The cost of higher education is growing so rapidly, that students and families are finding it a huge financial challenge. Succeed by starting savings and planning as early as possible.
Here’s a scary number: the cost of a college education is growing faster than inflation. Tuition increased by approximately 9% from 2012 to 2017. Figuring out how to pay for college requires advance planning and becoming extremely knowledgeable about loans, grants, scholarships and other available kinds of assistance.
Higher education costs are out-pacing inflation by an average of 4%. From 2012 to 2017, tuition has risen by about 9% across the board. With these escalating expenses, some families are having a tough time deciding the best way to pay for college.
The Michigan State University Extension recently posted an article, “Planning and paying for higher education,” that says applying for financial aid is usually the first step people will take to help with the expense.
There are four basic types of aid that can be received:
- work study;
- loans (federal and private); and
Aid is requested by completing the Free Application for Federal Student Aid (FAFSA form). This is filed between October and February prior to the student’s fall and spring classes to see what financial aid he or she is eligible to receive based on need. Student resources, parent’s resources (if the student is considered a dependent) and academic status (full-time, part-time) are factored into the equation.
Once the FAFSA form is filled out, the Expected Family Contribution (EFC) is created. The EFC isn’t the amount of money the family will have to pay for college and it’s not the amount of federal student aid the student will receive. It’s a number used by the school to calculate the amount of federal student aid the student is eligible to receive. The school sends financial aid award letters in the spring, which will help in calculating what will be required to defray the cost of school for a year.
When a student and parent have time, they should look into available college saving tools, such as 529 educational savings plans. Withdrawals from these plans aren’t taxable, the earnings are tax deferred, the contributions are considered gifts and the funds can be transferred between siblings without an effect on American Opportunity, HOPE, and Lifetime Learning Education Tax Credits. A Coverdell Educational Savings Account is another option to assist with college expenses. It’s similar to a Roth IRA, but can only be used for education.
If you are lucky enough to have relatives who are willing and able to help with the cost of college, there are several options. Family members can gift or pay tuition directly to the college or university, without incurring any gift tax liability. They can also make contributions to a 529 account. An estate planning attorney will be able to help family members, so that their generosity aligns with their estate plan.
Reference: Michigan State University Extension (May 1, 2017) “Planning and paying for higher education”