It seems like just yesterday you were helping your baby get on the bus for kindergarten and now you’re talking to them about the colleges they are interested in attending. Time sure does fly, and while it is easy to get swept up in all of the excitement and changes that are going to happen when your future college student leaves the nest, it is important to stay on top of financial management.
With the cost of tuition constantly rising, planning for your child’s education is more important than ever but determining a solid financial plan can help alleviate some of the stress and nervousness that can arise from such a big change.
Look Into Financial Aid and College Scholarships
First and foremost, understanding the different financial aid options that are available is important in determining your plans for funding college.
FAFSA, which stands for Free Application for Federal Student Aid, is an application that you fill out each year to determine your family’s financial need. Depending on your financial status, you will receive a different award amount to assist with paying for college.
Each school that your child applies to could give a different award amount, which might sway your child’s decision one way or another. Even if you don’t think you will qualify for any aid, it is beneficial to fill out the application just in case.
Another financial tip when preparing your child for college is researching the vast amount of college scholarship options that are available. Depending on the school your son or daughter chooses, there are scholarships available in-house.
In addition to school-sponsored scholarships, there are plenty of independent scholarship options as well. There are so many different organizations that are willing to give out scholarships to students so researching these ahead of time could be beneficial and allow your child to maximize their potential options.
Discuss Tuition Payment Options
Depending on your financial status, there are different ways to fund your child’s education. Do you plan on taking responsibility for paying for your future college student’s tuition or are you expecting that they take out a loan for their education?
Maybe your child received some financial aid but you plan on covering the deficit between the tuition owed and the financial aid award received. This is a major expenditure similar in scope to buying a home, so take your time and really review ALL of the options, including the choice to NOT attend college, or to go with a less expensive trade school program or other options.
It is important to discuss these different options with your family to make sure everyone is on the same page in understanding their financial obligations. Why? Well, recent survey data from Laurel Road found that one-third of millennials with student loans didn’t fully understand the basics of student debt and their repayment timelines.
So this is a good time to discuss some basic financial management concepts with your child and help them to understand the level of responsibility that comes with taking on such a large debt. Keep in mind that a High School Senior has very little concept of large dollar amounts, and their situation might be significantly altered by the time the loan comes due. For instance, they could be married with children by the time they graduate or they could drop out and join a rock band. Literally, ANYTHING is possible at this age.
And be realistic with your future college student. If you can only afford a state school or community college, that’s fine. Communicate that early and often. If they want to go to a more expensive school, they are going to have to work hard for scholarships or grants. It’s just like buying a car. If you can only afford a Hyundai, don’t take them window shopping for a Lexus!
Personal story: I was that parent. We were deeply in debt at that point, and had under-saved for college. That is a rough conversation to have with a 16 year old kid. You might not go to college because your Dad and I didn’t have our ducks in a row. Hint: Don’t be me, plan ahead and start saving NOW!
Plus my kids had not put in the work during their High School years to bring in decent grades. Kids with poor grades have very little chance of a scholarship unless they have great athletic ability or something else to bring to the table. So we told them what we could afford and told them they’d have to bust their butts or go into major debt with financial aid. One went into a trade school and the other half-heartedly tried Community College and bombed out. Postscript: They’re both just fine. They have good jobs and zero student loans to worry about.
Reevaluate Life Insurance Policies
Depending on how you plan to fund your child’s tuition, reexamining your life insurance policy is an important step to take in your college financial planning. If you intend to pay for some or all of your child’s education, you should account for this added cost when determining your coverage amount. Take into consideration both the loan amount and interest that will be accrued so that you and your family are adequately covered.
Here is a helpful resource from Money.com on how to find the best life insurance policy for your family.
While not many want to have a conversation about life insurance with their teenager, it is an important discussion to have when preparing for college. If your future college student is taking out a private loan that you are cosigning on, you are financially responsible for this debt in the event that the borrower passes away.
The good news is that you can find a custom life insurance policy online for your son or daughter that fits your families needs. Experts usually recommend purchasing a term life insurance policy for the student because they are usually much cheaper for young adults so it’s a small price to pay in the long run to give you added peace of mind.
Consider an IRA Withdrawal
In most scenarios, an early withdrawal from your IRA can result in a 10% penalty on top of standard income taxes. There are some outstanding circumstances that allow for an early IRA withdrawal and funding your child’s college tuition is one of them, if you meet all of the circumstances. If you decide to pay for some or all of your child’s tuition, this could be a good option if you don’t have additional savings or a 529 college savings plan.
As a disclaimer, using your retirement savings to fund your future college student’s education is considered financially risky by many and not necessarily the most ideal plan. Don’t cut yourself short on your own savings goals to assist your children. Remember, there are always student loans available but there’s no such thing as a retirement loan!
College Savings Plan and Prepaid Tuition
If you are early in your college planning journey, consider looking into a 529 college savings plan. The 529 plan is essentially a savings plan that allows for tax-free growth in your account and when withdrawn for a qualified educational expense, is also tax-free at the federal level and in certain states, tax-free at the state level as well.
Prices for college tuition are already sky high and are increasing exponentially. Another option to pay for your child’s tuition if you have a large savings account is looking into a prepaid tuition plan. The prepaid tuition plan locks in current tuition prices so in the future, you won’t be paying for inflation on college tuition when the time comes. If you are considering both the 529 college savings plan and the 529 prepaid tuition plan but can’t decide which is best, it could help to compare and contrast the two different plans side by side to determine which plan best suits your family’s needs.
Make a Budget with Your Future College Student
There are going to be additional expenses that arise once your child goes to college on top of tuition and room and board. Some unexpected costs that might arise include dorm room furniture and accessories, dining options outside of the meal plan, transportation, clothing and study abroad opportunities.
You can use online tools or a spreadsheet to help your son or daughter to get a better idea of where your money is being spent and determine approximately how much extra to account for. Your student should be actively involved in planning future goals for college students. This is their future after all, and your financial well-being as well!
Shop Around for Textbooks
When your son or daughter goes off to college, their professors will send out a list of required textbooks for the semester. When you look at the list, it is easy to get sticker shock when adding up the cost for their needed books, but there are ways to get around spending full price. An online search can help you compare prices on required textbooks, which can help in the planning process because every little bit of savings counts!
Look Into Student Working Options
College isn’t cheap—and neither is covering your child’s additional expenses on campus—so to help minimize the financial burden, encourage your child to look at the different employment options available on or off-campus during the school year. Additionally, depending on your financial status and the college your child chooses, they could be eligible for student work on campus that could help pay for college through a Federal Work Study Program.
Seek Expert Advice for Your Future College Student
In most cases, funding your child’s college tuition requires more than just saving a few extra dollars here and there each month. It is a large expense that requires a significant amount of financial planning and preparation. When in doubt, it might be helpful to seek expert advice from a financial planner or a friend or family member who is familiar with college financial planning.
No matter how your future college student’s education will be funded, remember to give yourself a pat on the back for all of the work you have done for them up until this point. Planning for college can be stressful, nerve-wracking and even frustrating but try not to worry too much, and soak up all the time you have left at home before their big transition!