College is expensive and the price keeps going up. The national average cost of attending a four-year public college is over $20,000 per year, and the average cost of attending a four-year private college is now over $42,000. Even the average cost of attending a two-year public college has nearly reached $15,000 per year.

And those are today’s prices. The table to the right projects those costs for future years assuming a 6% annual increase in the total cost of attendance.

Yes, college is a big investment, but fortunately there are strategies to reduce the cost of college and make it more affordable. However, understanding all of the strategies and determining which ones apply to your family’s situation can be quite confusing. College funding involves multiple areas of personal finance such as: taxes, investing, borrowing, cash flow and financial aid. Consequently, college funding requires knowledge of all of these areas and, more importantly, how they affect one another for education funding purposes. For example, when applying for need-based financial aid, you and your child need your tax information from the previous year. A change in your income, the sale of an investment or refinancing a home can all affect your taxes, which in turn can affect your child’s eligibility for need-based financial aid. College funding isn’t merely about financial aid; it’s about your financial life.

Regardless of whether your child qualifies for financial aid or not, your family still needs to figure out how to use your income and assets to come up with your share of the cost of college, an amount that will likely be different from one college to another. So, how are you going to pay for college? Will you rely on your income, assets, student loans and gifts from grandma?  If so, how will that all work?  Will you be eligible to claim one of the education tax benefits?  If so, which one will impact your child’s financial aid eligibility the least?  These kinds of big questions and the vast number of variables and possibilities can make the whole process overwhelming unless you have a knowledgeable advisor that can help eliminate the stress and complexity of it all, and determine what your Best Strategy is.

The basics of what you need to know about paying for college are summarized in the points below.

  • The out-of-pocket cost of college is a function of the sticker price (projected in the table above) of the college, and the total financial aid (need-based and merit) that the student receives to help pay for it

 

  • Need-based financial aid eligibility is based on the income and assets of the parents and the student.  However, not all assets are counted against the family. Retirement assets and home equity are not included in the federal financial aid formula.

 

  • It’s free to apply for federal student aid, and you should do it. You get a PIN on the federal aid website atwww.fafsa.ed.gov, and then your child picks some colleges that she wants the information sent to, you both (parent and child) complete the FAFSA (Free Application for Federal Student Aid) online and the aid processing center will crunch the numbers and arrive at an Expected Family Contribution (EFC) toward the cost of college. A Student Aid Report containing your EFC will be sent to you and to the colleges your child selected. Each school will then compare your EFC to their cost of attendance (COA), and if your EFC is lower than their cost of attendance then the child demonstrates a Need for financial aid.

 

  • If your child is eligible for need-based financial aid she may be awarded anything from grants and scholarships to student loans and work-study. Yes, loans and work-study are considered “aid.” If your childdoesn’t qualify for need-based aid she might still get merit aid for academic, musical, athletic or other achievements. So there are two types of financial aid: need-based is based on your family’s ability to “pay” and merit is based on your child’s ability to “play.”

 

  • Unfortunately, before you can pay the out-of-pocket cost of college you have to pay taxes on your income first. Fortunately there is one more form of aid that we haven’t discussed yet – tax aid. You may be able to claim one of the education tax credits (American opportunity Tax Credit, the Hope Tax Credit or the Lifetime Learning Tax Credit) or the tuition and fees deduction, each of which will reduce your federal tax bill if you qualify..

 

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