5 ways to finance your child’s education

vitucci-5-ways-finance-college-header-imageEven in the early days of parenthood, it’s hard not to worry about how to pay for college.

All you need to do is look at the headlines. Inflation rates have declined in recent years, and yet private non-profit tuition at four-year colleges rose 11% since 2010 and public tuition rose 13%. 1

So how will you pay?

For most people, there are 5 basic routes to paying for college:

  • Save your money
  • Apply for financial aid
  • Win scholarship funding
  • Take loans
  • Finance tuition with income — either your own or your child’s

Here’s what you need to know and how to get started.

Save your own money

If you can, start saving right away. The easiest way to make sure that you have money is to set it aside and give it an opportunity to grow — but as we all know, this is easier said than done.

Just remember that even small amounts add up over time thanks to the power of compound interest. Whether you’re saving hundreds each month or dozens, your forward thinking will make a difference.

Also, don’t overlook all the other potential sources of small savings:

  • Cash gifts from grandparents
  • Windfalls from bake sales
  • A cut of the monthly allowance

A rule that some or all of this money has to go to savings might be met with protest (or mutiny), but regardless of the amounts involved it’s a great habit to start with your child.

While $50 from you and a $10 contribution from grandma’s birthday money might not clear a path to the Ivy League, it will make a difference at the end of the day — even if only for books.

More importantly, starting now and doing it together will instill the habit of saving and waiting. The value of money isn’t automatically clear to kids, but these small actions can help to teach it.

Seek financial aid

Financial aid programs have expanded rapidly alongside college tuitions. The average grant aid per student in the 1994-1995 school year was just $3,640; in the 2014-2015 school year, it was over $8,000. 2

It’s a promising trend, and one that it makes sense to utilize if at all possible.

Your first order of business will be to fill out the Free Application for Federal Student Aid (FAFSA), a generic application that’s used both by the federal government and most universities. In deciding how much financial aid to award, both will look at your child’s asset base and income to determine how much he or she “should” be able to afford — including help from parents. 3

While the math is complicated, the philosophy is simple: the more you have, the more you’ll be expected to pay.

For many middle class Americans, this presents a problem: technically, they should be able to pay a certain amount, but practically it’s pretty near impossible.

Strategizing with your financial advisor or accountant can help. Because asset ownership and income sources weigh heavily in the assessment, it can be useful to try to optimize them — but it’s best to do so with qualified guidance.

Apply for scholarships

These days, there are more scholarships out there than you can possibly imagine. From socio-demographic awards to grants for special skills, fields of studies, and hobbies, it is quite possible that there’s literally something for everyone out there. 4

The cost? A strong desire for free money and a project manager’s sense of time management.

Some scholarships have a basic application process while others require lengthy essays or other deliverables. Making the effort to deliver on each potential award can be a challenging workload for the average high schooler, so it’s an undertaking that might require backup from a parental figure.

The potential benefit, though, is huge. Scholarships are generally free and come with few strings attached (if any) — a better deal, aside from direct financial aid, would be hard to come by.

Of course, while we’ve all heard stories of freshmen who have already financed their entire college careers with scholarships, for most people these awards won’t cover the full cost of attendance.

But that doesn’t mean they aren’t worth your time. Even smaller scholarships can contribute to your family’s bottom line by covering textbooks or a meal plan — and while it might not seem like much at the time, those little savings add up quickly.

Just ask anyone who’s tried to feed a hungry teenager!

Take student loans

While many people are (rightly) concerned about student loans, the judicious use of student loans to supplement gaps in funding isn’t necessarily a bad idea. In fact, they can be a smart way to help finish school and get on the job market.

Just be careful to figure out how much you want to borrow and what that will mean in terms of payments after college is over.

More importantly, be very careful to research the small print. While federal loans have strong borrower protections, private loans may not. If your child encounters financial difficulties or other issues that affect his or her payment ability, you’ll want to know what will happen.

In short, approach loans like you would approach any other major financial obligation: with your eyes wide open to the future costs and the extent to which you’ll be on the hook.

Use income — and maybe take it slow

Using income is certainly easier from the perspective of planning. Just send a check!

Unfortunately, for many people, paying college costs isn’t quite so simple. Even if you could theoretically pay for college out of your income today, few of us know how much we’ll be earning at the exact moment our children move into the dorms.

Fewer still know whether that money won’t already be spoken for due to unforeseen circumstances.

However, there are ways to make it work.

You might find that it’s better for your child to take a slower and steadier approach to higher education — for example, going part-time or starting at a community college. This could reduce your family’s cost burden in the moment and could also provide an opportunity for your child to work through school. Even if you’re paying for most of it, your child’s income could help cover living expenses and tuition.

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It might not sound like the idyllic college dream, but it can help build a better future by instilling a strong work ethic and helping to ensure that your child graduates with a clean financial slate.

Earning income could also help your child to appreciate the sheer scale of college costs in this day and age. When dozens of hours of work only produce 3 digits on a paycheck, the value of money becomes a little more apparent!

Of course, it might make the most sense to finance college with a combination of sources depending on your family’s preferences, needs, and personal finances.

After all, paying for college is a balancing act — between your income sources, your asset base, the availability of scholarships and loans, and the time your child can devote to supporting his or her education. As always, the right financial choice for your family is unique, but with an understanding of the options you’ll be on your way to making the right call.

Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement planning coaches, we can give you a review and make suggestions based on your retirement objectives.

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1 Collegeboard.org. Tuition and Fees and Room and Board over Time, 1975-76 to 2015-16, Selected Years. https://trends.collegeboard.org/college-pricing/figures-tables/tuition-and-fees-and-room-and-board-over-time-1975-76-2015-16-selected-years

2 Collegeboard.org. Average Aid per Student Over Time. https://trends.collegeboard.org/college-pricing/figures-tables/average-aid-student-over-time

3 More about the FAFSA can be found at https://studentaid.ed.gov/sa/fafsa

4 There are several scholarship search engines available — this one advertises that it offers over 3.7 million of them! https://www.scholarships.com/

Important disclosures:

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.

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