Paying for college: Financial steps to take as school nears
Learn how to pay for college tuition and costs as your child prepares to leave for school.
It’s time. After years of planning for this important financial goal, your student’s college years are right around the corner. Among the many decisions you’ll make, a strategy for how to pay for college costs — with savings, investments, financial aid, scholarships and potential loans — is critical.
As you and your student prepare, an Ameriprise financial advisor will help evaluate your financing options, offer guidance on tax strategies and the FAFSA and help determine what is fitting for you and your long-term goals.
Here are key steps to consider ahead of your first tuition payment.
In this article:
- Have a family conversation about college financing
- Fill out the FAFSA — regardless of your income level
- Bring your assets into focus
- Consider your financial aid packages and third-party scholarships and grants
- Decide on student loans
- Decide how you’ll make tuition payments
- Consider taxes in your payment plan
- Set your student up for success
- Questions to ask an Ameriprise financial advisor
The college selection process is a good time to discuss the financial implications of your student’s specific college choices, including their expected contribution and your college budget. Consider the projected costs of their top choices as they submit applications. Each school is required to have a net price calculator on its website where you can get a breakdown of the real cost of attendance.
Key to receiving financial aid is filling out the Free Application for Federal Student Aid (FAFSA). It collects information on a family’s financial situation and is used to assess need and determine aid from the government and most colleges and universities. Because multiple factors determine eligibility for aid under the FAFSA, submit it even if you assume your family’s income is too high to receive any form of aid. The information provided to the FAFSA is also used to obtain a variety of non-need-based federal loans, and many schools require the FAFSA to determine merit-based aid included in your financial package.
Finalize your plan for paying for college. Take an inventory of your 529 plan balances and other expected funding sources — such as savings and investments — to determine the total amount you plan to contribute to your student’s education. Also consider how other contributions — such as gifts from grandparents — may come into play as you evaluate your options to pay for college tuition.
- Learn more: College savings calculator
- Learn more: Saving for college: Understanding your options
- Learn more: 529 plans: Answering your top questions
After you receive financial aid award letters, review the packages and related expenses of your student’s top choices. Your child’s financial aid package may include scholarships, grants and work-study. But there are additional opportunities outside of this package that your child may be eligible for.
Various scholarship-finder websites can help you identify opportunities based on financial need, merit, community service, heritage, gender, sexual orientation and life experience. Some also benefit students who have unique skills and hobbies.
- Learn more: Understanding how financial aid works
Now that the costs are clear, you can determine whether a loan is the right option for your family. You may decide to extend a personal loan to your student — or perhaps you’d like your child to take out a federal loan so they have a role in financing their education and can establish a credit history. There are many different financing options, so plan to carefully weigh the pros and cons of each. If you and your student decide to borrow, you can help them fully understand the terms. A general guideline to consider is that the student’s projected total salary after graduation should be equal to or greater than 1.5 times the student loan balance. Monthly debt payments should not exceed 12% of after-tax take home pay.
Be strategic about the loans your family takes out
For some families, it may make sense to take out a short-term loan and then pay it off with investments, such as short-term, high-yield instruments, that may appreciate at a faster rate.
- Learn more: Student debt and college loans, explained
When the time comes to write a check to your student’s school, determine the details of how you want to pay college tuition: a lump-sum payment or installments. A tuition payment plan, offered by many higher education institutions, will help you do the latter. This option may be attractive because it allows you to make regular payments over a fixed period, such as the academic year or semester. However, there may be a fee to enroll in such plans.
If a grandparent or other family member is helping fund your student’s education, they may want to take advantage of the tuition gift tax exclusion, which can help reduce their taxable estate.
School tuition is exempt from gift tax
Under the gift tax exclusion rule, tuition payments made directly to a college are not considered gifts for tax purposes, nor are they counted toward the annual gift tax exclusion or the $12 million lifetime gift tax exemption. This exclusion only applies to tuition payments and not other expenses like books, supplies or room and board.
As you pay for college, consider all tax implications. Federal incentives like the American Opportunity Tax Credit, Lifetime Learning Credit and student loan interest deduction can be leveraged, if applicable, to offset education costs. But make sure to coordinate your 529 plan withdrawals with these credits. Tuition expenses paid with tax-free 529 plan funds are not eligible for a tax credit.
- Learn more: Tax strategies for college savings and gifting
Before your student heads off to school, consider talking about budgeting in college and how they plan to manage their expenses as young adults. For many students, college is full of new experiences, financial independence being one of them.
When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.
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Get help evaluating your payment options
From tax strategies to FAFSA guidance, an Ameriprise financial advisor will help you make informed decisions about paying for your student’s school, while staying on track for other long-term goals, like retirement.
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Clients contributing to a 529 Plan offered by a state in which they are not a resident, should consider, before investing, whether their, or their designated beneficiary(s) home state offers any state tax or other state benefits such as financial aid, scholarship funds or protection from creditors that are only available for investments in such state’s qualified tuition program.
The earnings portion of money withdrawn from a 529 plan that is not spent on eligible expenses will be subject to income tax, an additional 10% federal tax penalty, and the possibility of a recapture of any state tax deductions or credits taken.
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