Once your child has chosen the college he or she will attend, it’s up to you to figure out where the money to pay for it will come from. And you'll need to do it quickly since freshman deposits are due May 1st.
Other than the purchase of a home, a college education is the most expensive investment you will probably make. In the words of one financial aid director, "You're about to spend as much as if you were buying a new car every year for the next four or five years."
The basic ingredients to develop a payment plan are the same for everyone –grants, savings, income and loans. The exact recipe, however, is different for each family.
The most common type of grants are need-based, academic and athletic. Grants provide the best benefit since this money never gets repaid. Grants are used first, but be aware that most grants are not guaranteed for more than one year. Some carry finanicial conditions -- need-based aid -- for renewal, while others require minimum academic performance to be renewed.
As for savings, if you have education funds established by grandparents and other relatives, I suggest that gifted money be spent during the "blessed overlap" period of sending more than one child to college at the same time. If you will not have more than one child in college these monies can be used as needed.
The next layer of savings, the 529 account, grows tax free. Since this provides terrific tax advantages, the money in these accounts is often used last.
Savings bonds, mutual funds and other investments, when used for education expenses, may trigger the payment of taxes. In addition, you need to analyze your expectations about the movement of the markets and manage the upcoming increases in capital gain tax rates.
So if you are considering cashing in savings bonds, you should strongly consider using them to pay for tuition in your child's senior year. This way, the income triggered by cashing in the bonds will not impair financial aid eligibility.
For most families, some current income can be (or must be) devoted to education. Colleges offer the option of paying eight, nine or ten installments for each year with no interest. Other income that can be used for college expenses (even spending money) can come from work-study programs and other on-campus employment.
I urge all parents to consider the many benefits -- both financial and more importantly, emotional -- of having your child be responsible for some of his or her own welfare at this stage of life. Summer jobs count, too.
Then, there are loans ... but which ones? How much? Who should borrow, student or parent? Each option will have its own rate and terms and must be carefully investigated.
Since the college payment recipe is different for every family and the blend will likely change every year, there are no quick and easy answers. Creating a plan, and a flexible mindset, will provide the best opportunities for everyone to enjoy your child's college years.
Got questions about creatively financing your child's education? Email Joel at email@example.com so that he can answer your question in this blog.