My son chose a school weeks ago. We haven’t gotten a bill yet, so that means I have time to plan. I’ll not only be planning for how we’ll pay for the first semester; I’m going to put a plan together to pay for all 4 years. There are a lot of reasons you’ll probably want to do this as well. For us, it’s a matter of figuring out how much of our savings we’ll be using when so that we can make educated decisions about where to put that money in the meantime. It will also tell my son exactly how much he needs to win in private scholarships over the next 4 years.
I've put together a detailed article of what you'll need to consider to make your plan, and here are some reasons to put your plan together ahead of time.
If you're going to need any amount of student loans, you’ll want to plan which years you’ll request them and in what amounts. There is a yearly limit on the amount you can take in Federal Student Loans to be aware of.
Also related to student loans, if you’ll be needing them, calculate the EXACT amount you think you’ll need over ALL 4 YEARS, and figure out how much that will mean for your or your student’s future cash flow before you make the final decision to take on that debt.
If your grandparents are going to be helping out, under the current laws, it’s better for them to do so the 3rd and 4th year of school. This has to do with the fact that their help is currently considered untaxed income and is factored into your family’s EFC or Expected Family Contribution. In the near future, this will be going away.
You may be able to pay for some of your college expenses with a tax credit like the American Opportunity Tax Credit or the Lifetime Learning Credit. If this is your plan, you need to deliberately set the money aside so it will be available to you when you need it.
If you plan to pay with a 529, you’ll want to adjust your contributions to make sure you are neither over or under-contributing based on your plan.
If you are planning to divert cash flow to pay for a portion of the bill, you’ll want to deliberately set that money aside when saved so it is available when you need it. For example, if you’re counting on your grocery bill to go down when your student leaves for school (as I am, by like…a LOT), make sure you define the dollar amount this represents in savings to you and put that amount in your college savings every month so you don’t end up spending the money on something else without even realizing it.
If you will be using savings to help pay for college and are also eligible for need based aid based on your EFC or Expected Family Contribution, it’s helpful to know that the sooner you use this savings to pay part of the bill the more years you will benefit from having lower assets to report on your financial aid forms.
Planning to spend your student’s savings before your own will often help your EFC the most. That’s because parent’s assets raise the EFC by 5.64% while student assets raise it by 20%. So if the parent has $2,000 in savings, the EFC would increase by about $112, whereas, if the student had the same amount, it would increase the EFC by about $400. If you aren’t receiving or expecting to receive need based aid, this won’t matter.