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Saving for College
Five Ways to Cover College Tuition
By Scott Ziska
Senior Financial Planner, RollingBrook Financial Advisors/Sagemark Consulting
There is no escaping the fact that college costs are rising. According to the College Board, a not-for-profit membership organization composed of more than 4,700 educational organizations, the average annual tuition at four-year private universities is $20,082, up 6% from last year, and $5,132 at four-year public universities, up 10.5% from last year.
As the deadline nears for paying the fall semester’s college tuition bill, you might be trying to figure out which assets to tap for the payments. But the action you take could affect not only this year’s tax bill, but also your Federal financial aid package and expected family contribution next year.
Proper planning is essential for covering what could amount to being one of your largest bills. Outside of scholarships, there are five basic approaches to covering tuition costs; your financial planner can help you determine which would work best for your personal situation and goals.
1. Put a Solid Plan in Place
The best time to figure out how you’ll pay for college is before your oldest child is a freshman or sophomore in high school, if not earlier. It’s a good idea to shift assets to conservative investments such as bonds at least five years before you think you’ll need the money, so that you are sure to have it when you do.
If you don’t expect to qualify for financial aid and you have highly appreciated stock or mutual fund shares, there could be a tax benefit to gifting the shares to your college-bound child. However, if you’re eligible for financial aid, that’s one of the last things you want to do since assets in your child’s name will affect financial aid eligibility drastically.
Since assets such as a life insurance policy or a retirement plan may not be included in income calculations for financial aid packages, you may want to consider holding adequate amounts of such assets. Be sure to consult with your financial planner before making any sudden changes to your financial plan.
2. Sell Stocks or Mutual Funds
If you have the majority of your assets in the market, selling some may be an appealing option, since stock is relatively easy to liquidate. But keep in mind that if you sell at a gain, it’s considered income and you’ll owe taxes on the profit—and the boost in income you receive may reduce your financial aid eligibility for the following year. Thus, for every dollar your income increases, your aid eligibility could be significantly reduced.
3. Use Money in Savings
The benefit of using money in a savings account or a money-market account to pay tuition is that there’s no negative income-tax ramification, because there’s no capital gain or loss at the time of sale. While savings accounts typically don’t pay high interest rates, they’re considered liquid investments since there isn’t a penalty for a withdrawal. Certificates of Deposit, on the other hand, might offer a better interest rate but often charge a fee for a withdrawal made before the maturity date.
4. Take Out a Loan
While a home-equity loan might seem like a sound option, with prime rates currently around 6.0%, those rates do fluctuate and might not be low forever. Your financial planner can help you determine whether it would be more beneficial for you to take out a loan from your 401(k) plan or another type of defined-contribution retirement plan.
You don’t have to pay taxes on withdrawals from a 401(k) plan used for qualified education expenses—and you’ll pay interest to yourself when paying back the loan. However, most plans have a five-year repayment period and limit loan amounts. In addition, there are tax consequences if you owe a balance on the loan when you leave your current job.
The best options are the Stafford Loans for students and the Parental Loan for Undergraduate Studies (PLUS), which have relatively low interest rates compared with home-equity loan rates. The interest paid on Stafford Loans—depending on tax brackets—may even be tax-deductible. While Federal guidelines set ceilings on the amount that can be borrowed through these programs, eligibility isn’t based on income or assets.
5. Boost Household Income
In reviewing the tuition bill you’ve probably had the thought, “I simply need to earn more money.” But before you go begging for a raise, take heart: While increasing your household income might sound like a reasonable game plan on the surface, the extra earnings, after being reduced by taxes, are often scooped up by the school through a higher expected-family-contribution and can affect your financial aid eligibility the following year.
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