Are you perplexed—or even downright intimidated—by the ever-increasing expense of higher education? It’s perfectly understandable: For the 2017-18 academic year, the annual cost of tuition, fees, room and board is averaging $50,900 at private institutions and $25,290 at public schools, according to the College Board.
Not all families approach this challenge in the same way. Some start saving money the moment the child is born; others wait a few years. And some don’t really think about it until the last minute. Fortunately, in nearly every situation, if you really want to go to college, you probably can find a way.
Here’s one proven tactic to reduce the pain factor: Consider having your student attend a community college or inexpensive local school for the first year or two. Community colleges, for example, average just over $4,800 in annual tuition and fees for in-state students, according to Community College Review. This gives your student some time to build up great grades, to better qualify for scholarships and other opportunities at his or her preferred school to earn the actual degree. (One caution: Make sure all credits earned at the local school will transfer to your desired college.)
Whatever the route, the bills will arrive eventually. Here are three common scenarios that families face on this topic—and how to navigate them. We’ve also included brief “investment strategy” breakdowns for each stage.
Your child is graduating from high school soon, and you haven’t saved quite enough money for college
First of all, don’t beat yourself up over this. All families have different game plans when it comes to paying for college. Even those that saved may not have fully understood how expensive it can get. Also, the best-laid plans will change: You and your student could have anticipated going to a relatively affordable, in-state public school for years, only to have a better opportunity emerge at an out-of-state and/or private college.
No matter the reason, this scenario involves coming up with immediate funding. Fortunately, you can project an estimate for the financial aid you’d receive from a school by taking advantage of its “net price calculator,” which is now mandatory on every college’s website.
“This means there won’t be any surprises,” says Tim Higgins, a certified financial planner and author of Pay for College Without Sacrificing Your Retirement. “Then, there’s merit aid, which colleges will provide to ‘overqualified’ students, to attract the best talent at a big discount. But that means you shouldn’t have your hopes set on the most selective schools.”
For some relief, check into the American Opportunity Tax Credit. Single filers making less than $80,000 and joint filers making under $160,000 can qualify for the credit, which gives up to $2,500 back—100% of the first $2,000 you spend and 25% of the next $2,000 you spend—on qualified education expenses.
As for loans, research federal student loans first. Parents can acquire loans, too, including the federal Parent PLUS loan, which carries a 7.6% interest rate plus a 4.25% origination fee. If you still have financial needs, there are college loan packages from private banks and other lenders. As an NEA member, you can take advantage of the NEA Smart Option Student, Parent and Graduate Loans from Sallie Mae, with competitive rates, flexible repayment options and an exclusive rate reduction for NEA members.
Once you’ve established the available financing support, you can work up a budget combining these and other available savings, bank loans and cash flow—like you would with any other big-ticket item. You may want to ask for some form of contributions/income from your student, too. That will not only assist on the finances, but it will help your child appreciate the value of an education.
Your investing strategy: Regardless of whether you’ve saved a lot or a little, keep any available savings in conservative investing options. “How would you feel if your savings declined 40% like it did in 2008, right when you need to pay the bill?” Higgins says.
Your child is entering high school, and you need to start planning how you’ll save enough money for college
The key word here is “planning,” says Scott Weingold, co-founder of the College Planning Network, a higher-education admissions/funding/financial planning site. Obviously, you’ll seek out a college that presents the best education-potential fit for your child. Once you’ve come up with several good candidates, map out various costs along with realistic financial-aid packages, including grants.
“Knowing these figures in advance will tell you whether you’re better off going to a public school or a private one,” Weingold says. “It’s also time to maximize those grades and build that resume, because that will make your student much more appealing to colleges and increase the chances for a better award offer.”
Parents should avoid obsessing about saving for college. However, socking every spare dime isn’t necessarily a winning savings plan.
“Very few families end up saving enough to pay for 100% of college for all of their children,” Higgins says. “And, even if they do, it really isn’t wise if their own retirement is underfunded. At the same time you’re running a college-savings calculation, you should run retirement projections/calculations.”
Your investing strategy: Higgins advises a conservative approach here, with 80% in conservative funds and the rest in a diversified mix of stock/mutual funds.
Your child is in elementary or middle school, so you have time to grow your college savings
At this early stage, are you stuck with your own state’s 529 college savings plan as your sole option?
Hardly. For certain, 529 plans are popular vehicles that present considerable tax advantages to encourage families to save. But you can shop around by reviewing alternatives to your home state’s plan.
“You don’t need to use the plan from the state you live in,” Weingold says. “Advantages to doing that would amount to some small tax breaks, sometimes. By going out of state, you may find better investment options and/or lower costs. You must look carefully at each plan’s fees and investment choices, and then balance those against what you’d save by getting tax breaks from the in-state plan.”
Still, 529 plans aren’t for everyone. “They could place your capital at risk and come with high fees,” Weingold says. “You’ll run the risk of penalties, too, if you don’t use the money for college. What if your child gets a huge scholarship, or what if ‘life happens’ and you need the money for an emergency or opportunity that arises?”
Weingold advocates parking your funds someplace safe—certificates of deposit and fixed annuities, for example—so that you can sleep at night without worrying about drastic market swings taking a chunk out of your savings. “You have to decide if these are college ‘savings’ dollars or college ‘investing’ dollars,” he says.
To lower the chances of losing your investment, many states offer 529 packages in which investment risk is gradually reduced as your child gets closer to college age. However, a plan that includes any investment in stocks and/or mutual funds will never be 100% risk-free.
Your investing strategy: Higgins suggests a mix of 80% stocks/mutual funds and 20% bonds before your child enters elementary school, 60% stocks/mutual funds and 40% bonds while she’s in elementary school and then a 50/50 split through her middle-school years.
Note: Every situation is different. To determine what’s best for you and your family, consult with a financial or tax advisor.