I recently heard that college loans are the biggest debt our nation has, even bigger than mortgage debt. And frankly, I think it is crazy that students pursue an education and leave with the burden of debt that follows them around for a couple of decades. I’m glad several politicians are looking to make public colleges free which makes so much sense. Most countries offer basic education (and yes, I consider college education basic!) free or at minimal cost. After all, they want to encourage an educated workforce! Luckily I did both my Bachelors and Masters in another country and had little to pay till I came to the US for my MBA. For more on how, I paid for that, read this. Now with 2 young kids, I am trying to figure out how we will pay the cost of college.
Cost of College
First I tried to estimate the cost of college at Scholarshare to send one of my kids for undergraduate degree when they turn 18. I used University of California Berkeley as a proxy. Hope you are sitting down. The estimated cost is a whopping $270,000!!!! For two kids, that would amount to $540,000 over four years!! Excluding room and board. š± Now Iām trying to hold down the panic that is threatening to rise and instead focus on researching how I will pay for college for both my kids so here goes….
Strategies to reduce cost and pay for college
1. Get ahead of the game with AP classes – It is my responsibility as a parent to pay for college so my kids arenāt burdened with debt just as they start their adult lives. That said, I do think kids need to play their part as well. So the first thing I am planning on is to have my kids take AP (advanced placement) classes in high school. These are counted towards your credits for college, letting you finish college sooner. Also take the College Level Examination Program (CLEP). āMore than 2,900 public colleges and universities in the United States will give students credit for what they already know if they pass a CLEP test,ā said Steve Klinsky, the founder of Modern States Education Alliance, a philanthropic organization dedicated to making a college degree more affordable. Achievement tests and AP coursework can reduce the number of classes required for a degree and time spent at college.Ā Ā Ā Ā Ā Ā Ā Ā Ā Ā
2. Start saving as soon as possible but structure it smartly so you max out financial aid – When considering where to save the money, whether in a 529, an investment account, in the equity of your house, tax advantaged retirement plans (401km Roth, IRAs), brokerage accounts, etc, itās important to know what assets are included in assessing eligibility for financial aid and howĀ expected financial contribution (EFC) is calculated so you can plan to save accordingly. Most schools use one of these two forms to calculate EFC: FAFSA or CSS Profile. They look at the parentās and kidās assets and income by reviewing taxes from 2 years prior to the date of enrollment to determine how much you can afford to pay. 20% of the value of assets in the kidsā name and 5.64% of the value of the parentās account is considered eligible to be used to pay for school. They also include up to 47% and 50% of the parents’ and kids’ income respectively towards EFC. FAFSA does not include kids or parents retirement accounts (401(k), 403(b), 457(b), 401(a), and IRA accounts), nor the equity in your primary residence,Ā towards your EFC. That said, it depends on the method they use to calculate EFC. FAFSA is more favorable while the CSS Profile asks for more information including your home and retirement funds.Ā It is important to keep in mind that even if you qualify for aid, it doesnāt mean you will get it.Ā
So the first thing to do is define your target schools and see which of the 2 forms they use and what assets will be counted. Next estimate your EFC and see if there’s a way you can move assets into different bucket. There are four buckets I’d recommend you save in this order: 1) Retirement accounts (parents and kids, more on how to pay your kids and open an IRA for your kids in a later article ), 2) Home equity, 3) 529s and lastly 4) Brokerage accounts. A 529 account is a tax advantaged account. Thirty-five states give you a state tax credit if you save through a 529. This worked for us in New York, unfortunately California does not offer it. And are no capital gains tax on the earnings as long as you use the funds for education. The other advantage isĀ 529s are considered parentsā assets, even if the beneficiary is the kid, so they only reduce the childās aid package only by 5.64% of their value.Ā
If you open a 529 and your kids decide not to go to college, you will pay income tax plus a 10% penalty on withdrawal or you can change the beneficiary to a relative. Thereās a special exception to the 10% penalty if the beneficiary dies, becomes disabled, decides to attend a U.S. Military Academy or earns a scholarship. Students can avoid the 10% penalty on non-qualified withdrawals up to the amount of the tax-free scholarship. The earnings portion of the withdrawal, however, will still incur income tax. 529s can be used in four-year public and private colleges, community college, trade schools and even some international schools. Check if your school is an eligible for Section 529 with Savingforcollege.comās Federal School Code Lookup.
Opening the account when the kids are young gives you enough time to continuously add small amounts to it, so you donāt feel the pinch. And with the compounding effect of the money invested in the market, you can land up with a solid chunk of change for funding college in 15-18 years.
For more detailed information including an estimate of your EFC based on your income, check out this great article.Ā
3. Choose the right school, in state and public – If you choose to stay in state and go to a public school instead of a private school, you can save thousands of dollars. Below is a chart from Scholarshare that shows the cost difference between private and public school. Carry the difference for 4 years and excluding room and board and we are talking $12,324 for an in state public school over 4 years compared to $55,156 for an out-of-state or $100,388 for a private school!!!
| Tuition | Living Costs | |||||
| Public | Private | On-Campus | Off-Campus | |||
| State | Number of Schools | In-State | Out-of-State | |||
| California | 729 | $3,081 | $11,308 | $25,097 | $15,784 | $16,803 |
As we live in California, we feel really lucky to be surrounded by so many great public college options and plan to encourage our kids to attend Public schools close to home. Especially since I went to a Public School and the ROI on my education was phenomenal!
4. Start at a community college and then transfer to a Public university after two years. This can save a lot of money and you can still graduate with a great degree. In California, the first year of community college is free and there is a bill currently being considered to also make the second year free.
5. Apply for scholarships and grants – Scholarships and grants are a great way to pay for college as you don’t need to repay them. Scholly is a site that can help you find a scholarship. Apply for scholarships from the college you have been accepted at. Two-thirds of all undergraduates at Berkeley receive some form of financial aid. This includes scholarships, grants, subsidized loans and work-study aid (a federally subsidized scheme which helps students earn money through part-time work). Cal Grants from the state and Pell Grants from the federal government are the main financial aid programs that help students afford higher education in California. Pell Grants from the federal government provided grants of up to $5,920 in the 2017-18 school year. To avail of this, both students and parents complete financial aid forms, the FAFSA (Free Application for Federal Student Aid) and/or the CSS Profile. Unfortunately some of the CAL schools look to review a CSS form.
6. Live at home to save on room and board – If you choose to go to a school closer to home, you can also save the cost of room and board. The average cost for room and board is $10,440 at public colleges and $11,890 a year at private institutions.
7. Get a part-time job on campus while at school – Both my husband and I worked in school. He had a job as a Teacherās Assistant and I was an Assistant to the Dean of one of the schools. It not only paid us but reduced our college tuition, as we were considered employees of the school.
8. Get a paid internship – I saved $6000 from my grad school internship and it went a long way to pay for my 2nd year room, board and books.
9. Last resort student loans.
10. Claim the American Opportunity Tax Credit – This allows parents to reduce their taxes after paying for tuition, fees, books, and room and board — up to $2,500 a year per child. Parents can claim the tax credit if their modified adjusted gross income is no more than $90,000, or $180,000 if filing jointly.
Now we still have a ways to go before our kids go to college so I am hoping I learn more strategies to help us afford college. If you have thoughts or hacks, please share.
Some great resources I would recommend you read are:
https://blog.seonwoolee.com/general-gudelines-for-fafsa/
https://www.scholarshare529.com/plan/future.php
https://www.savingforcollege.com/article/7-myths-and-realities-of-529-plans?page=2
https://www.savingforcollege.com/blog/6-ways-you-can-save-for-college-837?page=1
https://edsource.org/2018/getting-free-college-tuition-in-california-a-quick-guide/599039