A Road Map for Financing Your Child's College Education
A guide to steps you should take from your child's birth to her first day at college.
With college costs rising rapidly, you might fear this part of the American Dream is "mission impossible." It's not. Even if you have modest resources, there are ways to get your child to college without going broke. Here's a road map of the journey, complete with instructions on what to do along the way.
Exit 1: New Baby
- Begin saving and investing. Money that you set aside and put to work now will be worth lots more than money invested later on.
- This is the time to be as aggressive as your comfort level allows. A few percentage points greater return will yield much bigger gains after 18 years' time.
Exit 2: Elementary School
- Continue -- or begin -- contributing to the college fund. Your investments can still be aggressive at this point.
- Take full advantage of tax-favored retirement plans such as 401(k)s, IRAs, Keoghs and SEPs. Only a few private colleges consider these accounts when determining aid eligibility.
- Buy a house if you haven't already. Years later, you can tap the equity, tax-free, to pay for college. Choose your school or school district carefully so your child starts off with a strong educational foundation.
- Be enthusiastic about your child's early school stuff. Kids who love to learn from the get-go grow up to be good students.
Exit 3: 7th Grade
- Encourage your child's special abilities: academic, athletic, or artistic. These talents can make your child eligible for college scholarships or specialized aid.
- Continue funding the college nest egg, or -- if you're just starting -- put the pedal to the metal. Any savings and investments you make now will improve your financial picture later.
- Prepare to move your college nest egg stash to safer, less volatile investments over the next few years. Start shopping for those investments now.
Exit 4: 10th Grade
- Encourage your teenager to get serious about studies, if she's not already. Stronger students often get financial-aid packages with more grants than loans. (Grants don't need to be repaid.)
- Boost your college-fund contributions and shift college funds to safer, more liquid investments. You don't want tuition to come due right after a market setback.
- Focus on financial aid possibilities now. Freshman-year financial aid is based, in part, on the parents' income after January 1 of the student's 11th-grade year. Take a look at your income and resources and estimate your cash flow for the next few years. Get your hands on a good college planning guide to see what your Expected Family Contribution (EFC) might be, and if you'll be eligible for aid. Beware of guidebooks that generate EFCs based only on parents' income and assets -- the results are often higher or lower by several thousand dollars.
- If you think you're eligible for aid, keep any income you can control -- bonuses, client billings, capital gains -- to a minimum. The EFC is more sensitive to parents' income than assets. For example: You have stock that's gone up in value, and you want to cash it in to pay tuition. Sell the stock before January 1 of your child's 11th-grade year, so you take the increased income during the year before your income is scrutinized in financial aid need analyses.
- If you are certain that you won't qualify for financial aid, you should consider shifting more of your assets into your child's name, thereby reducing your tax bite. Say you give stock that's grown in value to a child who sells it later. The capital gain will be taxed at the child's tax rate, which is generally lower than your rate.
Exit 5: 12th Grade
- Be alert. Timing is important. As your student applies to colleges, follow up with aid applications.
- Look for scholarships. Students: Check with the college admissions office, and check out scholarship-search Web sites. Don't forget to look and apply for hometown grants.
Exit 6: Graduation
- Admissions and aid decisions arrive -- compare what's offered.
- Compare the aid packages received by looking at the amount the school expects the family to pay, and the amount that the student is expected to borrow. If your child's top-pick school is still too pricey, appeal the aid package before May 1 -- which is the universal reply date to accept college admissions offers.
Exit 7: College
- Look into making tuition payments through college-sponsored installment plans.
- Check out the federal PLUS loans. They're not need-based and are often better than ordinary bank loans.
- Keep current with aid applications and deadlines; you'll need to repeat them for each year of college.