It seems like only yesterday your little one was taking her first steps, but now she’s about to toddle right out the door to college.
The years flew by, but financially, it’s no problem because you’ve been saving for this day since her arrival, right? No? Uh oh. OK, no need to panic. There are ways to afford higher education, no matter your current situation.
If you and your teen are college planning, money is likely a top priority. For answers to your financial questions about this exciting (and slightly scary!) stage in life, we checked in with Cristine Marik, a Certified Financial Planner with Stevens Wealth Management in Deerfield, and John Eiduk, a Certified Public Accountant and Certified College Planning Specialist in Winnetka.
Even if you don’t already have a plan, it’s not too late to put one in place now. “Financial planning is especially critical as you approach this stage of life,” Marik says. “Many parents are faced with balancing how to plan for paying for their child’s education while still keeping their own retirement plan on track.”
Deerfield parent Diane Moody, 54, agrees that figuring out how to pay for college is both confusing and essential. She and her husband went to several college finance meetings—they wanted to pay for their son’s college but still have enough for their own retirement—but found the assorted forms, instructions, funding sources and onslaught of information overwhelming, especially because they had money in all sorts of different accounts.
“It’s very frustrating and it’s very important that you get this done right,” Moody says. “We want to put him in a light where he is eligible for financial aid so he graduates with as little debt as possible.”
She eventually hired Eiduk to help her sort things out, and her son just left for his freshman year at Southern Illinois University in Carbondale, but she urges other parents to start thinking about college funding sooner rather than later. “You really have to get on this,” she says. “Time is ticking.”
1. How much will college cost, including living expenses?
The average estimated full-time undergraduate budget—including tuition, fees, room and board, books, supplies and transportation—for the 2012-2013 school year was around $22,300 per year to live on campus at an in-state public four-year school, and $43,300 per year to live on campus at a private school.
Prices vary widely. For example, Northwestern will set you back about $63,200 a year, while the University of Illinois at Urbana-Champaign costs around $29,600. But you may not end up paying the ”sticker price,” depending on availability of scholarships and other sources of financial aid.
2. Oh my, turns out I didn’t save enough. What can I do at this point?
“The key is to set a realistic budget for what you can afford to spend and don’t sacrifice your retirement plan to fund college,” Marik says. That might mean axing Junior’s pricey dream school in favor of another quality-but-more-affordable school. You also could get loans, but tread judiciously. “You need to carefully weigh the cost of the loan and potential burden repaying the loan could put on you or your child,” she says.
3. Is my family’s income too high to qualify for financial aid?
The definitive answer is: maybe. “Having a higher income could work to your disadvantage for some sources of aid, but it still may be worth applying to see what you are eligible for,” Marik says.
That’s because colleges consider more than just income; they also look at such things as the number of family members in college, medical expenses and more.
Even if you think your income is too high for aid, the College Board says you still should fill out the Free Application for Federal Student Aid (FAFSA) (here’s help on how) as soon as possible after January 1. The form determines your eligibility for federal and state student grants, work-study and federal loans, Eiduk says.
The best way to get an estimate of how much financial aid a college will offer you (and therefore how much you’ll really pay) is to use a net-price calculator, found on most college websites. The net price is the cost of attendance minus any financial aid.
4. Should my child pay some of his own expenses at college?
“Having him contribute toward his education—even if it is a small amount—could give him a sense of independence and satisfaction that he is helping pay his own way,” Marik says. “It could also give your son some ‘skin in the game’ and keep him invested in his own education.”
Eiduk agrees, adding that he routinely recommends that parents make their students an authorized user on their credit card, which should only to be used for small purchases and emergencies. A credit card allows parents to monitor spending while allowing kids to get a boost to their credit, he says.
5. I’ve saved in a 529 plan and my son has some money in a Uniform Transfer to Minors Act account. Which money should I use first to pay for school?
He might want to spend his money on a Superplexus, but if you’re a custodian of his UTMA account and would prefer to steer the funds toward education, then use this account first, Marik and Eiduk both advise.
6. Speaking of 529s, what types of expenses qualify for tax-free withdrawals from the plan?
Tuition, fees, books, supplies, equipment (including a laptop), and room and board for at least half-time students. Expenses must be paid to an eligible, post-secondary educational institution. Marik says generally an institution is eligible if it qualifies to participate in federal student aid programs.
7. Should I withdraw funds from an IRA or Roth IRA to pay for college expenses?
Probably not. “You don’t want to jeopardize your own retirement plan,” Marik explains. “Even if you do take funds from an IRA and are able to avoid the early distribution penalty, the funds withdrawn will typically be counted as part of your taxable income.” Eiduk agrees there are better ways to pay for college. “Our kids could take a loan out for college but we can’t borrow for our retirement,” he says.
8. What are the major differences between government and private college loans?
Federal loans are funded by the government and do not require repayment until six months after the student graduates or leaves college, Eiduk says. They offer a fixed interest rate and a variety of repayment options. Meanwhile, private loans are offered through private lenders and usually require payments while the student is in school, Eiduk says. They have variable interest rates (a possible negative if interest rates rise over time, Marik says) and are dependent on a family’s credit score.
Private loans may be more competitive than Federal PLUS loans for parents, and Eiduk says they should be considered if Federal PLUS loans are needed. But as a general rule, “students and parents should only consider private loans if they have maximized all federal options,” Eiduk says.
9. What’s the best way to handle spending money?
Create a budget. Start with income and separate expenses between needs and wants. Next have your child set aside at least 10 percent of any wages as savings, Eiduk advises. “Budgeting is a simple process, but sticking to it is the hard part,” he says.
Marik recommends setting a target amount for what your child can spend each week or month. She favors giving a college-bound child a debit card over a credit card for daily living expenses. The debit card, linked to a bank account that your child can access (and parents can monitor), could help avoid the temptation to spend money they don’t have, she says. For books, airline or bus tickets home and other larger purchases, she says, you could consider making your child an authorized user on your credit card.
10. What’s an easy way to help my grandchild with college costs?
Have the parents open a 529 account and then grandparents can gift from $14,000 to $70,000 to the fund per grandchild, Eiduk says. Marik notes additional ways to help include giving money directly to a grandchild or the parents; or paying tuition directly to the school on the student’s behalf and avoid making a gift for tax purposes.
But they also should keep in mind their own financial situation. “Grandparents should weigh their own estate planning needs and what impact their gifting strategy might have on the student’s financial aid eligibility in determining what options will best suit their situation,” she says.
Editor’s note: Make It Better is writing about questions you should ask a financial expert at different stages of life. Earlier we tackled concerns of new or expectant parents, and next we look into questions posed by people entering their “second act” of life, whether that be imminent retirement, a career change, or a person whose life is changing due to such circumstances as divorce or death of spouse.
If you are embarking on a second act, contact us with your general financial question at [email protected] and include your name, town and daytime phone number. We may use your question in a future article!