Paying for College

For the purposes of this discussion, “college” refers to any postsecondary school [ vocational school, 2- & 4-year college, university, professional school ] that offers student aid administered by the U.S. Department of Education.  

SUMMARY: The cost of a 4-year college is over $20,000 a year and continues to increase at nearly 4% annually.  Paying, not borrowing, is the better way to finance a college degree.  Parents can start a payment plan early by investing in a tax-free “529” college savings account.  Adults should avoid using their retirement savings to pay a child’s college expenses. 

The more effort a family puts into creating a college budget, the better their student’s chance for educational and financial success.  There are six important issues to address in the budgeting process:

  1. Cost-reduction
  2. Affordability 
  3. Savings plan
  4. Scholarships and grants  
  5. Family income
  6. Student loan as the last resort

1. Reduce the cost

High school programs which are designed to reduce the cost of college can prepare students for academic achievement and save them thousands of dollars in college expenses.  Families are encouraged to consult teachers, counselors, principals, and colleges about available programs. Here are several types of programs: 

  • Advanced placement (AP) courses and exams are sponsored by the College Board and participating high schools (ref 1).
  • Early college high schools (ECHS) enable students to earn a high school diploma and a two-year associate’s degree or 2 years credit toward a bachelor’s degree.  Recruitment starts in middle school (ref 2).  
  • Community college classes are open to high school students without a diploma.  Completion of the classes demonstrates a student’s readiness for college and the earned credit might be eligible for transfer to other colleges (ref 3).
  • College-level examination program (CLEP), also sponsored by the College Board, is designed to award college credit for knowledge already acquired.  There are 33 CLEP exams that award 3-12 credit hours toward a college degree (ref 1).  

Students who wish to get a bachelor’s degree can save money by transferring credits from a community college to a four-year school.  Money is saved by paying less at the community college and taking fewer courses to graduate from the four-year school.  Firstly, it’s important to earn an associate’s degree before entering the receiver school.  Secondly, there’s a risk of losing credits during the transfer unless the participating colleges have an “articulation agreement” on which courses will be credited.  Thirdly, the participating colleges may have a transfer agreement that guarantees admission to the receiver school.  Try searching for information about “transfer students” in the school websites (ref 4). 

Carefully selected online degree programs may provide another opportunity to reduce college expenses (ref 4).  Other cost-reduction strategies include adequate, —not luxurious—, room & board, frugal spending habits during college, and graduation on time (ref 5,6).  

2. Choose an affordable college

Financial safety schools are those which are most affordable and likely to accept your academic credentials (ref 7).    Here are some tips for choosing a college that satisfies your needs:

  • Have a study goal and search for colleges that satisfy that goal.  
  • Search for colleges which are recommended by teachers, guidance counselors, and college-rating websites.
  • Use college-ratings to help find affordable colleges [hint: try finding schools with the lowest net prices such as those listed in ref 8; net price is what you might have to pay after receiving financial aid].
  • Attend a college fair [hint: ask your guidance counselor for information].  
  • Visit the websites of colleges that interest you.
  • Contact admissions offices and request guided tours of your chosen colleges. 
  • Review your acceptance letters and visit the admissions office to negotiate the best financial agreement.  

3. College savings

It’s cheaper to save than to borrow for college.  I would like to join others (ref 9,10,11,12) in advising parents to own a tax-free 529 Savings Plan (“Qualified Tuition Program”; “QTP”) for the benefit of their young child.  Owners of 529 savings plans receive favorable tax treatment on the investment returns.  The best time to start is before birth or in the first year of the child’s life.  It’s important to make regular deposits into the account, preferably by a payroll deduction plan.  Here are some strategic details:

  • By today’s rules, withdrawals from a parent-owned 529 Plan will have the least impact on the child’s eligibilty for financial aid in college (ref 13). 
  • The designated beneficiary of the Plan is either the child or a member of the child’s family. The designated beneficiary can be changed without transferring Plans, which allows an adult to start a 529 Plan before the birth of the child by designating a family member as the beneficiary (ref 12).
  • The accumulated savings can be transferred from one 529 Plan to another by way of a roll over.  The new Plan must be for the benefit of the same designated beneficiary (ref 12).  There are several potential advantages, including the transfer of ownership from a third-party (e.g., grandparent) to the parent, but; beware that some states prohibit the transfer of a 529 account unless the owner dies and the transfer is mandated by court order (ref 14,15)
  • 529 Plans started in year 2018 can be used to pay qualified educational expenses for primary, secondary, and postsecondary school.  Misuse of the Plan for unqualified expenses will incur a financial penalty.  529s started before 2018 cannot  pay for primary and secondary education; only the Coverdell ESA will pay those expenses (ref 12).
  • The maximum investment is several-to-many hundred-thousand dollars depending on the specific plan. The total contributions may not exceed an amount needed to pay qualified education expenses of the beneficiary.  The federal gift tax exclusion allows a tax-free limit of $14,000 ($28,000 if married, filing jointly) on annual contributions. 

There are other tax-advantaged ways of saving for college (ref 12,16): 

  • Coverdell Education Savings Accounts receive favorable tax treatment on investment returns when used to pay qualified educational expenses from kindergarten through college.  Eligible owners who file joint tax returns must have a modified adjusted gross income below $220,000. Their contribution limit is $2,000 per year up to the student’s 18th birthday (no more after age 18) and the account must be used before the student’s 30th birthday.  Owners may change the Coverdell account or its beneficiary (ref 12).  Owners may also rollover the Coverdell to a 529 (ref 17).  
  • Education Bonds are U.S. series EE Savings bonds issued after 1989 or U.S. series I Savings bonds, both of which are purchased by someone at least 24 years of age.  The earned interest is tax-free if the benefiiciary is named as a dependent on the owner’s tax return, the owner’s modified adjusted gross income is below an acceptable limit, and the education expenses are qualified (ref 12). 
  • IRA distributions are tax-free when used to pay qualified educational expenses, but: beware that any educational withdrawals will severely impair the advantage of earning compounding returns for retirement savings. 

Investments in mutual funds and custodial accounts (UTMA/UGMA) offer an unlimited opportunity for funding college.  However, the balances reduce the student’s eligibility for financial aid and the returns are taxable (ref 16). 

4. Scholarships and Grants

Scholarships and grants are awards of ‘free’ money to students that don’t require repayment.  The application process demands time and effort by the high school student, but it’s well worth the effort (ref 18).  Guidance counselors, reference librarians, and college financial aid officers are excellent sources of help.  Free listings can be found online (ref 19,20).    

5. Family Income

Students from high income families can rely on parents for financial help.  Otherwise, they may need to earn money to pay for college.  The work-study programs offered by colleges and private employers are good opportunities for students with a financial need (ref 21). 

6. Borrow?

Student loans can delay college graduates from saving for retirement, a mortgage, and other big projects (ref 22).  Still worse is the possible financial stress of paying a large debt (ref 9).  Therefore, use student loans as a last resort.  Federal student loans are generally the cheapest and safest when offered by the college financial aid office (ref 21).     

Third parties (e.g., grandparents)

The student’s immediate family and the college are counterparties to each other when it comes to paying for college.  Grandparents, relatives, and friends belong to the category of third parties.  Third parties are valuable sources of financial aid under the right circumstances:

  • Gifts less the $14,000 per year ($28,000 if married filing jointly) are exempt from the federal gift tax.  A special exemption of $70,000 per donor may be paid as a one-time, five-year gift to a 529 savings plan (ref 14).   
  • Gifts are excluded from the gift tax when they bypass the family as direct payments to the college.  Unfortunately, direct payments are counted by the college as “other income” that may disqualify the student from future aid.  The disqualification is not a practical concern during the student’s final year of college (ref 14,15).
  • Indirect payments to the family are likely to reduce the student’s eligibilty for need-based financial aid by inflating the “expected family contribution” (“EFC”) toward college expenses.  The inflation of EFC is less when gifts are paid to the parents instead of the student.  The best strategy for indirect payments is to contribute to a 529 savings account owned by the parents with the child as the beneficiary (ref 14, 15).  
  • A 529 account owned by a third-party does not inflate the EFC until payments are made toward the student’s college expenses.  To avoid inflating the EFC, the third-party owner should transfer their account to the parents before the student applies for college.  Beware that some states prohibit the transfer of a 529 account unless the owner dies and the transfer is mandated by court order (ref 14,15).
  • Money borrowed by parents does not hurt their student’s chances for financial aid.  Third parties can plan to make a legitimate loan to parents that includes a charge for interest.  Once the parents are done paying for college, the third party has the option of forgiving the loan (ref 15).  

Parents and grandparent-guardians should both avoid dipping into retirement savings to pay for a child’s college education.  Instead, the child can earn income and apply for student loans.  

Consultants

Families who want professional help with the process of paying for college can hire a financial aid consultant.  Before hiring a consultant, review the excellent advice given in references 23 and 24. 

Conclusion

Students are required to submit a Free Application for Federal Student Aid (FAFSA) one year before attending college.  Some colleges also require students to submit a CSS/Financial Aid Profile.  The FAFSA and CSS Profile reveal how much a student can pay without borrowing money.  It’s best if the student, with the help of the family, pays without borrowing.  

References

1.  Getting College Credit Before College. BigFuture, https://bigfuture.collegeboard.org/pay-for-college/college-costs/getting-college-credit-before-college. 

2.  Christina Tyman-Wood, What is an early college high school?  https://www.greatschools.org/gk/articles/early-college-high-school/ , 3/7/2016.

3.  Start college early.  Rise Out, Inc. http://www.rise-out.com/start-college-early/ .

4.  Taking Credit: How to Make Sure Your Course Credits Transfer When You Do.  College Affordability Guide., https://www.collegeaffordabilityguide.org/transfer-credit/ .  

5.  Managing College Costs.  College Resources.  https://www.mycollegeoptions.org/Core/SiteContent/Students/Advice/College-Resource-Center/For-Parents/Paying-For-College/Managing-College-Costs.aspx .

6.  10 Ways to Reduce College Costs. Education Planner Org.   http://www.educationplanner.org/students/paying-for-school/ways-to-pay/reduce-college-costs.shtml.  

7.  How to Choose Dream, Target, and Safety Schools.  https://www.princetonreview.com/college-advice/dream-match-safety-schools .

8.  College Affordability and Transparency Center, U.S. Department of Education.   https://collegecost.ed.gov/catc/ 

9.  Mark Kantrowitz, It’s cheaper to save than to borrow,  Saving For College, 4/27/2018. https://www.savingforcollege.com/article/it-s-cheaper-to-save-than-to-borrow .

10.  Mark Kantrowitz, How to save for a child’s college education before the child is born, Saving For College, LLC. College Savings 101, https://www.savingforcollege.com/article/how-to-save-for-a-child-s-college-education-before-the-child-is-born , 4/5/2018.  

11.  Frequently Asked Questions About 529 Plans, ICI Investment Company Institute, ici;org, https://www.ici.org/pubs/faqs/ci.faqs_529.print , 2014.

12.  Tax Benefits for Education.  Publication 970, Tax Benefits for Education, Department of the Treasury, Internal Revenue Service, https://www.irs.gov/forms-pubs/about-publication-970 , 1/31/2018.

13.  Joseph F. Hurley and Brian Boswell, 2018-2019 Family Guide to College Savings, Saving For College, LLC.  www.savingforcollege.com , 2018. 

14.  Robert Farrington, The Smart Way Grandparents Can Help Pay For College, Forbes/Education. https://www.forbes.com/sites/robertfarrington/2014/10/13/the-smart-way-grandparents-can-help-pay-for-college/#69ad07a17927 , 10/13/2014.

15.  Safe Ways for Grandparents to Help with College Costs.  Dowling & Yahnke, LLC. https://www.dywealth.com/resources/blog/safe-ways-grandparents-help-college-costs

16.  Kathryn Flyn, 6 ways you can save for college.  https://www.savingforcollege.com/article/6-ways-you-can-save-for-college , 9/1/2018. 

17. Kathryn Flynn, When to consider a Coverdell ESA to 529 plan rollover.  June 26, 2018. https://www.savingforcollege.com/article/when-to-consider-a-coverdell-esa-to-529-plan-rollover , 10/9/2017. 

18.  Kristina Ellis, Confessions of a Scholarship Winner. Worthy Publishing, Brentwood, 2013. 

19.  Scholarships. College Scholarships Org.  http://www.collegescholarships.org/scholarships/  .

20.  Finding and applying for scholarships.  www.studentaid.gov/scholarships.  

21.  Federal Student Aid, U.S. Department of Education. https://studentaid.ed.gov/sa/.

22.  Matthew S. Rutledge, Geoffery T. Sanzenbacher, and Francis M. Vitagliano. How Does Student Debt Affect Early-Career Retirement Saving?  Center for Retirement Research at Boston College, May 2018. http://crr.bc.edu/wp-content/uploads/2016/09/wp_2016-9_rev.pdf.

23.  Evaluating Financial Aid Consultants.  http://www.finaid.org/scholarships/consultants.phtml .

24.  Deborah Ziff, Decide if you need a private financial aid consultant, usnews;com, https://www.usnews.com/education/best-colleges/paying-for-college/articles/2017-07-05/decide-if-you-need-a-private-financial-aid-consultant , 7/5/2017. 

Copyright © 2018 Douglas R. Knight 

Helping grandchildren invest in college and retirement. A 2018 workshop for Otterbein University’s Lifelong Learning Community.

Moderator’s Introduction, Douglas R. Knight

The goal of this workshop is to discuss ways of helping grandchildren invest for college and eventual retirement. Grandparents have the time, experience, and resources to help those investments.  

My role as moderator is to introduce today’s topics.  Mr. Eric J. Robbins will then describe ways of investing in your grandchildren’s future.  Eric is a senior investment advisor at Buckeye Wealth Management with over 30 years of experience in the financial services industry.  Finally, Mr. Jefferson R. Blackburn-Smith will suggest ways of preparing grandchildren for college.  Jefferson is Otterbein University’s Vice President for Enrollment Management. 

1 moderator
chart 1. basic concepts

The reinvestment of stock market returns is the preferred method of saving for college and retirement (chart 1).  “College” is any certified program of higher education at trade school, the 2-year Associates degree, the 4-year Bachelors degree, graduate school, or professional school.  Family savings, student scholarships, and financial aid are principal sources of funding to pay the cost of college. There are also ways of reducing the cost of college. Paying for college deserves early planning.  

2 moderator
chart 2. The column headings identify 3 training goals, each of which progress through 6 stages of educational development identified by the row headings. Suggestions for grandparents’ goals are printed in blue font.  Topics surrounded by red borders are the focus of today’s workshop.

Chart 2 shows 3 goals for gradually improving children’s knowledge of personal finance.  

  • The first goal, financial training, is an important program which is best taught at home by parents. The topic of money for pre-school children is an ideal place to start. Proper management of money will become the child’s most important skill for personal finance and college preparation. 
  • The second goal, “college” graduation, is headed for success when parents start saving for college early-and-often in a 529 plan. Grandparents can contribute funds to the 529 and also help nurture the lives of their grandchildren. Grandchildren thrive on dreams, experiences, and skills to help prepare for college. Well prepared students are those most likely to graduate from college with a useful education. “College prep” refers to the high school student’s tasks of choosing colleges, obtaining scholarships, and reducing the costs of college; guidance counselors and librarians are excellent resources.  Negotiation is the process of comparing college acceptance letters and seeking the best financial terms of paying for college. Excessive student loans can be a disturbing financial burden after graduation.  
  • The third goal, secure retirement, begins when grandchildren start saving for expensive things; those things become more expensive as a child’s interest shifts from toys to stylish clothes, electronic devices, and cars. Bank accounts offer security to a child’s savings. A grandparent can help grandchildren buy a stock and then periodically review its performance; it’s an excellent introduction to the world of finance. Jobs help grandchildren form entrepreneurial ideas. The taxable earnings can be deposited in a custodial Roth retirement account. Grandchildren need to be encouraged to save taxable earnings in the Roth account as a matter of habit. All children need safety lessons to avoid truancy, cyber attacks, gambling, credit card debt, and other risks to their wealth and health.

After college, young adults should enter the workforce even if their first job is not a ‘dream job’.  Job success will enhance their future workforce mobility.

Investing for Your Grandchild’s Future. It’s Never Too Early to Start, Eric J. Robbins

The key points of my talk are:

  • college is an expensive investment that often incurs debt
  • grandparents’ financial assets are not detrimental to student eligibility for federal financial aid
  • families have many ways of saving for college; among them are several tax-advantaged savings programs
  • parents and grandparents should avoid making 4 big mistakes when paying for college
  • careful planning will reduce expensive mistakes

The average cost of college tuition and fees in 2017-18 varied from $9,970 [for in-state public schools] to $25,620 [for out-of-state public schools] and $34,740 [for private colleges].  To cover these costs, my recommendation is to start a college payment plan early!  Otherwise, a large debt from student loans could cause significant financial distress after graduation from college.  The average cost of student-loan debt is $351/month (chart 3).

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chart 3.

In general, students use loans to pay for 19% of college costs and parents borrow an additional 8%.  Grandparents typically pay no more than 4% of college costs (chart 4)

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chart 4.

College students are required to submit a FAFSA form (chart 5) to the college admissions office when applying for federal financial aid.  High-income families with large savings accounts (“assets”) receive less federal financial aid than low-income families with small accounts.  For a given amount of family assets, larger portions of student savings attract less federal financial aid.  Grandparent-owned assets are invisible and have no effect on federal financial aid (chart 5).  

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chart 5.

Families have many ways of saving for college (chart 6)

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chart 6.

 

Qualifed series EE savings bond, 529 savings plans, Coverdell IRAs, and Roth IRAs are protected from federal taxation of investment returns.  Chart 7 offers a useful comparison of these tax-advantaged plans with taxable custodial accounts.

7 investing
chart 7. Four savings accounts (column headings) are compared by a list of important variables (row headings).

Several comments about chart 7: Investment returns are not taxed except in the UGMA/UTMA accounts; annual income limits may restrict participation in the Roth and Coverdell accounts; contribution limits to all accounts are regulated by the government except for the UGMA/UTMA; untaxed returns can be withdrawn for qualified educational expenses (UGMA/UTMA returns are always taxable); account owners are allowed to change the student beneficiary in all but the UGMA/UTMA accounts;  account owners or custodians are generally allowed to control the account with some exceptions; non-FDIC investments are not guaranteed (but why invest in a low-return FDIC account for long-term growth of savings?) 

The reason for having a college savings plan is avoid mistakes that lead to unnecessary personal losses.  The biggest mistakes that parents and grandparents make are shown in charts 8-11.  

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chart 8.

If a parent waits 5 years before starting to invest $200/month, the $17,380 opportunity-cost of waiting to invest would decrease the final savings balance to $13,680 instead of $30,998 (chart 9).  If the parent initially invested $10,000 and then waited 5 years before investing $200/month, an opportunity cost of $29,885 would reduce the final balance to $64,906 instead of $94,791.

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chart 9.
10 investing
chart 10.
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chart 11.

Additional mistakes are: failing to plan for college; allocating college savings and other financial assets to the student instead of the parent; and, no planning for possible investment losses.

Families can reduce financial mistakes for college by gathering useful information (chart 12), selecting a suitable investment return (chart 13), and seeking alternative sources of funding (chart 14).  

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chart 12.
13-investing1-e1523979884578.jpeg
chart 13.
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chart 14.
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chart 15.
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chart 16.

Helping Grandchildren Invest: Strategies for College, Jefferson R. Blackburn-Smith

The agenda for my talk:

  • some truths about college
  • savings strategies
  • controlling cost

Many families aren’t prepared for college.  Here are four ‘truths’ that college-student families need to know:

Truth #1: College is worth the effort of careful planning (chart 17).  Grandparents can help by promoting the opportunities of a college education.  

17 college
chart 17.

Truth #2: College is expensive but few students pay the full price (chart 18).  For example,  students can seek grants and scholarships that reduce their payments.  

18 college
chart 18.

Truth #3: The student debt crisis needn’t be as bad as reported by the media (chart 19).  Low-income students tend to borrow more carefully, high-income students less carefully.  

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chart 19.

Families can shop for government and private student loans with the best interest rates and repayment plans. College graduates might choose to participate in debt-forgiveness programs by seeking employment in certain public service programs.

 Truth #4: Cost, quality, and educational outcomes are important factors to consider in selecting a college (chart 20).  

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chart 20.

One way of paying for college is to distribute the expenses equally among 3 financial accounts (chart 21).   

21-college.png
chart 21.

Among ways of paying for college, an educational savings account works best when started by an adult early in the grandchild’s life.  Grandparents can encourage their family to open a savings account and then make contributions to that account (chart 22).

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chart 22.

There are many advantages to using a 529 college savings account owned by parents (chart 23).

23-college.png
chart 23.

In comparison, student-owned savings accounts may be taxable and could reduce the student’s eligibility for financial aid (chart 24). 

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chart 24.

Student performance and lifestyle have a signficant impact on the cost of college.  Roughly  half of Ohio’s 4-year college students graduate on time, which means that the other half are either dropping out or paying much more to graduate.  In chart 25, “Lifestyle” borrowing refers to students paying for unnecessary college expenses such as extravagant vacations.

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chart 25.

 

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chart 26.

WORKSHOP CONCLUSIONS

  1. Grandparents have the time, experience, and resources to help prepare grandchildren for college and retirement.
  2. Continual reinvestment of stock market returns is recommended for college and retirement savings plans that are started early in the grandchild’s life.
  3. Protect college and retirement savings in a tax-advantaged education account (e.g., 529 plan) and retirement account (e.g., Roth IRA).
  4. Help grandchildren acquire the lifetime habit of saving for retirement
  5. Help grandchildren channel their dreams and experiences into goals for careers and adult life; college could help them achieve those goals.
  6. Many families are unprepared for college. Early planning and careful preparation will reduce the cost of graduating from college.
  7. Minimize student-loan debt by starting a 529 plan early. Other ways of minimizing student debt include grants & scholarships, work-study programs, reduced college expenses, and loan forgiveness programs.

[additional references are listed in the LITERATURE page of this blog]

Copyright © 2018 Douglas R. Knight, Eric J. Robbins, and Jefferson R. Blackburn-Smith