The Alternative College Savings Plan

Besides saving for retirement, saving for college is the most discussed wealth planning topic that I address when working with families.  A child born in 2018 that begins kindergarten in the fall of 2023 would attend college between the years of 2036 and 2040. If that child attended an average public in-state 4-year college and if the annual price increases for public colleges experienced over the last 30 years (+5.4% per year) continue, the aggregate 4-year cost of the child’s college education (including tuition, fees, room & board) would be $237,262 or $59,315 per year (source: College Board).With numbers such as these, you can see why families are concerned about how to approach saving for college.  Below are some of the traditional methods you may be familiar with to save for college;

• College Coaching and “Free College Planning Workshop”
  • It can be an extremely expensive option, with some coaches charging $950 an hour and up to $10,000 per year with no guarantees and a good amount of effort on your part.
  • Beware of anything that says free as salespeople stand ready to dismantle your well-crafted wealth management plan.
• Live at Home or Attend a Community College
  • A great option, especially for students who have no idea of what they want to do.  As noted above, college can turn into a very expensive place to “find yourself.”
  • However, if your child is academically gifted and driven, this may not be the best option for them.
• 529 Savings Plan
  • Still, one of the best options to save in the most tax-efficient manner as assets grow tax-free if used for qualified education expenses.  Additionally, some states offer a tax credit, which also helps.  See Morningstar’s annual ranking of the best 529 plans.
  • The downside of being invested in the market is that you never know when the next correction or major pullback will occur.  Think about a college freshman starting in 2008 whose parents had four years saved only to see the college fund get cut by 50%.  529 plans ideally should be managed by a wealth advisor who can adjust asset allocations and try to reduce the risk that parents may not be thinking about.
• Pre-paid Tuition
  • For families who are trying to balance multiple financial priorities, this option is likely very difficult to come up with the annual amount to pre-fund the cost of college.
  • While your child could attend any college they choose, this option will not cover the full amount if your child chooses to go to an out-of-state school.
• Gifting Strategies
  • You could engage friends and family to cover portions of the school cost for your child through outright gifts of money, inheritances, or paying expenses directly to the college your child is attending.
• Student Loans
  • The default choice that most families turn to when all else fails.

With the various pros and cons of all these traditional college saving options, I have found that there are alternative options that families at any income level can choose, which helps reduce the cost of college without having to pay the entire bill on your own.

Begin by Completing the FASFA

Before I get to these alternative options, I need to spend some time with the all-important Free Application for Federal Student Aid (known as FAFSA).  According to estimates from sources like Edvisors.com and NerdWallet.com, over 1 million students who would have been eligible for a Pell Grant never filled out the FAFSA. The maximum Pell Grant award for the 2017-18 school year was $6,095, and, unlike a loan, a grant doesn't need to be paid back. Additionally, some merit-based scholarships offered by colleges and universities require applicants to file the FAFSA (which I will address below).The deadline to complete the FAFSA form is June 30.  However, per the FAFSA website, many colleges have earlier deadlines for applying for state and institutional financial aid; it is highly recommended that you fill out the form as soon as you can to ensure that you don't miss out on any aid.Your wealth advisor should assist you in completing the FASFA application since most are done wrong in that parent’s overestimate income and assets.  Additionally, eligibility for student aid does not carry over from one academic year to the next, so you need to file the FAFSA every academic year. Variables such as your family's income level and the number of family members enrolled in college at the same time will affect the amount of aid a student is eligible to receive.

Alternative Planning Options

With some grit and hard work by both the student and parents, the following alternative college planning options can help lower the actual costs of college without having to save more or reduce the potential use of loans.

• Investigate what Advanced Placement (AP) options are available during high school years
  • Advanced Placement (AP) is a program in the United States and Canada created by the College Board, which offers college-level curricula and examinations to high school students. American colleges and universities may grant placement and course credit to students who obtain high scores on the examinations.
  • AP credits directly result in free tuition; however, you must have a driven student who is willing to put in the time academically to pursue this option.
• Placement exams offered by colleges
  • Along the same lines as the AP program, find out if the college that your child wants to attend offers placement exams to test out of specific classes.
• Investigate if your local college or university offers classes for your high school student
  • In these types of programs, students work simultaneously toward their high school diplomas and towards their bachelor's or associate degree. With some programs, there is no cost to the student.  Again, this is an option that offers free tuition but requires a student to be driven academically.
• Merit scholarship
  • If you have the persistence to find free money for college, Google is a great place to start in your search to find applicable scholarship opportunities.
  • Local community organizations such as Lions, Optimists, and Community Foundations are great resources for scholarships that may or may not be academically based.
  • Another technology tool is the app Scholly.  It costs $2.99/month and will help match your child with national scholarships.
• Negotiate with the admissions department
  • Negotiating tuition is a viable strategy to pursue, and all it takes is a simple phone call.  State schools may be more difficult than private schools, but I have seen first-hand where this works, especially when dealing with out of state tuition.
  • Furthermore, the lesser-known schools are likely to negotiate, especially if your child’s academic record will boost the school’s “numbers.”  All it takes is one phone call with nothing to lose.
• Apply to highly selective schools
  • While this option may seem to go against the grain of lowering the cost of college, going to Harvard may be cheaper than going to a public school.  If your Adjusted Gross Income (AGI) is less than a certain amount, higher-cost schools will give discounts.  Additionally, higher costs colleges have forms for higher-income families that are treated as lower income.  The more selective a school is, the lower the net cost may be.

Parents Need to Have a Conversation With Each Other

I have worked work plenty of families who can be on opposite sides of how much support they are willing to provide their children’s college education.  While every situation is unique, it often comes down to two key issues for parents;

1. How much do parents want to contribute?  Trying to answer this question may result in some tense conversations because each parent may have their own idea of how much to contribute.
2. What capacity do parents have to contribute?  While parents might want to contribute to a college savings plan, it can be difficult with other pressing financial priorities such as retirement, health care, and other costs of living considerations.

I advise families to take a balanced approach and consider what portion of saving for college should be part of their complete wealth management plan.  Refer to the analogy that when traveling via airplane in the event of an emergency, always put the oxygen mask on you first and then your child.Your child can always get a loan for college, but you can’t get a loan for retirement.  However, there are options for families to put their kids through college while limiting the use of loans or eliminating the need for them if the parent/child can work together to create a winning game plan.