How Can Parents Help Fund Their Child’s Education Without Touching Their Nest Egg?

April 10, 2017 · Written By Barbara Glover, CFP®

Blink and your newborn is heading off to college. While an exciting milestone, it’s easily overshadowed by the looming fear of financial sacrifices. For many parents, especially those who started families in their 30s and 40s, saving for college and retirement at the same time is a nagging reality.

The average cost of college for the 2016 to 2017 academic year was over $24,000 for an in-state public college and over $49,000 for a private college[1]. Multiply that by the four years it takes to earn an undergraduate degree, and it’s easy to see why many parents consider tapping into their retirement savings to help foot the bill.

According to current research from Sallie Mae, only two out of five families have an actual college payment plan in place. As it turns out, having a strategy really does pay off—families who plan save 3.5 times more than non-planners, and the students from those families borrow one-third less[2].

Don’t know where to start?  Here are six strategies for funding college without digging into your hard-earned retirement fund.

1. Plan for 4 Years (or More)

From your child’s first step onto campus to their last step off stage with diploma in hand, you’re looking at a timeline of 4+ years. Changing majors, repeating classes, or taking time off for personal reasons also affect the prospects of a timely graduation. When planning your budget, look beyond freshman year alone—consider the total number of years expected, and plan accordingly.

When researching potential colleges and universities, look for schools with high four-year graduation rates. The fewer years your child spends in college, the less tuition, fees and related expenses you’ll incur.

2. Calculate the Savings at Home

There is at least one financial upside when sending your child to college—recouped living expenses.

Consider the cost of food, transportation, sports and activities, etc…which are all reduced when there’s one less person at home.  When building your college budget, don’t forget to factor these savings into your calculations.

3. Take Advantage of Tax Credits

Two tax credits that you may be eligible for are the American Opportunity Credit or the Lifetime Learning Credit.

For each of the four years, the American Opportunity Tax Credit allows deductions of the first $2,000 spent on education expenses and 25 percent of the next $2,000. In 2017, this credit begins to phase out at an adjusted gross income of $80,000 or less, or twice that if married and filing jointly.

Each year, for an unlimited number of years, the Lifetime Learning Credit provides a tax credit of up to $2,000 on the first $10,000 of college expenses.  In 2017, this credit begins to phase out for a single filer at $56,000, or double that if married and filing jointly.

If you do not qualify for either one of the above credits, you may be able to claim tax deductions for tuitions and fee payments; however, you cannot claim more than one of the listed educational tax benefits per student per year.  It’s best to check with your tax professional to see if you qualify for any of these tax strategies.

4. Complete the FAFSA, Regardless of Wealth

A common misconception: families in higher tax brackets shouldn’t bother filling out the Free Application for Federal Student Aid (FAFSA). But many are surprised to learn they don’t have to demonstrate need to qualify for federal assistance. Your income is only one part of the financial aid equation; the school’s cost of attendance, number of children in college, and the parents’ age also factor into how much aid your child is eligible for.

Federal student loans can provide up to $27,000 over four years with fixed interest rates and income-driven repayment plans not typically offered with more costly private loans. The US Department of Education also offers Direct PLUS loans for qualified borrowers with a healthy credit history. Among these options are Parent PLUS loans, which are federal student loans available to the parents of dependent undergraduate students.  To be eligible for either the Federal Student Loan program or PLUS loans, you must complete the FAFSA form for each year that a loan is needed.

5. Consider the Pros and Cons of Tapping Home Equity

Because of lower interest rates, a home equity loan is sometimes preferable to taking out a Parent PLUS loan. According to Consumer Reports, a Parent PLUS loan during the 2016 to 2017 school year had a fixed interest rate of 6.31 percent with an additional 4.28 percent loan fee. A $50,000 fixed-rate home equity loan currently has an interest rate below 4.8 percent[3]; significantly less than the PLUS rate in excess of 10 percent.

Even so, a home equity loan should not be assumed hastily. While home prices have since recovered from the housing bubble, it’s uncertain if prices will remain steady long-term. Consumer Reports suggests that total home loan borrowing should not exceed 60 percent of the home’s value so that, ideally, those over 50 can pay back the amount borrowed before they retire.

6. Spend Your 529 Carefully

Another popular option for college savers are 529 plans—tax-advantaged savings vehicles designed to fund qualified college expenses. These plans can be powerful savings tools, but it’s imperative to understand the ins and outs of how your plan works to fully reap its benefits.

Withdrawals from a 529 plan that are used to pay qualified higher education expenses are completely free of federal income tax and may also be exempt from state income tax. Withdrawals for non-qualified expenses, however, are subject to federal income tax and additional penalties.

Parents must also carefully budget how the funds in a 529 will be spread over the course of four years. Consider scholarships, grants, or other sources of aid before determining what you’ll need to withdraw each year.  Withdrawing funds too hastily, or too conservatively, may come with unintended consequences.

Other Alternatives

If necessary, you can also tap into your Roth IRA as a source of funding.  For parents under the age of 59 ½, you may be able to make a withdrawal free of penalties if the funds are used for qualified education expenses.  Before implementing this strategy, it’s best check with your tax professional.

In addition to the options discussed here, consider the value of having your student work over the summer or during the school year to help afford their education.  Doing this can build responsible habits and provide valuable experience that will prepare a student for the working world better than any college course.

Last but not least, look online for scholarships.  There are many great websites that can help you narrow down the scholarships for which your child may qualify.  If you have a motivated student, you may also want to look for schools that offer merit-based scholarships or awards.

Make An Educated Decision

If you’re feeling overwhelmed by the alternatives, or have specific questions pertaining to your family’s unique situation, get in touch with a Certified Financial Planner (CFP®).  An experienced advisor can help you weigh your options and develop a comprehensive plan and payment strategy that’s most appropriate for you and your college-bound child.

Barbara Glover, CFP® is an Advisor for JFS Wealth Advisors, an independent wealth management firm serving high-net worth individuals, families and professionals. She helps her clients achieve their financial goals by providing comprehensive investment and planning strategies designed to help build and protect their wealth. Questions about college funding strategies? Contact Barbara at bglover@jfswa.com.


 

[1] What’s the Price Tag for a College Education? Collegedata.com, 2017.

[2] How America Pays for College 2016, Sallie Mae® and Ipsos, 2017.

[3] Home Equity Loan Calculators, Bankrate.com, 2017.