Chany, founder and president of Campus Consultants and co-author of Paying for College Without Going Broke. “The market is too volatile for that. You’d be better off contributing to a younger child’s plan because it grows tax-deferred for a longer period of time.”
In the meantime, Kalman says, this is the time to start thinking about ways to increase the amount of aid you can receive based on your eligibility. “Most families don’t understand how the financial aid process works,” he says. Hire a consultant, suggests Chany, to help you navigate the system—and the sooner, the better. “We recommend that families start planning their aid process as early as 9th or 10th grade.”
“Stunned” by the Bell: Paying for College Without a Dime
If you haven’t saved anything for your child’s education, you’re not alone. According to a survey from Fidelity Investments, 42% of parents find themselves in the same position. Rest assured, there are still options available to you.
Every college student, upon starting the college admission process, should fill out a FAFSA form, which stands for Free Application for Federal Student Aid. This is a prerequisite for all students seeking financial aid, including the Stafford Student Loan Program, which are subsidized or non-subsidized low-interest loans offered through banks and, in some cases, schools.
After need is established, schools compile an offer package to suit your (and their) interests. If you are funding your child’s higher education, you can also look into PLUS loans (Parent Loans for Undergraduate Students), private loans and the Perkins Loan Program. If not, stop claiming your child on your tax return to give them a shot at more money through the programs mentioned above, along with the Pell Grant.
“Don’t just look at the school price tag,” says Erica Eriksdotter of Sallie Mae, one of the nation's largest providers of student loans. “Apply for the FAFSA, take into account that you might win scholarships, and look for money that doesn’t have to be repaid.” The message here is that, in tandem, a multi-tiered approach makes even the worst-case scenario survivable and entirely doable.
Take, for example, Judita Eisenberger from Tarrytown, NY. Now an urban planner, she graduated from Georgetown University in 2000 and remembers her experience well—at times, fondly. A first generation American from the Czech Republic, she was raised by a single-mother in a low-income home. As a result, she qualified for a significant amount of need-based financial aid.
Meanwhile, she says, “I took out the maximum amount of federal loans that I could each semester, and then supported myself by working one or two part-time jobs throughout the school year, and full time during the summer and winter breaks.”
What a drag, right? Not completely. “I had fun jobs such as washing laboratory glassware for a mad scientist at the Georgetown Medical Center, editing translations for the United States Patent and Trademark Office, interning at an international development company, teaching SAT prep classes, waitressing, working at Gap Kids. All very glamorous,” she recalls.
Regardless of how prepared you may or may not be, funding higher education is a reflection of the good men and women who do it—you tenacious rascals. We got ‘em this far. Here’s to that extra push.